India may need Rs 80 lakh crore urban infra investment by 2037 as cities drive economic growth: Report – Firstpost

India’s cities will require an unprecedented Rs 80 lakh crore investment in urban infrastructure over the next decade as rapid urbanisation reshapes the country’s economic landscape and pushes municipalities to modernise transport, housing and civic services, according to a report by Brickwork Ratings.

The report said urban centres are expected to contribute nearly 70 per cent of India’s GDP by 2036, underscoring the urgent need for large-scale investments in transport, housing, water supply, sanitation and other core infrastructure to support rising urban populations and economic activity.

In its report, From Grants to Markets: How Urban Challenge Fund (UCF) Will Reshape Urban Finance in India, Brickwork Ratings said the proposed Rs 1 lakh crore Urban Challenge Fund could fundamentally alter India’s urban financing model by nudging cities towards market-based fund raising instead of depending primarily on government grants.

The agency estimated that the scheme could help unlock nearly Rs 4 lakh crore in urban investments over the next five years by encouraging urban local bodies (ULBs) to tap municipal bonds, bank financing and public-private partnerships (PPPs).

Under the proposed structure, cities would need to raise at least 50 per cent of project funding on their own before becoming eligible for central assistance. The Centre would contribute 25 per cent of project costs, while the remaining funding would come from states and urban local bodies.

Brickwork Ratings said the framework could improve financial discipline, transparency and governance standards among municipalities, while strengthening their creditworthiness and access to capital markets.

Shift from grants to market-based financing

The report said the Urban Challenge Fund marks a structural shift in India’s urban financing framework by incentivising municipalities to access capital markets and institutional finance.

“The UCF marks a structural shift in India’s urban financing model by incentivising cities to access market-based capital rather than relying primarily on government grants,” the report noted.

However, the agency cautioned that implementation risks remain significant, particularly for smaller municipalities with weak balance sheets and limited revenue-generation capacity.

According to the report, urban local bodies would increasingly need to rely on municipal bonds, bank loans and PPPs to meet their financing requirements. While cities can still raise funds through institutional borrowings without formal credit ratings, excessive dependence on bank financing could keep them reliant on state guarantees and limit diversification of funding sources.

Credit ratings likely to become critical

The report underscored that credit ratings are likely to become increasingly important for ULBs seeking access to capital markets and long-term institutional financing.

“With the UCF mandating at least 50 per cent market financing, credit ratings are expected to become non-negotiable, particularly for Tier-II and Tier-III cities aiming to build long-term financial resilience,” the report said.

Brickwork Ratings also highlighted the sizeable untapped opportunity in India’s municipal bond market.

“Since FY18, only 17 cities have issued municipal bonds, amounting to Rs 45.4 billion, highlighting the large untapped financing opportunity in the sector,” said Manu Sehgal.

Investor confidence in municipal bonds improves

The report noted that investor confidence in municipal bonds has strengthened considerably in recent years, reflected in the narrowing of yield spreads against the RBI repo rate.

According to the findings, yield spreads have declined from around 480 basis points in FY20 to nearly 155 basis points in FY26, indicating a significant reduction in perceived risk premiums for municipal debt instruments.

Brickwork Ratings said the trend could help deepen India’s municipal finance ecosystem and attract broader participation from institutional investors.

The agency also pointed to strong growth potential among smaller urban centres, particularly the country’s 4,223 smaller ULBs and towns in the North-East, many of which currently have limited or no access to market debt.

“The UCF’s Rs 5,000 crore Credit Repayment Guarantee Scheme is expected to improve investor confidence by providing guarantees for first-time loans to smaller ULBs, thereby broadening the investable universe for lenders and investors,” Sehgal said.

The report added that the long-term success of the Urban Challenge Fund would depend on states and cities strengthening governance standards, improving revenue collection systems and building credible financial track records capable of attracting sustained private capital.