Critically analyse the challenge-mode/competitive federalism approach adopted in schemes like Smart Cities Mission and Urban Challenge Fund.

Q. Critically analyse the challenge-mode/competitive federalism approach adopted in schemes like Smart Cities Mission and Urban Challenge Fund. (15 marks, 250-350 words)

Challenge mode makes cities compete for central funds by bidding on project quality and reform commitments, rather than receiving formula-based grants. From the Smart Cities Mission (SCM) to the ₹1 lakh crore Urban Challenge Fund (UCF), it has sharpened project design, but its gains remain unevenly distributed.

The approach in practice - SCM selected 100 cities through a two-stage City Challenge; by March 2025, 7,555 of 8,067 projects (94%) were completed [1]. - UCF, approved as a ₹1 lakh crore market-led intervention [2], selects projects competitively on transformative impact and reform orientation; central assistance is capped at 25% of project cost, with at least 50% raised from municipal bonds, bank loans or PPPs [3]. - It mirrors the 15th Finance Commission's conditional ULB grants, which tied funds to audited accounts and property-tax floor rates [4].

Merits - Creates competitive federalism: reform becomes the price of entry, replacing entitlement with performance. - Outcome-linked disbursement curbs cost overruns; the ₹5,000 crore Credit Repayment Guarantee Sub-Scheme de-risks municipal borrowing and deepens the shallow municipal bond market [3]. - A further ₹5,000 crore for project preparation and capacity building addresses the weak project-pipeline problem [3]. - Advances the Budget 2025-26 "Cities as Growth Hubs" vision, prioritising transit planning and climate resilience [5].

Limitations - Competition presumes a level field it does not create — cities with better staffing and credit ratings win repeatedly, while smaller ULBs fall behind. - Incomplete 74th Amendment devolution means ULBs lack buoyant own revenues; market borrowing without that base risks fiscal stress. - Bias toward revenue-generating assets can crowd out non-monetisable services like slum sanitation. - Continuity is uncertain — SCM's budget allocation fell to nil in 2025-26 [6], leaving operation and maintenance of created assets unresolved.

Competition works only when paired with capability. Handholding laggard cities through credit ratings, accrual accounting and 16th Finance Commission support can convert challenge mode from a contest among unequals into a genuine ladder — making Indian cities bankable and inclusive, in line with SDG 11.

(~330 words)

Sources: 1. 10 Years of Smart Cities Mission, PIB/MoHUA — 7,555 of 8,067 projects completed by March 2025 2. Cabinet approves Rs. One Lakh Crore Urban Challenge Fund to Drive Market-Led Urban Transformation, PIB — fund size and market-led mandate 3. Union Minister Shri Manohar Lal Launches Operational Guidelines for Urban Challenge Fund, PIB — 25% assistance cap, 50% market financing, CRGSS, capacity-building window 4. Report of the 15th Finance Commission for 2021-26, PRS Legislative Research — ₹1.2 lakh crore ULB grants tied to property-tax and accounts conditions 5. ₹1 Lakh Crore Urban Challenge Fund to Implement 'Cities as Growth Hubs', PIB — Budget 2025-26 origin and sectoral focus 6. Demand for Grants 2025-26 Analysis: Housing and Urban Affairs, PRS Legislative Research — SCM allocation reduced to nil; ₹10,000 crore for UCF