Cabinet approves Rs 1 lakh crore Urban Challenge Fund to force cities to ‘earn’ their own growth

A year after it was announced in the Union Budget 2025-26, the Union Cabinet has approved the Rs 1 lakh crore Urban Challenge Fund that will provide 25% of the cost of projects for which at least 50% of the cost has to be raised from the market. Announcing the Cabinet’s decision on Friday, Information and Broadcasting Minister Ashwini Vaishnaw said on Saturday that a “wide range of cities” would be covered by the fund. The investment is envisaged over five years. The fund will provide Rs 1 lakh crore of Central assistance to projects worth Rs 4 lakh crore in total, with the remaining amount coming from the market and the local bodies/state government’s own sources. Cities will have to raise at least 50% of the project cost from the market, including through municipal bonds, bank loans and public-private partnerships. “The Urban Challenge Fund will leverage market finance, private participation and citizen-centric reforms for delivery of high-quality urban infrastructure. The fund aims to build resilient, productive, inclusive and climate-responsive cities, positioning those as the key driver of the country’s next phase of economic growth,” a government statement said. It added that the fund will be operational from this financial year, that is 2025-26 until 2030-31, and can be extended up to 2033-34. The projects to be funded will be identified by a challenge-based framework, with three kinds of proposals considered (cities as growth hubs, creative redevelopment of cities and water and sanitation). Among the projects that will be covered are urban mobility, retrofitting of legacy infrastructure and upgradation of water supply and sewerage networks. “There will be a strong thrust on reforms across urban governance, market and financial systems, operational efficiency, and urban planning. Private sector participation will be encouraged through structured risk-sharing frameworks and benchmarking of service delivery standards,” it said. The government will provide the guarantees for cities in the north-east/hilly states and those with populations below 1 lakh. A credit repayment guarantee scheme of Rs 5,000 crore for this has been approved, which will give Central guarantee of up to Rs 7 crore or 70% of the loan amount (whichever is lower) for first-time borrowers. Vaishnaw clarified that the administrative control of projects, created with private partnership, will remain with the state governments and urban local bodies. He added it had taken one year to frame the scheme after a lengthy consultation with the states.