Why in News?
The Union Cabinet has approved the Urban Challenge Fund (UCF), a new Centrally Sponsored Scheme aimed at financing large-scale urban infrastructure through market-linked funding and competitive project selection.
What are the Key Facts About the Urban Challenge Fund (UCF)?
- The Urban Challenge Fund (UCF) is a scheme started by the Ministry of Housing and Urban Affairs to help cities build important infrastructure like transport, housing, and public services.
- The central government plans to provide ₹1 lakh crore between 2025–26 and 2030–31, and the scheme can continue till 2033–34 if needed.
- Instead of just giving grants, the scheme works on a challenge-based model. This means cities must propose strong, practical projects that can attract funding from banks and private investors. The goal is to use government money to bring in much larger investments — about ₹4 lakh crore in total over five years.
- Overall, the scheme marks a shift in how urban development is funded. It recognises that government funds alone are not enough, so it focuses on market-based financing, reforms, and measurable results to improve urban infrastructure.
Funding Pattern and Financing Model
1. Central Government Support
- The Union Government will fund 25% of the total project cost.
- This support acts as a financial boost to help cities start and implement major infrastructure projects.
2. Market-Based Funding (Mandatory Requirement)
Cities must arrange at least 50% of the project cost from market sources. This can include:
- Municipal bonds – cities raising money from investors.
- Bank loans – borrowing from financial institutions.
- Public-Private Partnerships (PPPs) – working with private companies that invest and help run projects.
3. Remaining 25% Contribution
The final share of funding can come from:
- State Governments or Union Territories
- Urban Local Bodies (ULBs) like municipal corporations
- Additional market financing, if needed
4. Overall Purpose of This Funding Model
- Encourages private sector investment and participation.
- Promotes not just funding support but also professional management and expertise from private partners.
- Reduces dependence only on government grants.
- Helps cities build and manage infrastructure more efficiently and sustainably.
- Three Strategic Verticals: Projects under the UCF must align with one of three core pillars:
- Cities as Growth Hubs: Focuses on transit-oriented development (TOD), greenfield townships, and economic corridors to enhance competitiveness.
- Creative Redevelopment: Revitalizing congested city cores (Central Business Districts), heritage sites, and brownfield regeneration (reusing abandoned industrial land).
- Water and Sanitation: Achieving service saturation in water supply and modernizing solid waste management, including legacy waste remediation.
- Credit Repayment Guarantee for Small Cities: A Rs 5,000 crore corpus has been created to provide a Credit Repayment Guarantee Scheme to facilitate market access for smaller cities.
- Eligibility: ULBs in Northeastern/Hilly states and towns with a population below 1 lakh.
- The Guarantee: It provides a central guarantee of up to Rs 7 crore or 70% of the loan amount (whichever is lower) for first-time loans, and up to Rs 7 crore or 50% for subsequent loans.
- This enables small ULBs to undertake projects worth Rs 20 crore initially and Rs 28 crore in subsequent phases, improving lender confidence and expanding access to market finance.
- Coverage: The Fund will cover all cities with a population of 10 lakh or more (as per 2025 estimates), all State and Union Territory capitals not included in this category, and major industrial cities with a population of 1 lakh or more.
- Projects must be bankable, transformative, and aligned with the three verticals, with clear outcomes and credible market financing plans.
- Projects already funded under AMRUT (Atal Mission for Rejuvenation and Urban Transformation) 2.0, Swachh Bharat Mission-Urban (SBM-U 2.0), or other Centrally Sponsored Schemes are not eligible, ensuring that UCF supports new and innovative initiatives.
- Reform-Linked Selection (Challenge Mode): Unlike previous schemes, where funds were allocated based on population, the UCF uses a Competitive Challenge Mode.
- Funding is released only if cities implement specific reforms in Urban Governance, Digital Systems, and Financial Transparency.
- Projects are evaluated on performance indicators (KPIs) like job creation, revenue mobilization, and climate resilience.
Why are Cities Central to India’s Economic Future?
1. Productivity Powerhouses
- Cities concentrate people, businesses, and services in small areas, making economic activity more efficient.
- Even though urban areas cover only about 3% of India’s land, they generate 60–70% of the country’s GDP.
- A small group of major cities drives a large share of growth:
- Around 15 big cities (like Mumbai, Delhi, Bengaluru, Chennai, and Hyderabad) produce about 30% of India’s GDP.
- These cities are expected to add around 1.5% to India’s annual GDP growth until 2047.
2. Consumption and the Rising Middle Class
- Cities are the center of India’s growing consumer market.
- India is already the world’s third-largest consumer market, and cities lead this demand.
- By 2030, total consumer spending in India may double to about USD 3.1 trillion.
- The urban middle class will drive nearly 60% of this increase.
- Urban incomes are up to four times higher than rural incomes, which increases spending on:
- Electronics and appliances
- Housing and lifestyle services
- Premium goods and experiences
3. Global Competitiveness and Foreign Investment
- Major cities attract most international investment.
- About 90% of Foreign Direct Investment (FDI) comes into large urban centres.
- Strong urban infrastructure is essential for economic growth, including:
- Metro and transport systems
- Reliable electricity
- High-speed internet and digital networks
- These factors are crucial for India’s economic targets:
- USD 5 trillion economy by 2026
- USD 40 trillion economy by 2047
4. Social and Economic Opportunities
- Urbanization helps reduce poverty and improve social mobility.
- Cities provide better access to:
- Advanced healthcare facilities
- Higher and specialized education
- Digital services and technology
- As a result, urban growth not only boosts the economy but also improves people’s quality of life.
