Opinion: Union Budget fails to match cities’ growth

With India’s urbanisation expected to touch 50% by 2050, there is a need to allocate significant portion of resources for scaling up infrastructure

By Prof Alok Kumar Mishra, Pavan Kumar Thimmavajjala

The middle class has much to be happy about the Union Budget 2025-26. The tax rebates are expected to increase disposable incomes and leave more money in people’s hands. Interestingly, a significant portion of India’s middle class is moving towards cities for better livelihoods. In line with this development, Finance Minister Nirmala Sitharaman, in her Budget speech, stated that urban development was a key agenda for the NDA government. So, are our cities well equipped to accommodate the increased urban migration? The numbers point to a different story.

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Rapid Urbanisation

According to the 2011 Census, about a third (31%) of India’s population lives in urban areas. The Ministry of Housing and Urban Affairs (MoHUA) also stated that the rate of urbanisation has gone up in the last 10 years and is expected to cross 40% by 2030. This is evident from the UNDP’s World Urbanisation Prospects (Revised) Report, 2022, which notes that about 41.6 crore more urban dwellers will live in Indian cities by 2050. It also estimates that we will add 10 more 5-million-plus cities.

The NITI Aayog in 2022 estimated that urban India contributed close to 60% to the gross domestic product (GDP). The importance of urban centres is only expected to rise in the coming years owing to their capacity to create economies of scale, scope and bring together different industries, services and generate employment. With India’s urbanisation expected to touch 50% by 2050, it is recognised that there is a need to allocate a significant portion of resources for scaling up infrastructure in our cities such as roads and mass rapid transit corridors involving metro rail, suburban or regional rail as well as bus transport systems.

In the last four years, the actual amount spent on various programmes has been much less than the budgeted allocations

The High Powered Executive Committee (HPEC) led by Dr Isher Ahluwalia in 2011 estimated that (using 2009-10 prices) to build urban infrastructure over the next 20 years (till 2031) the quantum of investments required would be Rs 39.2 lakh crore or Rs 2 lakh crore (1% of GDP) per annum.

In the post-Covid years, there has been an increased allocation towards urbanisation. The outlay for MoHUA has grown by 14.10% year-on-year (CAGR). However, in the last four years, the total expenditure on urban development as a percentage of the total government expenditure has been less than 2%, and the actual amount spent on various programmes has been much less than the budgeted allocations. Only in 2021, did the actual expenditure exceed by 1.50 per cent from the budgeted amount. While there has been a noticeable rise from 0.3% of GDP in 2020 to 0.5% in 2025, the investments made are still much less than the required quantum. Besides, the budgeted capital expenditure outlay for the MoHUA has grown marginally from 34% in 2024 to 38% in 2025.

Efficient Utilisation of Funds

The Smart Cities Mission (SCM) aims at upgrading cities with technological support and Area-Based Development (ABD). As the date for its closure approaches, about 93% of the SCM work has been completed with about Rs 1.50 lakh crore being spent on 7,482 projects in all the 100 smart cities. Of these, only 20% of the projects pertained to smart mobility, followed by about 20% related to social and economic infrastructure and about 18.5% related to Water and Sanitation Hygiene (WASH).

Public-private partnership (PPP) seems to have had limited success with only 5% of the completed projects being taken up in PPP mode, while 48% of them were funded through the mission, suggesting funding challenges. For the Atal Mission for Rejuvenation and Urban Transformation (AMRUT) scheme, which focuses on fixing urban sanitation, water and provision of similar amenities in urban areas, data shows the total funding at about Rs 2.9 lakh crore for five years, with the central assistance amounting to Rs 76,760 crore. Documents also show lesser utilisation than the amount earmarked. Other schemes too showed similar trends.

The Pradhan Mantri Awas Yojana-Urban (PMAY-U) which was given huge allocations during FY21 saw a considerable decline with only half of its actual allocation being made in the following years while lack of utilisation persisted (except for 2022). Between 2021 and 2024, the budget earmarked was increased significantly. However, in this Budget there has been a 38% cut (from the previous BE) in the allocation. The SCM is set to conclude on March 31, 2025, raising questions of how continuity can be maintained with regard to projects taken up during the scheme.

Metro Projects

The one area where relatively efficient use of funds has been made is metro projects, which is the second major head for MoHUA after PMAY-U. The actual spending went up 171% between 2020 and 2021 and has only increased over the years, with this year’s Budget setting aside about Rs 31,239 crore, pointing to enhanced central assistance for various metro rail projects in the country. Despite this, Hyderabad metro’s expansion plan did not find any mention in the Budget. The State government reportedly sought Rs 24,269 crore for the second phase.

This year’s Budget saw the proposal for an ‘Urban Challenge Fund’ with the allocation of Rs 10,000 crore (with a planned corpus of Rs 1 lakh crore) to fund up to 25% of bankable urban infrastructure projects with additional allocations being made for enhancing social security of urban poor and street vendors. It remains to be seen how this supplements the existing National Urban Infrastructure Development Fund.

It is important to note that almost 30% of the urban population still lives in slums with inadequate sanitation, poor hygiene and limited transport options. Going forward, focus on the urban poor and earmarking money for the ULBs to directly tap into for improving slums should be undertaken. Solid objectives have to be laid out at the city level each year to improve the quality of living of the urban poor, besides ensuring that city budgets also factor in performance outcomes on key goals before seeking more allocations.

As cities still suffer from problems of inadequate autonomy vis-a-vis funding and with limited financing options, plans for scaling up transit networks, re-designing cities and planning capacity enhancement are in limbo. Therefore, it is of urgent need to redesign city administration mechanisms as well as scale up the urban infrastructure funding to at least 1% of the GDP to ensure urban India is prepared to achieve inclusive and sustainable growth in the long run.

 

(Prof Alok Kumar Mishra is Professor and Pavan Kumar Thimmavajjala is Research Associate, School of Economics, University of Hyderabad)