In Focus: Funding Cities, Fixing Governance
A few days ago, boarding a train from New Delhi station toward the eastern stretches of Uttar Pradesh, I expected a routine long journey. What I did not expect was that the train window would offer one of the sharpest lessons on Indian urban governance. As the train left Delhi, the view was not of the city’s skyline but of dense informal settlements along the tracks, with open drains and makeshift homes pressed against the railway network. Further along, half-constructed buildings stood abandoned mid-floor without sewage connections, while stations along the route showed broken taps, overflowing bins, and neglected infrastructure.
In one of the small town halls, a group of men were breaking the platform’s structures to fill a pothole outside the station entrance, an improvised and unbudgeted municipal repair. Somewhere past Prayagraj, as the train sped through an unlit stretch of peri-urban settlements where new buildings sat dark and roadless beside flooded lanes, a co-passenger remarked: “Yahan toh sirf building banti hai, sheher nahi (only buildings are built here, not cities)”. This is, perhaps, the most precise diagnosis of the urban governance crisis. Structures are rising. Institutions are not.
Growing Allocations, Shrinking Delivery
India’s urban financing journey tells a story of widening ambition, though not always of widening impact. The 13th Finance Commission, aligned with the 2011 Census, allocated a modest ₹23,000 crore for urban local bodies (ULBs) representing just 26% of total local body grants. The 15th Finance Commission raised this to ₹1.55 lakh crore, pegging the urban share at 36%. The 16th Finance Commission makes a historic leap: ₹3.56 lakh crore for ULBs, representing 45% of all local body grants, a two-fold increase over its predecessor and a 15-fold rise from the 13th FC. The 45% allocation is deliberately anticipatory, calibrated to cushion urban bodies against any demographic shock that Census 2027 may reveal, particularly if urbanisation crosses the 45–48% mark.
In parallel, the Union Cabinet approved the Urban Challenge Fund (UCF) in February 2026, a ₹1 lakh crore Central Assistance mechanism designed to catalyse a total investment of ₹4 lakh crore in urban infrastructure over the next five years. The Fund signals a deliberate shift from grant-based to market-linked financing. A dedicated ₹5,000 crore Credit Repayment Guarantee Scheme will extend first-time market access to smaller and hilly-state ULBs. Yet, in a contradictory move, the Union Budget 2026 simultaneously reduced the total central outlay for urban development from ₹96,777 crore to ₹85,522 crore, a nominal cut of 11.6%. Atal Mission for Rejuvenation and Urban Transformation (AMRUT) saw a 20% reduction, Swachh Bharat Mission-Urban was halved, and PMAY-Urban faced a 6% cut, precisely the schemes that serve the urban poor and manage climate stress. The juxtaposition of a transformative fund alongside scheme-level austerity reflects an unresolved tension in India’s urban fiscal architecture.
The Problem Architecture: What Is Broken and Why
It is important to note that India’s urban local governance crisis is structural and not incidental. The Comptroller and Auditor General (CAG) has flagged systemic failures across 18 states covering 241 million urban residents. The key fault lines are as follows:
Devolution Gap: The 74th Constitutional Amendment mandated decentralisation of 18 functions to ULBs, yet three decades later, only 4 functions have been transferred with full autonomy. States have technically complied but violated the “spirit” of the amendment across 393 ULBs. This includes states such as Maharashtra, Odisha, Andhra Pradesh, and Haryana.
Revenue Fragility: ULBs face a 42% gap between resources and expenditure; only 32% of their revenue is internally generated. Property tax, their primary own-source revenue, achieves only 56% realisation of total demand.
Staffing Vacuum: Urban bodies operate with an average 37% vacancy rate in sanctioned positions; ULBs in 16 states have little or no control over their own recruitment. The CAG separately noted a 20% vacancy rate among elected officials.
Developmental Spending Deficit: A mere 29% of ULB expenditure goes towards developmental and programmatic work, with the rest consumed by salaries, administrative overheads, and debt servicing.