What are the Challenges in Sustainable Development of Indian Cities?
1. Infrastructure and Housing Shortage
- Cities are expanding faster than infrastructure can be built.
- India’s urban population is expected to reach 600 million by 2031, creating huge pressure on services and space.
Investment gap
- Cities need about ₹4.6 lakh crore every year for infrastructure.
- Actual spending is only around ₹1.3 lakh crore, leaving a 70% funding shortfall.
Housing shortage
- There is a shortage of about 1 crore affordable homes.
- This gap could triple by 2030.
- Around 6.5 crore people live in slums due to lack of proper housing.
2. Slow Completion of Housing Projects
- Many homes are approved under government schemes like PMAY, but construction is often delayed.
- Example: Around 1.08 crore houses approved, but many are not completed on time.
Reasons for delays
- Rising land prices
- Complex regulations and approvals
- Administrative and financing hurdles
3. Environmental and Resource Pressure
Rapid urban growth is damaging basic natural resources like air, water, and land.
Air and pollution
- India ranked among the most polluted countries globally in 2024.
- Many households now spend heavily on air and water purifiers, as public systems fail to provide clean environments.
Water crisis
- By 2030, water demand may be double the available supply.
- Cities such as Bengaluru and Delhi already face seasonal shortages.
- 40–50% of piped water is lost due to leaks and old infrastructure.
Waste management
- Cities produce over 1.5 lakh tonnes of waste every day.
- Major landfills are overflowing.
- Only a small share of waste is scientifically processed.
4. Transport Problems and Climate Risks
Urban systems are struggling to handle movement and climate stress.
Traffic congestion
- Cities like Mumbai and Bengaluru face severe traffic congestion (often above 50%).
- This causes productivity losses of about USD 22 billion annually.
Urban heat
- City centres are 3–4°C hotter than nearby rural areas (Urban Heat Island effect).
- This increases health risks and electricity demand for cooling.
Urban flooding
- Natural drainage systems are blocked or encroached upon.
- Heavy construction and poor planning worsen flooding.
- Cities like Chennai and Mumbai are highly vulnerable to extreme rainfall.
- About 85% of Indian districts face climate-related risks.
5. Weak Urban Governance and Finances
Cities generate most of the economy but have limited financial and administrative power.
Limited revenue control
- Cities produce about two-thirds of India’s GDP, but municipalities control less than 1% of national tax revenue.
- Property tax collection is very low (less than 0.2% of GDP) compared to higher levels in developed countries.
- Reasons include poor property mapping and reluctance to raise tax rates.
Coordination problems
- Urban projects often involve multiple authorities (central, state, and local).
- Lack of coordination causes delays.
- Example:
- Large infrastructure projects like metro expansions often get stuck due to overlapping responsibilities.
What Measures can be Adopted for Sustainable Growth of Indian Cities?
1. Transit-Oriented Development (TOD)
- Plan cities so that homes, offices, shops, and services are built close to metro lines and major transport routes.
- This reduces long travel times and makes public transport more convenient.
- People depend less on private vehicles, which lowers traffic and pollution.
2. Non-Motorized Transport (NMT)
- Improve walking and cycling facilities, especially for short distances.
- Build safe footpaths, pedestrian zones, and dedicated cycling tracks.
- Strengthen “last-mile connectivity” — the distance between transport stops and homes/workplaces.
- This reduces traffic congestion and saves time and fuel.
3. Digital Infrastructure for Integrated Planning (PM Gati Shakti)
- Use digital mapping and geospatial tools to plan infrastructure in a coordinated way.
- Water lines, power cables, and roads can be planned together instead of separately.
- This prevents repeated road digging, reduces costs, and avoids wastage of resources.
4. Sponge City Approach for Flood Management
- Design cities to absorb rainwater naturally instead of letting it flood streets.
- Create permeable surfaces that let water seep into the ground.
- Develop urban wetlands, green spaces, and rain gardens to store excess water.
- This reduces urban flooding and helps recharge groundwater.
5. Reducing Urban Heat (Urban Heat Island Mitigation)
- Increase green spaces like parks and plant more trees.
- Protect and restore water bodies such as lakes and ponds.
- Promote “cool roofs” that reflect sunlight and reduce heat inside buildings.
- These measures can lower city temperatures and improve comfort.
6. Circular Economy in Waste Management
- Move toward zero-waste cities by managing waste more efficiently.
- Ensure proper segregation of waste at the source (wet, dry, and hazardous).
- Use waste-to-energy plants to safely process non-recyclable waste.
- This reduces landfill pressure and generates useful energy.
7. Water Neutrality and Reuse
- Treat and reuse wastewater instead of wasting it.
- Install small sewage treatment plants in large housing complexes.
- Reuse treated water for gardening, flushing, and other non-drinking uses.
- This reduces pressure on freshwater supplies and promotes sustainable water use.
Conclusion
The Urban Challenge Fund represents a major step toward making urban development in India more financially sustainable and future-ready. Instead of relying only on government grants, it helps cities raise funds from markets, attract private investment, and manage resources more efficiently. The scheme also focuses on improving urban governance, encouraging innovation, and ensuring that even smaller and emerging cities get the support they need to grow in a planned way. By promoting better infrastructure, stronger financial systems, and greater private sector participation, the fund aims to build cities that are more resilient, inclusive, and economically vibrant. In the long run, it is designed to help Indian cities meet the demands of rapid urbanisation while improving living standards and supporting the country’s broader development goals.
