Union Budget 2026 and Urban India – Spending Cuts and Policy Signals

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• The Union Budget 2026 has reduced central allocations for urban development by 11.6%, triggering debate on the government’s commitment to India’s cities.

Urban Development in India: Context and Importance

• Urban India is central to the country’s economic and social transformation. 
• Cities contribute nearly two-thirds of India’s GDP and act as hubs for employment, innovation, and service delivery. 
• Rapid urbanisation, however, has placed enormous stress on housing, transport, sanitation, water supply, and urban governance systems. 
• Managing this transition requires sustained public investment, especially as urban local bodies (ULBs) remain fiscally weak and highly dependent on central and state transfers.
• The Constitution, through the 74th Constitutional Amendment Act, envisaged empowered municipalities with functional autonomy. 
• In practice, inadequate devolution of funds, functions, and functionaries has limited their capacity. 
• Central schemes such as PMAY-Urban, AMRUT, Swachh Bharat Mission-Urban, and investments in mass transit were designed to fill this gap and create a baseline of urban services across Indian cities.

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Urban Development Financing Framework

• Urban development in India is financed through a mix of central allocations, state budgets, municipal revenues, and borrowing. 
• Centrally Sponsored Schemes (CSS) play a dominant role, particularly in housing, sanitation, water supply, and mobility. 
• While capital-intensive projects such as metro rail have received consistent support, everyday urban services, waste management, buses, footpaths, drainage, and informal housing depend on sustained, predictable funding.
• In recent years, climate risks such as heatwaves, floods, and water scarcity have further increased the need for resilient urban infrastructure. 
• This makes budgetary prioritisation of cities not merely a welfare concern but a macroeconomic necessity.

Union Budget 2026: Overall Urban Allocation

• The Union Budget 2026 has reduced total central outlay for urban development from Rs. 96,777 crore to Rs. 85,522 crore, a nominal cut of 11.6%. 
• After accounting for inflation, the real decline in urban spending is even sharper. 
• This contraction comes at a time when cities are absorbing large-scale migration, facing infrastructure fatigue, and confronting climate-induced stresses.
• The reduction signals a shift in fiscal priorities, where urban development appears to be treated as a residual sector rather than a growth-critical investment area.

Skewed Spending Priorities within Urban Allocation

• Despite the overall contraction, spending remains heavily skewed towards metro rail projects. 
• In 2026-27, metro and mass rapid transit systems account for Rs. 28,740 crore, about one-third of total urban allocations. 
• While metro systems are important for large cities, they are capital-intensive, spatially limited, and cater mainly to formal commuters.
• By contrast, bus-based public transport, non-motorised transport, and last-mile connectivity, used by the majority of urban residents, receive relatively limited attention. 
• This reflects a policy bias towards high-visibility infrastructure over inclusive and scalable mobility solutions.

Cuts in Flagship Urban Schemes

• All major urban welfare and service schemes have seen budgetary reductions:
  • Pradhan Mantri Awas Yojana-Urban (PMAY-U) has faced a cut of nearly 6%, despite persistent urban housing shortages and expanding informal settlements.
  • Swachh Bharat Mission-Urban (SBM-U) allocation has been halved, raising concerns about the sustainability of sanitation gains and waste processing infrastructure.
  • AMRUT, critical for urban water supply and sewerage, has seen a 20% reduction, even as cities face acute water stress and ageing infrastructure.
• These cuts directly affect the quality of life in cities and risk reversing progress made in basic urban services.

Implications for Urban Governance and Growth

• The Budget does not compensate for reduced central spending through greater fiscal devolution or enhanced revenue-raising powers for municipalities. 
• As a result, ULBs remain constrained in planning long-term infrastructure and responding to local needs.
• At a broader level, weakening urban investment undermines India’s growth aspirations. Globally, successful development trajectories are built on well-funded, inclusive, and productive cities. 
• Treating urban development as a cost centre rather than an engine of growth risks long-term economic and social consequences.

Source: TH