Union Budget 2026: Rethinking Priorities for Urban India’s Growth

Why in News ?

The Union Budget 2026 has reduced central allocations for urban development by 11.6%, triggering debate over the government’s commitment to India’s cities at a time of rapid urbanisation, infrastructure stress, and climate vulnerability.

Background: Urban Development in India – Context and Importance

Urban India lies at the heart of the country’s economic and social transformation:

• Cities contribute nearly two-thirds of India’s GDP.
• They function as hubs of employment, innovation, services, and governance.
• Rapid urbanisation has placed enormous pressure on:
  • Housing,
  • Transport,
  • Water supply,
  • Sanitation,
  • Solid waste management, and
  • Urban governance systems.

The 74th Constitutional Amendment Act envisaged empowered municipalities with financial and functional autonomy. However, in practice, inadequate devolution of funds, functions, and functionaries has constrained the capacity of urban local bodies (ULBs).

To bridge this gap, the Centre introduced flagship schemes such as:

• PMAY-Urban,
• AMRUT,
• Swachh Bharat Mission-Urban, and
• Investments in urban mass transit.

These interventions aimed to create a minimum standard of urban services across Indian cities.

Urban Development Financing Framework

Urban development financing in India rests on four pillars:

1. Central allocations through Centrally Sponsored Schemes (CSS),
2. State government budgets,
3. Municipal revenues (property tax, user charges, fees), and
4. Borrowings and market instruments.

While capital-intensive projects such as metro rail have received consistent support, everyday urban services—such as:

• Bus transport,
• Footpaths,
• Drainage,
• Waste management, and
• Informal housing—

depend on stable and predictable funding, which remains inadequate.

The growing impact of climate risks—including heatwaves, floods, and water scarcity—has further increased the need for resilient and adaptive urban infrastructure, making urban investment a macroeconomic imperative rather than merely a welfare concern.

Union Budget 2026: Overall Urban Allocation

The Union Budget 2026 has reduced total central outlay for urban development from ₹96,777 crore to ₹85,522 crore, a nominal cut of 11.6%.

• After adjusting for inflation, the real decline in urban spending is even sharper.
• This contraction comes at a time when:
  • Cities are absorbing large-scale migration,
  • Infrastructure systems are ageing, and
  • Climate-induced stresses are intensifying.

The reduction signals a shift in fiscal priorities, with urban development increasingly treated as a residual sector rather than a growth-critical investment area.

Skewed Spending Priorities within Urban Allocation

Despite the overall reduction, urban spending remains heavily skewed towards metro rail projects:

• In 2026–27, metro and mass rapid transit systems account for ₹28,740 crore, nearly one-third of total urban allocations.

While metros are important for large cities, they are:

• Capital-intensive,
• Spatially limited, and
• Primarily serve formal commuters.

By contrast, bus-based public transport, non-motorised transport, and last-mile connectivity—used by the majority of urban residents—receive relatively limited attention.

This reflects a policy bias towards high-visibility infrastructure over inclusive, scalable, and everyday mobility solutions.

Cuts in Flagship Urban Schemes

All major urban welfare and service delivery schemes have faced budgetary reductions:

• Pradhan Mantri Awas Yojana–Urban (PMAY-U): Cut by nearly 6%, despite persistent housing shortages and expanding informal settlements.
• Swachh Bharat Mission–Urban (SBM-U): Allocation halved, raising concerns about sustaining sanitation gains and waste processing infrastructure.
• AMRUT: Reduced by 20%, even as cities face acute water stress and deteriorating water and sewerage infrastructure.

These cuts directly affect the quality of urban life and risk reversing progress in basic services.

Implications for Urban Governance and Economic Growth

The Budget does not offset reduced central spending through:

• Greater fiscal devolution, or
• Enhanced revenue-raising powers for municipalities.

As a result:

• ULBs remain constrained in long-term planning,
• Urban infrastructure investment slows,
• Local service delivery becomes more uncertain.

At a macro level, weakening urban investment undermines India’s growth aspirations. Globally, successful development trajectories are built on well-funded, inclusive, and productive cities. Treating urban development as a cost centre rather than a growth engine risks long-term economic, social, and environmental consequences.

Way Forward: Reimagining Urban Development Policy

To realign urban development with India’s growth and sustainability goals, policymakers should:

• Restore and expand central allocations for urban infrastructure and services.
• Prioritise bus systems, walkability, and last-mile connectivity alongside metros.
• Strengthen municipal finances through property tax reforms, user charges, and credit access.
• Enhance fiscal devolution and empower ULBs with greater autonomy.
• Integrate climate resilience into urban planning, infrastructure design, and budgeting.
• Adopt a place-based, needs-driven approach rather than a one-size-fits-all model for cities.

Such reforms can reposition cities as engines of inclusive growth, social mobility, and climate resilience.