Last year, while presenting the Union budget 2025–26, finance minister Nirmala Sitharaman identified urban development as one of six national policy priorities. Presenting the 2026–27 budget this year, she reinforced this direction, once again describing cities as “engines of growth, innovation and opportunity.”
The emphasis on urban development as a driver of growth is both timely and well-founded, given the well-established link between urbanisation and economic transformation. Yet a closer reading of the allocations reveals underlying tensions — between ambition and fiscal commitment, welfare expansion and infrastructure cuts, and growth imperatives and environmental sustainability, which warrant careful scrutiny as India charts its urban transition. The overall decline in the ministry of housing and urban affairs’ allocation — from Rs 96,777 crore to Rs 85,522 crore — further complicates city-centric growth ambitions.
Focus on Tier II and Tier III cities
The most explicit urban signal in the budget is the emphasis on Tier II and Tier III cities as the next engines of economic growth. At the core of this shift is the proposal to identify and develop City Economic Regions (CERs) — urban clusters anchored in sector-specific growth drivers. To operationalise this idea, the government has proposed an allocation of Rs 5,000 crore per CER over five years, to be disbursed through a reform-linked, challenge-based financing mechanism.
Finance minister Sitharaman in her budget speech of 2025 had announced an Urban Challenge Fund with a corpus of Rs 10,000 crore to attract private investment to develop “Cities as Growth Hubs”, “Creative Redevelopment of Cities” and “Water and Sanitation” infrastructure through bankable, financially viable projects. It was mentioned that this fund would finance up to 25 per cent of the cost of projects, which can raise at least 50 per cent of the cost from bonds, bank loans, and public-private partnerships. However, analysis of the ministry of housing and urban affairs (MoHUA) budget reveals, this entire Rs 10,000 crore had remained unutilised during financial year 2025-26. It may be assumed that this will now be channelised for the Tier II and Tier III cities, as there is no specific allocation otherwise.
There is no denying the fact of the critical importance of focusing on Tier II and Tier III cities, as the metro cities are bursting at seems. However, it remains unclear how many of these cities will actually be able to access the Urban Challenge Fund, given that they are required to raise half of the project cost through market-based instruments. According to Securities and Exchange Board of India (SEBI), since 2017 only 14 Tier II and Tier III cities located in five states (Andhra Pradesh, Madhya Pradesh, Uttar Pradesh, Gujarat and Maharashtra) had been able to float municipal bonds, while a few more have gained experience in handling managing public-private partnerships. Thus, most states will need to prioritise enhancing the creditworthiness of their municipal governments, through accounting reforms and greater fiscal empowerment.
Urban Swachh Bharat allocation halved
One of the more positive signals in the budget is the renewed emphasis on urban welfare, particularly livelihood support for the urban poor. Rapid urbanisation, coupled with the dominance of informal employment, has long created a policy vacuum in urban social protection, exposed starkly during the COVID-19 pandemic.
The allocation for PM-SVANidhi, which provides micro-credit support to street vendors, has increased significantly to Rs 900 crore in 2026–27, up from Rs 373 crore in 2025–26. Similarly, the Deendayal Antyodaya Yojana–National Urban Livelihood Mission (DAY-NULM), which received Rs 200 crore in revised budget 2025–26, has been allotted Rs 536 crore in the current budget. These increases reflect a growing recognition of the vulnerabilities of urban informal workers and the need for targeted support mechanisms.
However, these gains in livelihood support are offset by sharp reductions in affordable housing allocations. Funding for Pradhan Mantri Awas Yojana–Urban (PMAY-U) has declined steadily — from Rs 30,170 crore in 2024–25 to Rs 19,794 crore in 2025–26, and further to Rs 18,625 crore in 2026–27. While the government introduced an Industrial Housing Scheme initially funded at Rs 2,500 crore in financial year 2025-26, the latter has seen its allocation fall to just Rs 400 crore this year. Cuts are even sharper in basic urban services. The allocation for the Swachh Bharat Mission (Urban) has been halved from Rs 5,000 crore to Rs 2,500 crore.
Cuts in affordable housing risk deepening informality and overcrowding, undermining India’s commitment to Sustainable Development Goal (SDG) 11.1 on access to adequate and affordable housing. Urban sanitation, likewise, requires sustained investment in waste processing, sewage treatment, faecal sludge management and worker safety. Similarly, cutting half of the Swatch Bharat Mission (Urban) budget signals a troubling deprioritisation of public health and weakens progress towards SDG 11.6, which focuses on reducing the environmental impact of cities through improved waste management.
On-ground and digital infrastructure ignored
Budget 2026–27 also signals a broader contraction in core urban infrastructure spending. The allocation for metro and mass rapid transit has declined from Rs 31,239 crore to Rs 28,740 crore. Nevertheless, metros still absorb nearly a third of the total urban budget, even as investment in bus systems, suburban rail, non-motorised transport and last-mile connectivity remains inadequate.
The allocation for AMRUT, the flagship scheme for water supply and sewerage, has fallen from Rs 10,000 crore to Rs 8,000 crore between financial year 2025–26 and 2026–27. At a time of acute water stress, groundwater depletion and climate-induced variability, this reduction weakens a critical pillar of urban sustainability.
Digital infrastructure reflects a similar pattern of retreat. The Smart Cities Mission has effectively concluded, with no provision for sustaining the Integrated Command and Control Centres established in 100 cities. Without a long-term financing framework, these high-value assets risk institutional decay. Meanwhile, funding for the National Urban Digital Mission has sharply declined from Rs 1,250 crore to Rs 300 crore.
No commitment to climate adaptation
Perhaps the most significant gap in the budget is its limited engagement with urban environmental risk — particularly striking given that both the Economic Survey 2024-25 and 2025-26 identify climate adaptation as central to achieving the Viksit Bharat vision. Indian cities are already grappling with worsening air pollution, recurrent flooding, heat stress and water scarcity, yet the budget makes no dedicated financial commitment to climate resilience or ecosystem-based urban planning, relying instead on a supply-side push for electric mobility.
Admittedly, urban development is constitutionally a state subject under India’s federal framework. However, the scale and interconnected nature of environmental risks —spanning air basins, river systems and national climate commitments — make it imperative for the Union government to provide strategic direction, fiscal incentives and coordinated leadership.
The absence of an integrated environmental lens points to a deeper policy disconnect. Urban growth continues to be framed in terms of physical expansion rather than ecological constraints. Without sustained investment in addressing environmental challenges, the very urban development–centric growth ambitions the budget seeks to advance risk being undermined.