Rs 1 lakh crore city push: Why Amitabh Kant calls this India’s biggest growth engine

The Union Cabinet’s approval of a Rs 1 lakh crore Urban Challenge Fund places cities at the centre of India’s growth strategy, a shift former NITI Aayog CEO Amitabh Kant said could redefine how the country develops over the next decades.

In a post following the announcement, Kant linked the initiative to long-term economic expansion driven by urbanisation. 

“Urbanisation will be the single biggest agent of growth in the next few decades in India,” he wrote on X. “In fact, India is already the second-largest urban system in the world with 11% of the total global urban population living in Indian cities. This is more than the urban population of the US, Germany, Japan and UK.” 

“Hitherto, India has been a reluctant urbaniser. However, this challenge route scheme for cities makes a paradigm shift. Efficient implementation must transform our cities,” he added. 

On Saturday, the Union Cabinet, chaired by Prime Minister Narendra Modi, approved the launch of the Urban Challenge Fund (UCF) with a total Central Assistance of Rs 1 lakh crore. Announcing the scheme, PM said the fund will leverage market finance, private participation and citizen-centric reforms to deliver better urban infrastructure.”

Urban Challenge Fund: How the scheme will work

According to the Cabinet note, the Urban Challenge Fund (UCF) will provide central assistance of Rs 1 lakh crore, covering 25% of project costs, provided at least 50% of financing is mobilised from market sources. The structure is expected to generate a total investment of Rs 4 lakh crore in the urban sector over five years, marking a shift from grant-based financing to market-linked and outcome-oriented infrastructure creation.

The fund will operate from FY 2025–26 to FY 2030–31, extendable to FY 2033–34, and implement Budget 2025–26 proposals on Cities as Growth Hubs, Creative Redevelopment of Cities, and Water and Sanitation.

Market borrowing will include municipal bonds, bank loans and public-private partnerships, with states, union territories and urban local bodies contributing the remaining share. Projects will be selected through a competitive challenge-based framework linked to reforms, milestones and measurable outcomes, monitored through a single digital portal of the Ministry of Housing and Urban Affairs.

A Rs 5,000 crore corpus has been created to improve the creditworthiness of 4,223 cities, particularly Tier-II and Tier-III cities, positioning urban local bodies as a bankable asset class.

A Credit Repayment Guarantee Scheme of Rs 5,000 crore will support smaller cities and those in northeastern and hilly states. It will provide a central guarantee of up to Rs 7 crore or 70% of the first loan amount, and 50% for subsequent loans, enabling projects of at least Rs 20 crore initially and Rs 28 crore later.

Projects will fall under three verticals: Cities as Growth Hubs, Creative Redevelopment of Cities and Water and Sanitation. These include transit-oriented development, renewal of business districts and heritage cores, climate resilience, water supply upgrades and integrated waste management.

Coverage will extend to cities with populations above 10 lakh, all state capitals, major industrial cities with populations above 1 lakh, and smaller urban local bodies through the guarantee scheme. In principle, all cities will be covered under the UCF.

Funding will be tied to governance, financial and operational reforms, including digital systems, planning improvements, efficiency benchmarks and third-party verification. Projects will also be evaluated on economic, social and climate outcomes, including job creation, investment mobilisation, service equity and cleanliness.

The government expects the Urban Challenge Fund to catalyse large private investment, strengthen urban governance and accelerate the creation of future-ready cities aligned with national development priorities.