Cabinet Clears Rs 1 Lakh Crore for India's Big Urban Reset; Aims to Unlock Rs 4 Lakh Crore Investment

Why It Matters

By linking financing to reforms and private capital, the UCF aims to unlock massive private investment, improve city creditworthiness, and accelerate India’s urban economic engine.

Key Takeaways

• Rs 1 lakh crore Urban Challenge Fund launched.
• 25% central assistance; cities fund 50% via market.
• Expected Rs 4 lakh crore investment by 2031.
• Rs 5,000 crore credit guarantee for smaller cities.
• Focus on growth hubs, redevelopment, water and sanitation.

Pulse Analysis

India’s urban population is projected to exceed 600 million by 2030, creating an urgent need for scalable financing solutions. The Urban Challenge Fund marks a strategic pivot from traditional grant‑based schemes to a market‑linked model that leverages municipal bonds, bank loans, and public‑private partnerships. By requiring ULBs to mobilise half of project costs, the government is nudging cities toward fiscal discipline and stronger balance sheets, while the 25% central grant acts as a catalyst rather than a crutch.

The fund’s architecture embeds reform incentives directly into financing. Projects are awarded through a competitive challenge, with disbursements tied to measurable governance, digitisation, and performance metrics verified by third parties. A parallel Rs 5,000 crore credit guarantee scheme lowers the risk barrier for smaller cities, offering up to 70% loan coverage for first‑time borrowers. This dual approach not only expands the pool of bankable urban assets but also creates a standardized credit framework that can attract institutional investors seeking stable, long‑term returns.

For investors, the UCF opens a pipeline of high‑impact infrastructure opportunities across three pillars: growth‑hub development, creative city redevelopment, and water‑sanitation upgrades. The emphasis on climate‑resilient design and digital monitoring aligns with ESG criteria, enhancing the appeal to global funds. If the projected Rs 4 lakh crore investment materialises, the initiative could generate millions of jobs, boost urban productivity, and position Indian cities as engines of the nation’s next growth wave.

Cabinet clears Rs 1 lakh crore for India's big urban reset; aims to unlock Rs 4 lakh crore investment

ET Online · Last Updated: Feb 14 2026, 02:12 PM IST

Union Minister Ashwini Vaishnaw said on Saturday that the Cabinet has approved the launch of a Rs 1 lakh crore Urban Challenge Fund (UCF) aimed at driving market‑led, reform‑driven urban infrastructure development over the next five years.

The fund will provide 25 % central assistance for projects, subject to cities mobilising at least 50 % of project costs from market sources such as municipal bonds, bank loans and public‑private partnerships.

The move is expected to catalyse total investments of around Rs 4 lakh crore in the urban sector between FY 26 and FY 31, marking a shift from grant‑based financing to outcome‑oriented and market‑linked urban transformation.

The scheme will be operational from FY 26 to FY 31, with an extendable implementation period till FY 34, and gives effect to Budget 2025‑26 proposals relating to Cities as Growth Hubs, Creative Redevelopment and Water & Sanitation infrastructure.

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Here is a look at what the reset entails

Market‑Linked Urban Financing Model

The Urban Challenge Fund seeks to position Urban Local Bodies (ULBs) as a bankable asset class by encouraging structured private participation and risk‑sharing frameworks. Projects will be selected through a competitive challenge mode, with funding linked to reforms, milestones and clearly defined outcomes.

A strong reform thrust is built into the framework, covering governance digitisation, financial strengthening, operational efficiency, urban planning reforms and defined Key Performance Indicators (KPIs) backed by third‑party verification.

Rs 5,000 crore Credit Guarantee for Smaller Cities

To facilitate first‑time access to market finance, the Cabinet has approved a Rs 5,000 crore Credit Repayment Guarantee Scheme targeting 4,223 cities, including Tier‑II and Tier‑III urban centres.

Under the scheme, smaller ULBs (population below 1 lakh) and cities in northeastern and hilly states will receive a central guarantee of up to Rs 7 crore or 70 % of the loan amount (whichever is lower) for first‑time borrowing. For subsequent projects, the guarantee will extend up to Rs 7 crore or 50 % of the loan amount.

The framework is designed to enable projects of at least Rs 20 crore initially and Rs 28 crore for follow‑on proposals.

Focus Areas: Growth Hubs, Redevelopment, Water

Projects under the fund will be anchored around three verticals:

• Cities as Growth Hubs – focusing on economic nodes, transit‑oriented development, mobility and corridor‑based expansion.

• Creative Redevelopment of Cities – renewal of central business districts, heritage cores, brownfield regeneration and climate‑resilient retrofitting.

• Water and Sanitation – water‑supply upgrades, sewerage, storm‑water systems, integrated waste management and legacy waste remediation.

The fund will cover all cities with population above 10 lakh, all state and UT capitals, major industrial cities with over 1 lakh population, and smaller ULBs through the credit‑guarantee route.

Reform‑Linked, Outcome‑Oriented Framework

Funding under UCF will be conditional on sustained reforms across governance, financial management, service delivery and spatial planning. Continuation of reforms will be a prerequisite for fund release, with paperless monitoring through a unified digital portal of the Ministry of Housing and Urban Affairs.

Officials said the initiative is expected to catalyse large‑scale private investment, improve urban creditworthiness, create jobs and accelerate the development of resilient, climate‑responsive cities positioned as engines of India’s next phase of economic growth.