New Delhi, February 15: The Indian Cabinet, chaired by Prime Minister Narendra Modi, has approved the Urban Challenge Fund (UCF) with a total allocation of ₹1 lakh crore. This fund will provide central assistance (CA) amounting to 25% of the project cost, provided that at least 50% of the project cost is raised from the market.
This initiative is expected to attract an overall investment of ₹4 lakh crore in urban areas over the next five years. It marks a significant shift in India’s urban development approach, moving away from grant-based financing to market-linked, reform-oriented, and outcome-focused infrastructure development.
The Urban Challenge Fund aims to leverage market finance, private partnerships, and citizen-centric reforms to build high-quality urban infrastructure. The goal is to create resilient, productive, inclusive, and climate-friendly cities that can drive the next phase of economic growth in the country.
The fund will operate from the financial year 2025-26 to 2030-31, with the possibility of extending the implementation period until 2033-34.
At least 50% of the project’s financial arrangement must be sourced from market avenues, including municipal bonds, bank loans, and public-private partnerships (PPP). The remaining portion can be provided by states, union territories, urban local bodies, or other sources. Projects will be selected through a transparent and competitive challenge system, ensuring support for high-impact and reform-oriented proposals.
Special emphasis will be placed on improving urban governance, market and financial systems, operational efficiency, and urban planning. Private sector participation will be encouraged through a structured risk-sharing framework and standardization of service delivery standards.
A dedicated fund of ₹5,000 crore will enhance the creditworthiness of 4,223 cities, including Tier-II and Tier-III cities, particularly those accessing market finance for the first time. To facilitate access to market finance for all cities and urban local bodies (ULBs) in northeastern and hilly states, a loan repayment guarantee scheme of ₹5,000 crore has been approved. This scheme will provide a central guarantee of up to ₹7 crore or 70% of the loan amount (whichever is lower) for first-time loans.
Upon successful repayment of the first loan, a central guarantee of up to ₹7 crore or 50% of the loan amount (whichever is lower) will be provided. This support will effectively enable projects in smaller cities, starting with a minimum of ₹20 crore for initial projects and up to ₹28 crore for subsequent projects.
Projects under this fund will be selected based on a framework that considers transformative impact, sustainability, and reform orientation. Fund allocation will be linked to reforms, targets, and clearly defined outcomes. The continuity of reforms will be a prerequisite for further fund disbursement. A single digital portal by the Ministry of Housing and Urban Affairs will facilitate paperless monitoring of projects and reforms.
Cities will be recognized as development centers, with a focus on urban areas as vital economic hubs. This includes integrated spatial economic and transit planning, development of green and semi-green areas, and significant infrastructure projects to enhance urban mobility and economic competitiveness.
Creative redevelopment of cities will involve the renewal of central business districts and heritage centers, brownfield redevelopment, transit-oriented development, and the restoration of heritage infrastructure. Measures will also be taken to alleviate congestion in existing cities, especially in northeastern and hilly states, by developing new cities away from crowded areas.
Water and sanitation improvements will include upgrading water supply, sewage, and rainwater systems, as well as rural-urban infrastructure, water grids, and integrated solid waste management, with a strong emphasis on sanitation.
The funding provided under the Urban Challenge Fund is based on a comprehensive reform agenda that includes governance and digital reforms, market and financial reforms to enhance creditworthiness, operational improvements for better service delivery and utility efficiency, urban planning and spatial reforms, and project-specific reforms linked to key performance indicators (KPIs), third-party verification, and continuous operation and maintenance mechanisms.
Projects will be evaluated based on their potential to deliver transformative outcomes, including revenue generation, private investment, job creation, and improvements in safety, inclusivity, service equity, and sanitation.
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