What Happened
- The Union Cabinet approved the Rs 1 lakh crore Urban Challenge Fund (UCF), a reform-driven urban infrastructure programme.
- Central government will fund 25% of each project, with the condition that at least 50% must come from market sources such as municipal bonds, bank loans, and PPPs.
- The programme targets resilient, productive, inclusive, and climate-responsive cities.
- Special provisions have been made for smaller urban local bodies and northeastern/hill state cities through a Rs 5,000 crore Credit Repayment Guarantee Scheme.
- The initiative aims to transform cities into growth hubs and improve their creditworthiness over a five-year period (FY 2025-26 to FY 2030-31).
Static Topic Bridges
AMRUT and Smart Cities Mission -- Evolution of Urban Schemes
India's flagship urban development schemes have evolved through several phases. The Jawaharlal Nehru National Urban Renewal Mission (JNNURM, 2005-2014) was the first large-scale urban reform initiative, covering 65 cities with Rs 66,000 crore. It was succeeded by the Smart Cities Mission (2015, 100 cities, Rs 48,000 crore), AMRUT (2015, 500 cities, Rs 50,000 crore for water and sewerage), and AMRUT 2.0 (2021-26, Rs 2.99 lakh crore, universal water supply coverage). The Smart Cities Mission concluded in 2023, and AMRUT 2.0 is in its final year.
- JNNURM (2005-2014): 65 mission cities, Rs 66,000 crore, focused on urban renewal and governance reform
- Smart Cities Mission (June 2015): 100 cities selected through competition; area-based development + pan-city solutions
- AMRUT 2.0 (October 2021): Universal water supply through functional taps in all statutory towns; 500 cities for sewerage
- Swachh Bharat Mission-Urban 2.0 (2021-26): Focus on solid waste management, ODF++ status
Connection to this news: The UCF represents a generational shift from centrally designed urban missions toward a market-oriented model. Unlike AMRUT and Smart Cities Mission where central grants formed the bulk of funding, the UCF mandates majority market financing, signalling the government's intention to make cities financially self-sustaining.
Municipal Bonds and Urban Debt Instruments
Municipal bonds are debt instruments issued by ULBs to raise capital for infrastructure projects. In India, Ahmedabad Municipal Corporation issued the first municipal bond in 1998. SEBI's ILDS (Issue and Listing of Debt Securities) framework governs municipal bond issuance. The bonds offer tax-free interest under certain conditions. Despite their potential, only a handful of Indian cities -- Pune, Hyderabad, Indore, Bhopal, Lucknow, and Visakhapatnam -- have issued municipal bonds, largely due to weak revenue bases and lack of credit ratings.
- First Indian municipal bond: Ahmedabad Municipal Corporation, 1998 (Rs 100 crore)
- Tax-free municipal bonds notified under Section 10(15)(iv)(h) of the Income Tax Act
- SEBI guidelines for municipal bonds issued in 2015 (subsequently amended)
- Prerequisite: ULB must have investment-grade credit rating from a SEBI-registered credit rating agency
- Global comparison: US municipal bond market exceeds $4 trillion; India's is negligible
Connection to this news: The UCF's design -- requiring 50% market financing and providing credit guarantees for smaller cities -- is explicitly aimed at expanding India's nascent municipal bond market and making urban debt instruments a viable funding channel for city infrastructure.
15th Finance Commission and Local Body Grants
The Finance Commission, constituted under Article 280 of the Constitution, recommends the distribution of tax revenues between the Centre and states, and grants-in-aid to states. The 15th Finance Commission (Chairman: N.K. Singh, 2021-26) introduced performance-based grants for local bodies, linking fund release to reforms such as property tax improvement, publication of audited accounts, and notification of floor rates for property tax.
- Article 280: Finance Commission constituted every five years by the President
- 15th FC period: FY 2021-22 to FY 2025-26; total local body grants: Rs 4.36 lakh crore
- Performance conditions: 60% of grants are tied to demonstrable reforms
- State Finance Commissions (Article 243I for PRIs, Article 243Y for ULBs) recommend state-local fiscal transfers
- 16th Finance Commission (Chairman: Arvind Panagariya) constituted in December 2023 for the period 2026-31
Connection to this news: The UCF builds on the 15th FC's reform-linked approach by tying central assistance to market financing performance, further incentivising cities to improve governance, revenue collection, and financial management.
Key Facts & Data
- UCF total central assistance: Rs 1 lakh crore; expected total investment: Rs 4 lakh crore
- Funding ratio: 25% central, minimum 50% market-sourced
- Credit Guarantee: Rs 5,000 crore for smaller ULBs and NE/hill states
- Timeline: FY 2025-26 to FY 2030-31, extendable to FY 2033-34
- India's urban population share: approximately 35% (Census 2011), projected over 40% by 2036
- Only about 20 Indian cities currently have investment-grade credit ratings