The missing piece: A cohesive national framework on India's urbanisation

India's 2026 policy framework recognises the importance of urban growth, but falls short of offering a cohesive, data-driven national urbanisation strategy to guide planning and investment

India’s 2026 policy season is finally speaking the language of cities. The Union Budget 2026-27, the Economic Survey 2025-26 and the 16th Finance Commission have all recognised that India’s growth story is decisively urban, and that fiscal architecture must adapt accordingly. Yet, they stop short of acknowledging the true scale and nature of urbanisation, and the institutional reforms required to plan and manage it.

 

The Union Budget foregrounds projects and markets – City Economic Regions (CERs), high-speed rail corridors, and incentives for large municipal bonds. The Economic Survey positions cities as markers of India’s long-term growth, arguing that India is far more urban than Census numbers suggest. The 16th Finance Commission (FC-16) works through intergovernmental transfers, boosting urban local body (ULB) grants, creating special infrastructure windows, and introducing an “urbanisation premium” to support the rural to urban transition.

 

 

Together, this marks a conceptual shift: cities are no longer just sites for schemes, they are systems needing sustained financial and governance attention. Yet a coherent national vision for India’s urbanisation is missing.

How India’s urbanisation is being imagined

The Economic Survey makes the boldest move, estimating functional urbanisation using the UN’s Degree of Urbanisation (DEGURBA) method. It finds that nearly 650 million Indians live in functionally urban areas, a 72 per cent jump from the 2011 Census figure of 377 million. It calls for policies that prioritise system performance over standalone projects – integrating housing, mobility, climate resilience and finance. While it acknowledges hidden urbanisation, it does not identify ‘where’ the urbanisation is actually happening beyond urban agglomerations.

 

The Budget also looks at urbanisation through the lens of agglomeration in selected corridors and regions. CERs are mapped around “specific growth drivers”, with ₹5,000 crore per CER allocated over five years, and seven highspeed rail “growth connectors” to link major city pairs. This prioritises market-ready regions – Tier 2/3 clusters and temple towns – while largely disregarding messy peri-urban spaces, census towns and small statutory towns where much of India’s uncontrolled urbanisation is unfolding.

 

The 16th Finance Commission sits between these two approaches. It more than doubles urban local body allocations to about ₹3.56 lakh crore and raises the urban share of local government grants to 45 per cent, signalling that urbanisation is now a fiscal priority. It also introduces a ₹10,000 crore “urbanisation premium”, pegged at ₹2,000 per capita, tied to mergers of peri-urban villages into ULBs and to state-level rural-to-urban transition policies, but calibrated to 2011 Census data and restricted to mergers into ULBs with populations above one lakh. This excludes thousands of settlements that urbanised over the past decade, including 3,892 census towns, limiting the premium’s transformative potential.

Budgets and bonds: What counts as a city?

The Budget and FC-16 lean heavily on deeper transfers and market-based financing, yet both disproportionately favour already recognised and relatively creditworthy cities. The Budget’s ₹100 crore incentive for single municipal bond issuances over ₹1,000 crore clearly targets large municipal corporations. Smaller issuances (up to ₹200 crore) will continue to receive AMRUT-linked support. But such support remains inaccessible to India’s 7,428 small towns (93.6 per cent of all urban settlements under one lakh population) and the thousands of urbanising panchayats without a statutory status or balance-sheet strength.

 

The 16th Finance Commission’s ₹10,000 crore urbanisation premium aims to encourage states to develop rural-to-urban transition policies and integrate peri-urban villages into urban areas, with funding for basic infrastructure. Yet the finance pool is quite limited. Moreover, political and institutional challenges persist, as states and panchayats often oppose reclassification to towns as that alters tax powers and constituencies. Many urban local bodies (ULBs) also struggle with project execution. The premium could be effective if used as a nudge linked to transition policies and urban planning, potentially bundled with other state and national schemes that reward systematic integration of peri-urban settlements into urban systems.

 

The Economic Survey comes closest to articulating a “system of cities” framework, treating metros, small towns, census towns and urbanising villages as a functional network. But without statutory backing or fiscal conditionalities, this remains a narrative rather than a mandate.

Equity and climate: Still at the margins

All three instruments reference inclusion and sustainability, but largely as attributes of better growth rather than non-negotiable guardrails. CERs and high-speed rail corridors may improve accessibility and productivity, yet their design and allocations do not explicitly hard-wire affordable housing, gender-responsive services or climate resilience. FC-16’s special infrastructure grants can improve environmental health in medium-sized cities, but adaptation and low-carbon transitions remain sectoral themes rather than cross-cutting spend criteria.

 

The Economic Survey gives climate and inclusion the strongest push – calling for “economically dynamic, socially inclusive, environmentally sustainable and institutionally capable” cities and rallying for integrated approaches. But until such principles appear as budget lines – such as ring-fenced adaptation funds or performance grants tied to slum upgrading – they will remain aspirational.

From intent to a national urbanisation policy

For the first time, the Union Budget, Economic Survey and Finance Commission, align in recognising that India’s future will be shaped in its towns and cities. India’s million plus cities house 32 per cent of the urban population. Small towns (under one lakh) house 39 per cent, yet remain structurally disadvantaged in accessing finance and planning support. The India imagined by this policy season is mostly formal – cities large enough to issue bonds or receive highspeed rail. But hundreds of millions live in functionally urban but administratively rural settlements, starved of recognition and investment.

 

Bridging this gap will require three decisive shifts. Firstly, a stable national framework to recognise functional urbanisation using the DEGURBA method and satellite mapping. Second, a fiscal architecture that treats small towns and transitioning settlements as frontline urban spaces with predictable, flexible resources. Third, hard integration of equity and climate into all urban spending, with standards and adaptation funding tailored to small and vulnerable settlements.

 

India’s 2026 policy season has learned to speak of cities. The real test is whether this recognition can evolve into a coherent, data driven national urbanisation policy that guides future budgets, Finance Commissions, and state level reforms across the entirely of India’s urbanisation geography.

 

(Views expressed by the author are personal. Sudeshna Chatterjee is a program director and Jaya Dhindaw is executive program director of the Sustainable Cities Program at WRI India.)