Climate Exposure: By 2030, 40% of Indian cities are projected to face water scarcity, even while urban heat waves intensify annually. Delhi already registers one in seven deaths as pollution-linked. Understandably, climate resilience requires fiscal autonomy, and most ULBs fall short.
Accountability Deficit: Special Purpose Vehicles (SPVs) created under the Smart Cities Mission are corporate entities with no elected representatives and thus no democratic accountability. The Smart Cities Mission’s top-down design also generated over 8,000 projects worth ₹1.64 lakh crore, but was criticised for limited municipal ownership and excluding informal urban populations.
Urban Governance and AI- Intelligence at the Last Mile
India is at an inflexion point in deploying Artificial Intelligence for urban governance, not as a technology showcase but as an operational backbone for city management. National missions such as AMRUT, the Smart Cities Mission, and the National Urban Digital Mission have laid the digital and institutional foundations for this transition. Cities across India now demonstrate what embedded urban AI looks like in practice. Gorakhpur uses predictive flood alerts, Prayagraj deploys crowd analytics for large gatherings, Ahmedabad uses computer-vision traffic monitoring, and Pimpri-Chinchwad has scaled AI pilots for city management.
The IndiaAI Mission, approved in 2024 with a ₹10,300 crore investment, focuses on national compute infrastructure, datasets, and startup funding. However, the most tangible public impact will come from localising this mission for cities by curating AI models for traffic management, waste collection, grievance redressal, and multilingual citizen services. Three specific problems in urban governance where AI can provide immediate, measurable solutions are worth highlighting. First, property tax leakage: GIS-integrated AI can map unassessed properties, cross-reference satellite imagery with tax records, and significantly close the 44% revenue gap in property tax realisation, directly addressing one of ULBs’ most critical revenue failures. Second, water distribution losses: AI-based sensor networks can help identify real-time pipe leakages and distribution inefficiencies, reducing non-revenue water losses that in some cities exceed 40%. Third, solid waste management: AI-enabled route optimisation and bin-fill sensors can cut collection costs while improving coverage of a foundational urban service that SBM-Urban cuts now threaten. With cities projected to contribute nearly 70% of India’s GDP by 2050, this is not a luxury investment but a macroeconomic necessity.
From Funding to Functioning
Urban governance reform in India requires simultaneous action across fiscal, institutional, and technological dimensions. The following recommendations reflect an integrated policy approach:
Constitutionalise Devolution: The Centre must create time-bound compliance mechanisms to ensure states genuinely devolve all 18 Schedule XII functions to ULBs, backed by performance-linked financial incentives and CAG monitoring.
Mandate Multi-Year Budgeting: ULBs must be statutorily required to prepare and publish multi-year development plans and budgets, alongside independently audited annual accounts, to improve creditworthiness and access to market finance under the Urban Challenge Fund.
Replicate Kerala’s Urban Policy Framework: The Centre should incentivise all states to develop 20–25-year urban policies through the UCF’s reform-linked funding, with climate resilience and institutional design as mandatory components.
Launch an IndiaAI-Urban Pillar: An Urban AI Challenge jointly funded by IndiaAI, MoHUA and MeitY, should identify and scale AI solutions for property tax digitisation, water management, waste logistics, and flood prediction, with winning pilots required to open-source their models for replication across cities.
Build Urban Data Infrastructure: Urban transport, health, and utility data remain fragmented across agencies with no interoperability. A national urban data architecture akin to Singapore’s decades-long investment in integrated data systems is a foundational prerequisite for any AI governance initiative to succeed.
Institute Social Audits as a Legal Right: Mandating community-led social audits of ULB performance, measuring quality of service, climate resilience of projects, and administrative transparency, would create a bottom-up accountability system that political checks alone cannot provide.
