On 1 February 2026, the Finance Minister (FM) Nirmala Sitharaman of India unveiled the 2026-27 national budget, her ninth consecutive Union Budget. The budgetary provisions for Urban Local Bodies (ULBs) and cities offer insight into the government’s urban priorities and their implications for the long-term trajectory of urban growth.

Urban Local Bodies Across Previous Union Budgets

It is useful to take a directional view of how the last five Union Budgets have addressed urban issues. In 2021, the Budget strengthened allocations for cities’ physical and social infrastructure to support the expansion and improvement of select urban services. In 2022, the FM turned her attention to urban planning and outlined a complete overhaul of how it was being addressed. In 2023, there was an extended focus on municipal reforms and seeking implementation through an incentivisation package for the states and urban local bodies (ULBs). In 2024, the emphasis moved to urban housing and street vendors. Last year, the concept of an Urban Challenge Fund for developing ‘Cities as Growth Hubs’ was initiated, and the idea of incentivising state-level reforms in urban governance, municipal services, urban planning, and urban land was mooted.

Last year, the concept of an Urban Challenge Fund for developing ‘Cities as Growth Hubs’ was initiated, and the idea of incentivising state-level reforms in urban governance, municipal services, urban planning, and urban land was mooted.

Provision for Cities and Urban Local Bodies in Budget 2026-27

In this year’s national budget, there is an emphasis on cities with over half a million population, Tier II and Tier III ULBs, identified as emerging growth centres. The first mention of this idea appears in Para 15 (vi) of the FM’s speech under the government of India’s first ‘kartavya’, ‘developing city economic zones’. There will now be a stronger emphasis on developing their infrastructure, as mentioned in para 32 of the speech. In Para 39 of her speech, she reiterates this emphasis and includes temple towns, noting their need for modern infrastructure and basic amenities. She adds that this budget aims to further augment their potential to contribute to the economic power of agglomerations. The strategy would be to map city economic regions (CER) based on their specific growth drivers. To achieve the aforesaid objectives, the budget allocates INR 50 billion per CER over five years. Cities could implement their plans through a ‘challenge mode with a reform-cum-results based financing mechanism.’

In para 40 of the speech, the FM addresses environmentally sustainable public transport systems. The budget would support the creation of seven high-speed rail corridors between major cities and craft them as growth connectors. These corridors are i) Mumbai-Pune, ii) Pune-Hyderabad, iii) Hyderabad-Bengaluru, iv) Hyderabad-Chennai, v) Chennai-Bengaluru, vi) Delhi-Varanasi and vii) Varanasi-Siliguri.

Para 46 outlines municipal bonds. The objective is to promote the issuance of high-value municipal bonds by large cities. Accordingly, an incentive of INR 1 billion is allocated for a single bond issuance of more than INR 10 billion. For smaller cities, the ongoing scheme under the Atal Mission for Rejuvenation and Urban Transformation (AMRUT) — which provides incentives for bond issuances of INR 2 billion or less — continues to support such ULBs.

Cities could implement their plans through a ‘challenge mode with a reform-cum-results based financing mechanism.’

Para 62 mentions support for states through the challenge route for creating five university townships in the neighbourhood of major industrial and logistics corridors. These will develop as strategic academic zones that will host several universities, colleges, research institutions, skill centres, and residential complexes. While this initiative is outside the existing ULBs, one could presume that these townships will, over time, evolve into bustling urban centres. Academic townships, while needing adequate infrastructure, also require tranquillity away from the noise of large urban settlements. For all these initiatives, the budget has accepted the recommendation of the 16th Finance Commission and decided to allocate INR 14 billion to the States in 2026-27 as finance commission grants — to be shared among rural and urban local bodies, as well as for disaster management, as mentioned in Para 91 of the budgetary speech.

Analysis of the Budgetary Provisions

Of the urban initiatives outlined in the Budget, the notable aspect is the focus on tier II and tier III cities. The smaller and medium cities have suffered neglect ever since the Integrated Development of Small and Medium Towns (IDSMT) programme was abandoned.** **This is in part responsible for the skewed pattern of urbanisation, where most migration is concentrated in large cities of the country. Census 2011 listed about 4 dozen cities with populations between half a million and one million. An emphasis on the economic, physical, social and recreational infrastructure of these cities could improve the quality of life and attract migration, relieving pressure on overloaded metropolitan centres.

Similarly, the proposal to develop multiple transportation corridors as growth connectors is significant. In India, transportation routes stimulate growth and generate new economic centres. Therefore, the development of such routes needs to be expedited and multiplied to create additional centres of economic activity and help distribute rural-urban migration more evenly. The idea of municipal bonds has a long history in India, but has struggled to gain traction. Except for some of the larger cities, the municipal bond market remains underdeveloped. The provisions in the budget lack sufficient detail to establish municipal bonds as a primary borrowing tool for Indian ULBs, unlike in the United States. Most Indian ULBs are financially weak and cannot yet attain credit ratings attractive to investors. Before the bond market is promoted, the government of India and state governments need to prioritise the financial strengthening of municipal bodies.

The smaller and medium cities have suffered neglect ever since the Integrated Development of Small and Medium Towns (IDSMT) programme was abandoned.****

Some of the incentives provided in the budget for ULBs are through the challenge mode. In the last budget, an INR 1,000 billionUrban Challenge Fund (UCF) was created to transform cities into growth hubs. Unfortunately, the UCF has largely remained on paper, as its initial allocation has not been implemented. Rules framed for the scheme by the Ministry of Housing and Urban Affairs (MOHUA) failed to receive Cabinet approval, making it unlikely that the fiscal targets will be achieved in the current year. This raises concerns about the programme outlined in this year’s budget, which also relies on the challenge mode.

Finally, the allocation of INR 14 billion to the States in 2026-27 is for rural local bodies, disaster management, and urban local bodies. There is no clarity on how this allocation will be divided. As the funds are allocated to the states, their distribution will depend on state priorities. In this context, ULBs have often been disadvantaged, particularly in predominantly rural states.

While the budget proposals for ULBs move in the right direction, they do not appear robust enough given the scale of the urban problem. The urban effort appears limited despite enhanced government engagement with urban matters. The results of the past five national budgets, despite provisions for reforms in urban planning, infrastructure, and housing, have been constrained by state-level obstacles and city-level limitations, limiting their impact on the fundamental challenges facing Indian cities. The government of India needs to commit greater resources and resolve to Indian cities.

***Ramanath Jha ***is a Distinguished Fellow at Observer Research Foundation.

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