Between Promise And Reality: What Budget 2026-27 Really Means for India's Cities
The cuts in budgetary allocations for flagship urban schemes, coupled with renewed focus on prioritisation of reform mechanism-linked incentives, highlight a troubling shift towards privatisation.
Published : February 21, 2026 at 4:19 PM IST
The UN World Urbanisation Prospects 2025 has projected an increase of 986 million in global city population by 2050, and over half of them would be located in seven countries, with India at the centre of this urban transition. In contrast to the typical rural-urban binaries, the UN report acknowledges the rapid transformation of peri-urban settlements and transitional spaces between rural and urban areas.
In particular, as per the WUP 2025, about 40.3 percent of India’s population lives in cities in 2025, and about 44 percent people live in towns and transitional areas. This stark contrast to the officially recognised urbanisation rate of 31.2% underscores the urgency of addressing the myriad challenges posed by urban growth, particularly in smaller cities and informal settlements.
Accordingly, the core challenge is to facilitate urban expansions, especially beyond the large metros, so that cities can become centres of economic activity and are equipped to tackle issues of inequality, climate vulnerability, and inadequate access to basic services.
Analysing Overall Trend In Urban Allocations
In the last couple of years, the government has intended to prioritise urban development, shifting focus from basic service improvement to long-term planning, infrastructure, and sustainability. In this year’s budget, the Ministry of Housing and Urban Affairs (MoHUA) receives an allocation of Rs 85,522 crores, which is equivalent to about a 50 percent increase over the revised estimates of budgetary allocations of Rs 52,204 crores in 2025-26. However, the share of MoHUA’s allocation in the total union budget has decreased from 1.9 percent (budget estimate - BE) in 2025-26 to 1.6 percent in 2026-27.
Decoding Allocations
Two most significant announcements of this year’s budget are: a direct focus on Tier II and Tier III cities as engines of growth, and the development of City Economic Regions (CERs) to unlock the potential of urban agglomerations. The budget proposes to allocate Rs 5000 crore per CER over the next five years. Theoretically, the CERs can make people and firms more productive owing to a pooled labour market with scope for easy matching between firms and employees; forward as well as backward linkages between producers, suppliers and consumers and knowledge spillovers spurring innovation. At the same time, CERs open up the possibility of urban planning by integrating transport, housing, economic systems, and climate strategies.
In addition, the government’s renewed focus on tier II and tier III cities is in sync with earlier budget announcements of the Urban Infrastructure Development Fund (UIDF) in 2023-24 with an initial outlay of Rs 10,000 crore, followed by the proposed Rs 1 lakh crore Urban Challenge Fund (UCF) in 2025-26. Funds are intended to partly finance, on a competitive basis, bankable projects for creative redevelopment of cities and improvement in water and sanitation facilities.
Following the cabinet approval of UCF with central assistance of Rs 1 lakh crore over the next five years in the last week, all cities with a population of 10 lakh or more, state capitals and major industrial cities with at least one lakh population can avail funds to emerge as the new growth hubs.
Among the urban schemes, metro rail and Mass Rapid Transit System (MRTS), with budgetary allocations of Rs 30,996 crore, accounts for about 36 percent of total MoHUA allocations. This clearly indicates the government’s policy orientation towards strengthening as well as further expansion of about 1,036 km of metro rail operational in 24 cities with further approval of 17 metro rail projects in tier II cities. Metro rail-centred transport investment also complements the National Transit Oriented Development Policy (2017) towards facilitating compact multimodal integration and value-capture financing around metro stations.
However, the lack of last-mile connectivity seriously constrains the metro ridership in many Indian Cities. Facilities for non-motorised transport mode and last-mile connectivity are crucial for improving urban mobility. Accordingly, about 77 percent reduction in budgetary allocations in 2026-27, as compared to the previous year, under PM e-Bus Sewa is a matter of concern. Inadequacy of bus services, as per the Economic Survey 2025-26, is evident from the concentration of 61 percent buses in nine megacities. The persistent deficit in bus services, especially across Tier II and III cities, forces reliance on private transportation, resulting in heightened congestion and decreased productivity.
Access to affordable housing has crucial ramifications for urban inequality. The dream of affordable housing remains elusive for millions of urban dwellers. Staggering property prices and speculative practices have forced many, particularly those in lower-income brackets, into informal living arrangements.
The Knight Frank - NAREDCO report (2025) indicated a decline in supply of affordable housing (units costing less than Rs 50 lakh) from 52.4 per cent in 2018 to 17 per cent by 2025 in India's top eight cities. Against this backdrop, a reduction in budgetary allocation under the Pradhan Mantri AwasYojana–Urban (PMAY-U) and its recent 2.0 version, from Rs 30,171 crore in 2024-25 to Rs 21,625 crore in 2026-27, will further stifle the supply of affordable housing in cities.