At its core, India’s urban governance crisis is not a resource problem but an institutional one. The 16th Finance Commission has ensured that the money will flow, and the UCF has laid the pathway toward market-driven, reform-linked city transformation. And yet, money alone has never built a city worth living in. What India needs urgently is proof that its institutions can match its allocations, and it is here that two states, from opposite ends of the country and using very different instruments, are beginning to write a different story. In February 2026, Kerala became the first state in India to ratify a comprehensive 25-year Urban Policy, a document that does not merely announce intent but operationalises it: reclassifying ULBs by economic parameters, integrating climate resilience into every planning layer, mandating GIS and AI in decision-making, and institutionalising citizen participation through e-ward sabhas and performance-graded accountability frameworks
Odisha, meanwhile, has chosen the institutional-technology route. By signing an MoU with the Airawat Research Foundation (ARF) of IIT Kanpur in February 2026, the state has embedded Artificial Intelligence into the DNA of its urban governance apparatus not as a pilot, but as a structural commitment, backed by a dedicated AI Project Management Unit within the Housing & Urban Development Department and a mandate to build a multi-year AI roadmap for every ULB in the state. These initiatives indicate that while funding frameworks are expanding, the future of India’s cities will ultimately depend on whether governance institutions can translate financial commitments and technological tools into reliable, everyday urban services for citizens.
Top Stories of the Week
India–Canada CEPA Talks Move Forward with Signing of Terms of Reference
On March 2nd, India and Canada signed the Terms of Reference for the India–Canada Comprehensive Economic Partnership Agreement (CEPA), marking a key step toward strengthening bilateral economic ties. The document was signed by Union Minister of Commerce and Industry Shri Piyush Goyal and Canada’s Minister of International Trade Mr. Maninder Sidhu, in the presence of Prime Minister Narendra Modi and Canadian Prime Minister Mark Carney at Hyderabad House in New Delhi. The Terms of Reference will serve as the framework guiding negotiations toward a balanced and mutually beneficial CEPA.
With Canada representing a market of about 41.65 million people, the proposed agreement has the potential to significantly expand bilateral trade between the two countries. India’s key export interests under the CEPA include drugs and pharmaceuticals, iron and steel, seafood, garments, electronic goods, and fertilizers, among others. On the other hand, India imports important commodities from Canada such as pulses, semi-precious stones, coal, paper, crude petroleum, and fertilizers. Beyond goods, the agreement is also expected to boost India’s services exports to Canada, particularly in sectors such as telecommunications, computer services, and information technology. Overall, the CEPA aims to deepen economic cooperation while opening new avenues for trade, investment, and services between the two nations.
New Rail Tech Policy to bring startups into Indian Railways
The Ministry of Railways has introduced a Rail Tech Policy to integrate startups and emerging technology firms into the modernisation of the Indian Railways. Announced by Railway Minister Ashwini Vaishnaw on 26 February 2026, the policy aims to promote large-scale adoption of advanced technologies in railway operations.
The policy creates a dedicated RailTech Portal that allows innovators, startups, industry players and research institutions to submit proposals and pilot solutions directly with Indian Railways. It simplifies the selection process and increases financial support for innovation, including higher grants for prototype development and scale-up of successful technologies.
The initiative is part of the government’s broader railway reform agenda and the “52 Reforms in 52 Weeks” programme aimed at accelerating technology-driven transformation across the rail network. The policy focuses on areas such as AI-based safety systems, drone-based track monitoring and sensor-driven infrastructure management. Industry stakeholders and startup groups have broadly welcomed the move, stating it could open a large public infrastructure market to new technology providers.
A Few Good Reads
Mark Mazzetti, Julian E. Barnes, Tyler Pager, Edward Wong, Eric Schmitt and Ronen Bergman trace how a joint U.S.–Israel strike on Iran unfolded behind the scenes.
Shivam Shekhawat examines whether Nepal’s post-protest elections can break the long-standing dominance of the old guard, or simply reproduce the same cycle of fragile coalition politics.
Debadityo Sinha argues that the Supreme Court’s endorsement of a 100-metre threshold to define the Aravalli Range risks weakening ecological protections by prioritising administrative convenience over scientific assessment.
Avani Kapur writes that India may be entering a new phase of fiscal federalism, where the GOI gradually reduces its social-sector role while states and local bodies assume greater responsibility, often without a new architecture to support the shift.
Pratnashree Basu analyses how rising tensions around the Strait of Hormuz threaten global energy flows and trade routes, warning that disruptions could trigger wider economic instability for major importers including India.