New Delhi, Feb 14: The Union Cabinet, led by Prime Minister Narendra Modi, has approved the launch of the Urban Challenge Fund (UCF) to modernise India's cities through a market-driven approach. The central government will provide Rs 1 lakh crore in assistance over the next five years to support large-scale urban infrastructure projects.

This move is expected to trigger a total investment of Rs 4 lakh crore in the urban sector by 2031.

The new fund signals a major change in how the government finances city development. Instead of relying solely on government grants, cities will now be encouraged to raise money from the market and private investors. The government stated that this represents a "paradigm shift in India's urban development approach from grant-based financing to market-linked, reform-driven and outcome-oriented infrastructure creation."

Under the scheme, the central government will pay for 25 per cent of a project's cost. To get this money, cities must raise at least 50 per cent of the total project cost from market sources like bank loans, municipal bonds, or public-private partnerships. The remaining 25 per cent can be covered by state governments or the local city bodies themselves. The fund will be operational until the 2030-31 financial year, though it could be extended to 2034.

The projects will be selected through a "challenge mode," meaning cities will compete for the funding based on the quality and impact of their proposals. The government wants to ensure the money goes towards "high-impact and reform-oriented proposals" that make cities more productive and resilient to climate change. Funding will be released in stages and will be strictly linked to whether the city meets specific reform goals and project milestones.

To help smaller towns and cities in hilly or North-Eastern states, the government has set aside a special Rs 5,000 crore corpus. This will act as a credit guarantee for cities that are borrowing from the market for the first time. The goal is to make these local bodies more "bankable" so they can eventually fund their own growth. The government noted that this will "facilitate first-time access to market finance for all Cities/ULBs in Northeastern & Hilly States and smaller ULBs."

The Urban Challenge Fund will focus on three main areas: turning cities into economic growth hubs, redeveloping old city centers or heritage sites, and improving water and sanitation systems. This includes upgrading sewage networks, managing solid waste, and creating better urban transport corridors. The government aims to use these projects to "leverage market finance, private participation and citizen-centric reforms for delivery of high-quality urban infrastructure."