The “Urban” in the 2025 Union Budget
An information piece I had written for the newspaper Indian Express's UPSC Specials. This is the slightly longer and unedited piece.
The Union Budget 2025, presented by Finance Minister Nirmala Sitharaman, emphasized urban development as one of the six domains for transformative reforms. This renewed focus on urban areas in the budget points to the government’s commitment to empowering cities as a vital component of India’s economic and social development. In this piece, we focus on unpacking what the budget means for urban areas and how urban local bodies (ULBs) finance urban infrastructure projects in Indian cities.
Unpacking Budget 2025 & Urban Development.
In the 2025-26 Budget, the Ministry of Housing and Urban Affairs (MoHUA), the nodal ministry at the union level for housing and urban affairs, has been allocated Rs. 96,770 crore, accounting for 1.91% of the total expenditure. Over the past ten years, the budget has steadily increased the allocation for urban development from Rs. 16,000 crore in 2016 to Rs. 79,000 crore in 2024 and Rs. 96,770 crore in 2025. This steady increase in budgetary allocation is remarkable as it provides much impetus for urban development. Several key schemes, such as Pradhan Mantri Awas Yojana (PMAY-Urban), which focuses on affordable urban housing; the Smart Cities Mission, which focuses on creating smart cities; and the Atal Mission for Rejuvenation and Urban Transformation (AMRUT), which focuses on water and sanitation infrastructure, are recipients of these budgetary allocations. In recent years, allocations have also gone to urban transport projects, particularly Metro rail and Mass Rapid Transit projects, with the objective of transitioning to sustainable mobility. The PM Street Vendor’s Atmanirbhar Nidhi (PMSVANIDHI), focusing on improving street vendor livelihoods by providing them with low-cost loans and interest subsidies, is also a recipient of this year's budgetary allocation.
The budget also introduced the establishment of an “Urban Challenge Fund” that will mobilize Rs. 1 lakh crore to transform cities. Under this fund, proposals shall be evaluated along three categories: “Cities as growth hubs, creative redevelopment of cities, and water and sanitation projects.” The fund will finance up to 25% of the cost of bankable projects, with a stipulation that at least 50% of the project cost is sourced from bonds, bank loans, or Public-Private Partnerships (PPPs). The fund aligns closely with the flagship missions of the Ministry, such as Smart Cities and AMRUT, and focuses on promoting innovative urban redevelopment projects and improving urban infrastructure in major cities. Through this fund, the budget also points to a creative partnership between Urban Local Bodies and private enterprises to participate in urban development projects. A similar framework was also explored in the Smart Cities Mission, wherein private enterprises were invited to partially finance citywide or area-specific projects.
City Finance
Structuring the Urban Challenge Fund to include private enterprise participation is a signal to empower and improve the financial autonomy and capacities of Urban Local Bodies to raise their own sources of finance to fund urban development projects. As the analysis by PRS points out, the majority of ULBs’ revenue comes from central and state government grants. With several limitations in terms of their urban governance (such as complete autonomy and devolution of responsibilities from state governments), ULBs lack resources and capacity to generate their own revenue. This means that there is an increased dependency on central and state government funds to finance their urban development projects or even improve existing urban infrastructure.
The main revenue sources of ULBs can be primarily categorized as tax and non-tax revenues. Tax revenues mainly include property tax, professional taxes, and entertainment taxes, while non-tax revenues include user fees such as parking fees, water supply fees, license fees, and rental income from municipal property. For example, in the 2021-22 financial year, the Brihanmumbai Municipal Corporation (BMC) had 19% of its revenue from tax, 54% from fees and user charges, and the remaining from other sources of income. In comparison, the Greater Chennai Corporation (GCC) generated 80% of its income from tax sources and the remaining 20% from other sources of income. These percentage mixes can vary from city to city depending on multiple factors such as the capacity to collect taxes in a timely and efficient manner, pricing urban infrastructure services rationally (in return achieving improved service delivery), and the ability to generate income from other sources such as parking fees, advertisements, rental income, and interest income. While large cities have a wider tax base and capacity to generate revenues, smaller cities have to rely on grants from central and state governments. For example, in 2021-22, 57% of Kochi Municipal Corporation’s revenue came from revenue grants, contributions, and subsidies. The Central Finance Commission (CFC)’s Performance Fund is an example of a grant received by the Kochi Municipal Corporation in the year 2022-23.
There are several market mechanisms through which ULBs can raise finance. The most prominent example of this is municipal bonds, where ULBs issue bonds to finance their infrastructure projects. Ahmedabad Municipal Corporation was one of the first ULBs in India to issue a municipal bond to service its water and sanitation projects. Following suit, many such cities have floated similar bonds, and in previous years, the municipalities of Indore, Pune, Rajkot, Greater Hyderabad, Ahmedabad, and Lucknow have all issued bonds for financing their infrastructure projects. ULBs can also raise loans from financial institutions such as HUDCO, the World Bank, etc., for specific projects. The Urban Challenge Fund points to the mechanism of public-private partnerships (PPPs) to finance urban development projects. A cursory glance at the database of public-private partnership projects in India shows that at least 5-10% of the total projects are urban projects in the fields of water-sanitation and transport. These projects not only bring private finance onboard, but they also facilitate expertise and capabilities from the private sector, thereby improving infrastructure and service delivery in urban areas.
The urban focus in the Union Budget 2025-26 marks a significant step toward strengthening India’s cities as engines of economic growth and social transformation. By prioritizing infrastructure investment, encouraging Urban Local Bodies to diversify their revenue streams, and fostering public-private partnerships, the budget lays the groundwork for greater financial autonomy and sustainable urban development. As India continues its rapid urbanization, these measures will be crucial in transforming cities into more livable, inclusive, and vibrant spaces for their citizens.
For more reading:
CityFinance is an excellent resource that gathers financial information from Urban Local Bodies in Indian states. They have interactive dashboards explaining the complex financial details in a very simple manner. This website was put together by the Ministry of Housing & Urban Affairs (MoHUA) and the Janagraha Foundation.
The PRS Legislative Research has a repository of budget analysis, that analyzes the budget as a whole and goes into detail about various ministries. You can read them here.
As stated in a previous post, want to know more about Municipal budgets and how they work in our cities? Check out Dr. Ravikant Joshi’s work on Municipal Budgets 101. Also, his website has plenty of resources related to urban governance and finance.
To read the Union Budget 2025 in detail, visit here.
To read my article published by Indian Express, click here.