Relevance: GS II (Governance – Urban Local Bodies) & GS III (Economy) | Source: The Hindu

1. The Big Change: From “Gift” to “Loan”

The government has launched a new ₹1 Lakh Crore scheme called the Urban Challenge Fund (UCF) to fix our cities.

• The Shift: In the past, the central government gave most of the money as a “Grant” (free gift). Now, under UCF, cities are being forced to take “Loans” (debt).
• The Goal: To make cities financially independent and “bankable” (able to get loans from banks like a real business).

2. How does it work? (The 25-50-25 Rule)

If a city wants to build a new bridge or water plant under UCF, it cannot just ask for money. It must follow this strict rule:

• 25% (Grant): The Centre gives this as free help.
• 50% (Debt): The City MUST borrow this huge amount from the market (Banks or Bonds).
• 25% (Own Share): The State or City pays this from its own pocket.

3. The Problem: The “Debt Trap”

Critics say this rule is dangerous for small cities.

• Why? Most Indian cities are poor. They don’t collect enough property tax and depend on the state government for salaries.
• The Trap: If a poor city is forced to borrow 50% of the cost for a project, it might not earn enough later to repay the loan. This pushes the city into a “Debt Trap”—borrowing new money just to pay off old interest.

UPSC Value Box

What is the primary objective of “Municipal Bonds” in India?

1. To provide loans to farmers in urban areas.
2. To allow city governments (ULBs) to raise money from the public for infrastructure projects.
3. To collect taxes from citizens who own multiple properties.

Correct Answer: (2)