Can Union Budget 2025 deliver on urban infrastructure?

The rapidly growing urbanisation in India calls for a robust and sustainable urban infrastructure framework. Urban areas contribute significantly to the country’s GDP and are central to its developmental aspirations. However, the existing infrastructure in cities often struggles to keep pace with the growing population and urban expansion, leading to challenges in transportation, housing, waste management, and sanitation. The Union Budget 2025 provides a crucial opportunity to address these gaps by fostering innovation, enhancing funding mechanisms, and encouraging public-private partnerships (PPP).

Public-Private Partnerships (PPP) have been a game-changer in sectors like roadways and railways, yet their presence in urban infrastructure projects has significantly declined. Investments in PPP urban projects peaked at INR 8,353 crore in 2012 but dropped drastically to INR 467 crore by 2018. One primary reason for this decline is the limited revenue streams from urban projects, making them less attractive to private players. To reverse this trend, the Budget should focus on innovative PPP models. Immediate measures could include fiscal support through viability gap funding (VGF) or other upfront financial incentives to attract private investment.

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Introduced in the 2023-24 Budget, the Urban Infrastructure Development Fund (UIDF) was established to promote infrastructure development in Tier 2 and Tier 3 cities. While it marked a significant step forward, there is potential for a greater impact. The Budget 2025 could increase the corpus of UIDF and widen its scope to include PPP projects. Providing fiscal support for private sector participation under this fund can bridge funding gaps and accelerate project completion. This step will not only bolster urban development but also decentralise economic growth to smaller cities.

Urban Local Bodies (ULBs) are at the forefront of implementing urban infrastructure projects but often face severe funding constraints. Municipal bonds, a key financing tool for ULBs, remain underutilised in India. Over the last decade, municipal bonds accounted for less than one-tenth of the total commercial debt raised by ULBs. To address this, the Budget should introduce measures to strengthen the municipal bonds market. Empowering SEBI to incentivise pension and insurance funds to invest in these bonds could increase their market share. Additionally, raising the interest rates on municipal bonds could attract more retail investors. This move would provide ULBs with a reliable funding source and enable them to execute critical projects effectively.

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While private sector involvement is essential, government investment remains pivotal, particularly in areas where private capital is scarce, such as Tier 2 and Tier 3 cities. Budget 2025 is expected to announce a significant increase in financial allocation for urban infrastructure projects. Priorities should include urban housing, water supply, and sanitation. A targeted approach focusing on smaller cities can address regional disparities and foster inclusive urban development. Increasing the fiscal outlay for urban infrastructure projects will ensure that underserved regions receive the necessary support for infrastructure development. It will also help tackle urbanisation challenges, creating an environment conducive to sustainable economic growth and social progress.

India’s commitment to sustainable development underscores the need for environmentally friendly urban infrastructure. Budget 2025 should provide tax incentives for developers adopting green building technologies and materials. Incentivising the skilling of workers in green construction can also enhance labour productivity while promoting sustainable practices. These measures align with India’s goals to reduce carbon footprints and build resilient urban ecosystems.

Affordable housing remains a cornerstone of urban development, especially under the PM Awas Yojana Urban 2.0. Despite substantial investments, rising construction costs and an affordability gap have hindered progress, with metro cities witnessing a 4 per cent dip in sales and a 7 per cent decline in new launches. To counter this, Budget 2025 should introduce fiscal stimuli to boost affordable housing projects, particularly for the poor and middle class. Enhancing subsidies, reducing GST rates on affordable housing, and increasing credit-linked subsidy schemes can make housing more accessible. By focusing on affordability, the government can help ensure that every citizen has access to safe and secure housing, thereby addressing one of the most critical urban challenges.

India’s Smart Cities Mission aims to enhance urban living through technology and innovation. Budget 2025 is expected to increase allocations for smart city initiatives, emphasising capital expenditure for cutting-edge infrastructure. Priorities could include smart lighting systems responsive to pedestrian activity and safe pathways with emergency stations. These investments will not only improve the quality of life but also establish Indian cities as global benchmarks for urban innovation.

The Union Budget 2025 must focus on addressing the multifaceted challenges of urban infrastructure. By reviving PPPs, enhancing the UIDF, empowering ULBs, and prioritising sustainability and affordability, the government can lay the groundwork for a resilient and inclusive urban future. An equitable focus on Tier 2 and Tier 3 cities, coupled with innovative financial mechanisms, will ensure balanced development and unlock the true potential of India’s urban landscape. The upcoming budget has the potential to shape the future of urban India, ensuring that the growing population is met with efficient, sustainable, and inclusive infrastructure that supports economic growth and improves quality of life.

The author is Partner, JSA Advocates & Solicitors. Views expressed in the above piece are personal and solely those of the author. They do not necessarily reflect Firstpost’s views.