By Pooja Dhooper, Vice President- Cities, Infrastructure and Growth; and Harsh Jha, Associate Manager – Cities, Infrastructure and Growth, IPE Global Limited
India is home to some of the world’s most distinctive, oldest, continuously inhabited cities, and some of the fastest-growing economic hubs driving the nation’s future. Yet beneath the skylines, heritage facades and billion-dollar investments lies a fundamental question: who actually pays to maintain our cities and how is that money allocated?
Indian cities are growing faster than the institutions that govern them. By 2036, nearly 600 million people are expected to live in urban areas, while cities are projected to contribute an even larger share of national output. Already, urban India generates close to 60 per cent of the country’s GDP, despite occupying only a small fraction of its land area. Yet the institutions responsible for managing this transformation, India’s urban local bodies (ULBs), remain among the weakest arms of the state in terms of fiscal capacity, asset management and operational autonomy.
This is the central paradox of Indian urbanisation: while the country is investing in modern infrastructure, mapping every commercial opportunity and competing for global investments; the question of how municipal governments will finance, operate and maintain their own assets remain fundamentally unaddressed. As a result, ULBs, the primary institutions of urban development, remain financially dependent, operationally constrained and institutionally overstretched.
The consequences are visible in every city. A water treatment plant is inaugurated with much fanfare, only to run at half its capacity within five years, because no one budgeted for the chemicals, pumps and staff needed to keep running to its full capacity. A road is laid, and every monsoon or traffic congestion or accident reminds us why the potholes were not repaired. Assets are built; the recurrent funding that keeps them operational remains a perpetual afterthought. The result is a familiar cycle of construction, neglect and eventual failure. At its core, this challenge reflects three interlocking structural deficiencies in the way Indian cities finance and manage urban infrastructure.
First is the dependency trap. An Indian city raises a very limited share of the resources it spends. According to the RBI’s Report on Municipal Finance (2022), own-source revenue funds only about 40 per cent of a municipal budget, with the majority still dependent on transfers from state and central governments. Property tax, the one substantial local instrument, yields barely 0.17 per cent of the GDP. Taken together, municipal revenue and expenditure have been stuck at roughly 1 per cent of the GDP for over a decade, against 7.4 per cent in Brazil and 6 per cent in South Africa. The scale of the requirement makes this weakness deeper. The World Bank estimates that cities will require nearly $840 billion in infrastructure investment by 2036, yet only 5 per cent is currently financed through private capital. A local body that cannot generate and leverage its own revenues cannot govern its own future. It remains trapped in a cycle of dependence, waiting for the next grant, approval or scheme allocation. In the absence of credit enhancement and sustainable revenue strategies, municipal governance becomes reactive rather than strategic, limiting the city’s ability to plan, invest and grow on its own terms.
Second, cities are treated as cost centres, not economic engines. Beneath the fiscal dependency of the ULBs lies a deeper structural problem: cities are viewed as service delivery institutions rather than economic engines. Municipalities are responsible for delivering services such as sanitation, public safety and infrastructure maintenance, all of which require predictable and sustained revenue streams. Yet policy frameworks continue to prioritise capital expenditure while paying insufficient attention to the recurring revenues required to sustain urban service. Local revenue streams, which are a natural recourse for income generation, remain an afterthought across most state policies. In fact, major infrastructure programmes fail to recognise how tariff and revenue streams are pertinent for long-term service sustainability. The 74th Constitutional Amendment promised fiscal decentralisation in 1992. Yet, more than three decades later, many ULBs still lack the powers, staffing capacity and revenue base required to operate as self-reliant institutions. The result is a persistent mismatch: a handful of metros struggling under demands they cannot adequately meet, and a long tail of smaller towns that people leave because opportunities remain limited. Cities are expected to deliver the outcomes of economic engines while continuing to be governed and financed as cost centres.
Third, the missing discipline of operations and maintenance (O&M). India budgets to build but rarely to run. Capital grants fund the creation of an asset, yet adequate resources for their long-term O&M and renewal are rarely ring-fenced. The result is a recurring cycle of build, use, deter, rupture and again rebuild, in which yesterday’s investment becomes tomorrow’s liability. A city, much like a household, must provide for its own future, setting aside a recurring fund that keeps a service running long after it starts operations. This is where the promise of sustainable urban development quietly breaks down. An asset with no provision for maintenance is not infrastructure, it becomes a future liability, putting ULBs in a fix over whether maintain it or divert the budget allocation to cater to future demand.
Why does reform never stick?
What stops this systemic change from being adopted and implemented? The barriers are less financial than institutional and political. Decades of grant-based financing have created incentives that reward spending over performance. It is easier to access central and state transfers than undertake politically difficult measures such as strengthening property tax systems, rationalising user charges or improving revenue collection. Grants require only compliance, while raising property taxes requires political willingness, institutional capacity and fiscal discipline. A shift that links O&M spending to capital budgets and making O&M a mandatory component of every infrastructure plan requires intense buy-ins from the government, communities, think tanks, the private sector and civil society. And that is why reforms that can actually shape the future remain the last leg.
The pattern repeats: the Urban Challenge Fund
India’s newest urban intervention shows the same story unfolding again, in its most revealing form yet. The Urban Challenge Fund marks an important shift in urban finance. By limiting central assistance to a fraction of project costs (25 per cent) and requiring cities to raise capital from the market, it seeks to replace grant dependency with financial discipline. At its core lies a simple but powerful idea: cities should be rewarded not for spending money, but for demonstrating the capacity to raise and manage it.
This instrument largely rewards creditworthiness without deliberate correction, and may reward only the cities that already possess it. Of roughly 470 cities credit-rated under the Atal Mission for Rejuvenation and Urban Transformation programme, only about 164 have earned an investment grade, and fewer than 30 are genuinely bond-ready. Since 1997, fewer than two dozen municipal corporations have ever issued a bond, raising some Rs 45 billion between them, in a country whose comparator, the US municipal bond market, is worth around $4.4 trillion. Even the strong do not borrow: the World Bank finds that 27 of the largest rated cities could take on more than 20 times their current debt and simply choose not to. In this ecosystem, a challenge fund risks becoming a competition that only a few metros and well-performing municipal corporations are positioned to win. Without parallel reforms in municipal finance and institutional capacity, it could reinforce existing disparities, leaving many Tier-II and Tier-III cities unable to compete for the very funding intended to accelerate their development.
The pathway: Reform before capital
India’s cities need an urgent shift from capital-centric asset creation to long-term asset stewardship. The way forward is not another funding scheme, but a change in sequencing: reform before capital – or at the very least, reform alongside capital. ULBs must be encouraged to evolve from grant-dependent bodies into financially resilient institutions with stronger revenues, sound financial management and a clear pathway to creditworthiness. This means improving property tax collections, rationalising user charges, unlocking non-tax revenues, maintaining auditable accounts and ring-fencing O&M so that assets continue to deliver services long after they are built.
Cities also need the capacity to develop genuinely bankable project pipelines, supported by clear governance, consistent reform and conditions conducive to public-private partnerships and market borrowing. Multilateral and bilateral partners can support this transition through credit enhancement, guarantees and targeted technical assistance that strengthens municipal creditworthiness. Ultimately, urban development should be judged not by how quickly assets are built, but by how effectively cities govern, finance, operate, maintain and sustain them over time.