Prime Minister Narendra Modi, at a Niti Aayog governing council meeting, urged state governments to focus on tier-2 and 3 cities as engines of sustainability and growth. He spoke of the Urban Challenge Fund (UCF) that will provide seed money. Are the small- and medium-sized cities in India ready to embrace such transformation? How can we spur, institutionalise and sustain growth in our tier-2 and 3 cities? Here, we suggest some orientations for policy, toward achieving such a goal.

The UCF, introduced in the FY26 budget, allocates ₹1 lakh crore over five years, with ₹10,000 crore set aside for the current fiscal, to fund projects in three priority areas: Cities as growth hubs, creative redevelopment, water and sanitation. The Centre will finance up to 25% of bankable projects, provided at least 50% of the funding comes from bonds, bank loans, or public-private partnerships (PPPs) via the UCF, with the remaining 25% expected from state governments. This incentivised partial public funding is likely to support many tier-2 and tier-3 cities.

Budget FY24 established the Urban Infrastructure Development Fund (UIDF) with an initial corpus of ₹10,000 crore for tier-2 and 3 cities to become regional economic hubs. It covered 459 tier-2 cities and 580 tier-3 cities, with city populations ranging between 50,000 and 9,99,999. Such a policy shift raises two pertinent questions. First, do we have a framework for identifying tier-2 and 3 cities with significant growth potential? Second, do we have a suitable operational model to bolster the urban economic growth process for making tier 2 and 3 cities India’s new growth hubs? Tier-wise classification of cities is generally based on population size, which is no indicator of their growth potential.........

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