Further, among the four PMAY (U) verticals, the Affordable Housing in Partnership (AHP)/In-situ Slum Redevelopment (ISSR) component, with greater potential for addressing affordability for the urban poor, accounts for about 14 percent of total sanctioned units, with the corresponding figure being as low as 7 percent in 2025-26.
In addition, inadequate urban services coupled with limited opportunities for livelihood activities have resulted in low occupancy of the housing units under AHP/ISSR. The budgetary allocations for Interest Subsidy Scheme (ISS) for the economically weaker section, lower income group and middle income group have declined from Rs 3,500 crore in 2025-26 to Rs 3,000 crore in 2026-27.
The Industrial Housing Scheme is allocated only Rs 400 crore as compared to the provision of Rs 2,500 crore in 2025-26. All these are likely to exacerbate the housing crisis, making it increasingly difficult for lower-income populations to secure affordable housing.
Budgetary allocations for AMRUT and SBM (U) – two flagship schemes for improving urban water supply, sewerage and scientific as well as sustainable management of solid waste – are Rs 8000 crore and Rs 2500 crore that are equivalent to cuts of about 25 percent and 60 percent respectively, compared to the previous year’s budget.
Quite a significant proportion of urban people experience inadequate and poor quality of essential basic services. Squeezing of financial allocations would certainly undermine cities' ability to provide clean water, adequate sanitation and lots of other amenities. This, in turn, would move the cities further away from global commitments related to SDGs and climate targets.
As part of the Smart Cities Mission, the Integrated Command and Control Centres (ICCCs) have been created to digitally monitor urban services, to decongest the dense city centers and to improve accessibility to basic education and health needs. Without any budgetary allocations for smart cities, the operational viability of the ICCCs looks uncertain.
Among the general decline in budgetary allocations across most of the major urban schemes, Prime Minister’s Street Vendors’ AtmanirbharNidhi (PM SVANIDHI) - although accounts for a small share of total MoHUA allocations – experiences about a three-fold increase in budgetary support to Rs 900 crore in 2026-27. This program, by providing collateral-free working capital loans, has enhanced the livelihood opportunity of millions of urban street vendors.
Moreover, the Deendayal Jan AajeevikaYojana- Shehari -DJAY(S) has been allocated Rs 536 crore in the current budget – an increase of about 2.6 times of revised estimates in 2025-26. These schemes would provide the much-needed credit support and recognition to a section of urban informal workers and could make them stakeholders towards building inclusive cities.
Reading Beyond The Numbers
A closer look at the budgetary allocation reveals two key insights. First, the cuts in budgetary allocations for flagship urban schemes, coupled with a renewed focus on prioritisation of reform mechanism-linked incentives, highlight a troubling shift towards privatisation and innovative financing for urban infrastructure. The UCF illustrates this pivot as it caps the central government’s financial commitment at 25 percent cost of bankable projects, with the condition that at least 50 per cent of the project cost is funded through bonds, bank loans, and PPPs. However, the cities are yet to unlock the full potential of their own source revenue (OSR) and innovative sources of financing. For most large Indian cities, OSR covers only 30-40 per cent of total municipal expenditure, with the same being lower than 20 per cent for smaller cities. This problem of weak financial health, coupled with a lack of creditworthiness, constrains the municipal bond issuances.
Among the 500 AMRUT cities, only 36 cities have secured investment grade rating of A and above. In this year’s budget, an attempt has been made to strengthen the municipal bond market through an incentive of Rs 100 crore for a single bond issuance above Rs 1000 crore, along with an annual lump-sum grant-in-aid for AMRUT cities with a ceiling of a maximum of Rs 200 crore of bonds. Nevertheless, only larger cities with better financial and administrative capacity would likely be able to tap innovative sources and arrange matching contributions for funds available under urban schemes. Smaller cities would continue to find it more difficult to plan and finance their development actions.
Second, endemic implementation gaps plague urban schemes, often resulting in low utilisation rates and repeated deadline extensions for project completion. As per the World Bank (2025) report, in the case of SCM and AMRUT, cities could utilise only about one-fifth of the cumulative cost of approved projects.
The low implementation capacity of the city governments has become a serious issue. This lack of capacity, compounded by fragmented local governance and inadequate planning expertise, continues to hinder progress and drain resources that could be better invested. The recommendation to establish a ‘National Urban Regional Planning Authority (NURPA) in 2023 as an apex advisory body for recruiting urban planners and building capacity for urban planning over a period of five years has not been operationalised. This clearly signifies a lack of commitment to enhancing expertise in urban management. It is high time to prioritise capacity building of the city governments to address the evolving challenges of urbanisation in India.
Disclaimer: The opinions expressed in this article are those of the writer. The facts and opinions expressed here do not reflect the views of ETV Bharat.
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