Cities of debt: On the Urban Challenge Fund

Source: The post “Cities of debt: On the Urban Challenge Fund” has been created, based on “Cities of debt: On the Urban Challenge Fund” published in “The Hindu” on  17th February 2026.

UPSC Syllabus: GS Paper-2- Governance

Context: India’s rapid urbanisation requires large investments in infrastructure, housing, and basic services. The proposed Urban Challenge Fund encourages cities to raise funds through bonds, loans, and PPPs while the Centre contributes 25% of project costs. However, many urban local bodies lack the fiscal autonomy and administrative capacity required to safely access market finance.

Background: Role of ULBs in Urban Governance

1. Urban local bodies were given constitutional recognition through the 74th Constitutional Amendment Act.
2. ULBs are responsible for urban planning, water supply, sanitation, housing, roads, and public health services.
3. They are expected to mobilise their own revenues through property tax, user charges, and municipal bonds.
4. In reality, most ULBs remain dependent on State and Central transfers due to weak revenue bases.

Key Issues Highlighted by the Urban Challenge Fund

I. Limited Administrative Capacity

1. Many ULBs do not have proper accounting systems and rely on outdated financial records.
2. There is a shortage of trained municipal staff in finance, engineering, and urban planning.
3. Project implementation delays are common under schemes such as AMRUT, Swachh Bharat Mission Urban 2.0, and Smart Cities Mission.
4. As a result, funds remain underutilised and projects remain incomplete.

II. Weak Fiscal Autonomy

1. State governments control many municipal taxes and limit the fiscal independence of ULBs.
2. Property tax collection remains inefficient due to poor valuation systems and political resistance.
3. ULBs depend heavily on grants under schemes like Pradhan Mantri Awas Yojana and other transfers.
4. Without stable revenue streams, cities cannot build creditworthiness to borrow from markets.

III. Risk of Debt Burden

1. Experiences from other sectors show that borrowing without reforms can create financial stress.
2. The power sector reforms under Ujwal DISCOM Assurance Yojana revealed large implementation gaps.
3. Hospitals under National Health Mission often faced delays in fund releases while continuing services.
4. Similar borrowing pressures on ULBs may lead to higher user charges and reduced affordability of services.

VI. Inequality Among Cities

1. Large and economically strong cities are more likely to attract private finance.
2. Smaller towns and poorer municipalities may be excluded from funding opportunities.
3. Cities may prioritise monetisable assets instead of essential services like slum upgrading and sanitation.

V. Governance and Transparency Concerns

1. The eligibility criteria and application process for the Urban Challenge Fund remain unclear.
2. Lack of transparency may lead to politically influenced allocation of funds.
3. Weak land records, frequent violations of master plans, and poor urban planning reduce investor confidence.

Why Market-Based Financing Alone Is Problematic

1. Market borrowing requires predictable revenues, which most ULBs do not have.
2. Essential services may become profit-oriented and expensive for citizens.
3. Poor households may face higher tariffs and user charges.
4. Urban development priorities may shift toward real estate projects instead of public welfare.

Measures to Strengthen ULB Capacity

I. Fiscal Reforms

1. States should grant greater taxation powers to ULBs.
2. Property tax systems should be modernised using GIS mapping and better valuation.
3. Predictable transfers from Finance Commissions should be ensured.
4. User charges should be rationalised with subsidies for vulnerable groups.

II. Administrative Capacity Building

1. A professional municipal cadre should be created for urban governance.
2. ULB staff should be trained in accounting, PPP management, and municipal bond issuance.
3. Modern accrual-based accounting systems and independent audits should be adopted.

III. Governance Improvements

1. Land records should be digitised and integrated with planning systems.
2. Master plans should be enforced strictly to improve planning discipline.
3. Fund allocation criteria should be transparent and rule-based.

IV. Balanced Financing Model

1. Grants, loans, and PPPs should be used together rather than relying only on market borrowing.
2. Basic urban services should be prioritised before monetisable infrastructure projects.
3. Credit guarantees should be used cautiously to avoid moral hazard.

V. Inclusive Urban Development

1. Policies should protect renters, informal workers, and slum residents.
2. Financing should be linked to service delivery outcomes instead of only revenue generation.
3. Urban planning should focus on affordability and sustainability.

Way Forward

1. Urban infrastructure financing must be supported by strong municipal institutions.
2. Fiscal devolution, administrative reform, and transparent governance are essential before pushing ULBs toward market borrowing.
3. Coordinated efforts by the Centre, States, and ULBs are necessary to build resilient and inclusive cities.

Conclusion: The Urban Challenge Fund is an important step toward improving urban finance. However, without strengthening municipal capacity and fiscal autonomy, cities risk falling into debt traps. Sustainable urban development requires empowered local governments, accountable governance, and inclusive planning.

Question: The success of market-based urban financing depends on the fiscal and administrative strength of Urban Local Bodies. Discuss in the context of the proposed Urban Challenge Fund.