Context
- The Urban Challenge Fund promotes market-linked, reform-driven urban infrastructure financing. The central government funds 25% project cost if cities mobilise 50% via market instruments.
- Instruments include municipal bonds, loans, and Public–Private Partnerships (PPPs).
- The reform seeks fiscal discipline while expanding non-budgetary urban infrastructure funding.
- India’s urban population exceeds 35%, contributing nearly 60% of GDP output but the rapid urbanisation widens the infrastructure financing gap across Indian cities.
- However, the ULBs face administrative stress amid unfinished works under multiple flagship schemes. The projects under AMRUT, SBM-U 2.0, Smart Cities, PMAY-Urban face chronic underutilisation.
Different Types of Constraints
- Fiscal & Constitutional Constraints
- Fiscal devolution remains incomplete despite the 74th Constitutional Amendment Act mandate.
- Amendment envisaged transfer of functions, funds, and functionaries to municipalities.
- State Finance Commissions remain weak in ensuring predictable fiscal transfers.
- Municipal dependence on States undermines fiscal autonomy and borrowing credibility.
- Administrative & Institutional Constraints
- Weak accounting systems reduce transparency and municipal creditworthiness.
- Eligibility norms under the Fund remain unclear, risking politicised allocations.
- Administrative overload weakens project planning, monitoring, and timely execution.
- Lack of professional municipal cadres constrains urban governance capacity.
- Political Economy & Equity Constraints
- Market-linked financing risks sidelining financially weaker municipalities.
- Cities may prioritise revenue-generating assets over essential social infrastructure.
- Informal settlement regularisation risks reduced policy focus.
- Urban growth risks becoming creditworthiness-driven rather than inclusion-driven.
Global Experiences and Reform Pathways
- Municipal bond markets succeeded in United States, Brazil, and South Africa. The credit rating frameworks improve transparency and investor confidence.
- Pooled financing mechanisms help smaller municipalities access capital markets.
- Property tax digitisation strengthens municipal revenue mobilisation.
- GIS-based mapping improves property coverage and tax compliance.
- Rationalised user charges ensure financial sustainability of urban services.
- Professional municipal cadres enhance planning and execution capacity.
- Capacity building aligns borrowing with inclusive urban service delivery.