Opinion: Budget 2026 Finally Unlocks The Power Of Agglomeration

For decades, Indian urban policy remained a mere subset of general infrastructure, often lost in the shadows of highways, airports and power grids. However, Budget 2026 has delivered a landmark departure from this legacy, signalling that the government finally understands the immense, untapped potential of its urban centres. In a move that defines strategic clarity, the Finance Minister announced the six interventions for accelerating economic growth, notably positioning the “Development of City Economic Centres” as a standalone pillar, distinct from the broader push for infrastructure.

This separation is not just a clerical update, but a profound recognition of urban development as an independent engine of prosperity. As an urban economist,

it was a delight to see the FM’s speech punctuated with a focus on “agglomeration”, a concept that captures how productive density drives growth. It is something that wasn’t much expected in the traditional budget discourse. While the government has long prioritised capital expenditure, urban development has historically occupied only a small part of that pie. By recognising it separately, the government has signalled that India is finally ready for the structural take-off required to achieve the vision of Viksit Bharat 2047. The sheer scale of the government’s commitment is evident in the leap of public capex, which has surged from ₹2 lakh crore in FY 2014-15 to a staggering ₹12.2 lakh crore in the Union Budget announced today. This sustained investment in physical assets is the primary reason India has maintained its status as the world’s fastest-growing major economy. However, Budget 2026 sharpens the focus toward cities as the true “engines of growth”. A revolutionary move is the mapping of City Economic Regions (CER) based on specific growth drivers, backed by an allocation of ₹5,000 crore per CER over five years. By targeting Tier-II and Tier-III cities, and even temple towns, the government is wisely spreading out development to maximise the “density dividend” while mitigating the negative externalities of congestion found in over-saturated metros. This shift mirrors global success stories where top cities generate a GDP larger than many entire nations and function as massive economic powerhouses. By nurturing these clusters, the government ensures that cities become self-sustaining hubs of innovation and high-value employment, cementing their role as the primary drivers of India’s $10 trillion ambition. Unlocking this urban renaissance, however, necessitates a fundamental shift away from the traditional reliance on central grants toward a market-linked financing architecture. The Budget addresses the critical risk premium that has long deterred institutional capital by proposing an Infrastructure Risk Guarantee Fund. This is a strategic intervention, designed to provide calibrated partial credit guarantees that effectively de-risk projects for lenders and entice private participation into the urban fold. Equally vital is the renewed push for the Municipal Bond market. The government has introduced an incentive of ₹100 crore for single bond issuances exceeding ₹1,000 crore by large cities, while continuing the AMRUT scheme to support smaller and medium towns. This is a critical step in reviving Urban Local Bodies (ULBs), which have historically been fiscally constrained despite the 74th amendment. Without a dedicated finance list to match their powers, ULBs have lacked the resources to generate independent capital. This step shows the government is serious about making municipalities self-reliant entities capable of tapping into capital markets. One hopes that the 16th Finance Commission will further support this by ensuring the plumbing of urban finance is fixed to support the skyscrapers of the future. Ultimately, realising the paramount importance of cities is the most significant stride toward the Viksit Bharat 2047 goal. The government’s focus on developing a “hub and spoke” model, connecting metropolitan areas with growing Tier-II and Tier-III centres through seven new High-Speed Rail corridors, will effectively spread growth across the national geography. These corridors, such as Mumbai-Pune, Delhi-Varanasi, and Hyderabad-Bengaluru, act as growth connectors that transform isolated cities into a seamless economic network. By intentionally designing for agglomeration benefits, the government is moving away from accidental urbanisation toward a planned, high-productivity future. This vision of capturing the economic gains of proximity while tackling the congestion that plagues our current metros shows a maturity in policy that is truly commendable.

By pivoting toward a cluster-led economic geography, the government has finally provided the blueprint to convert our urban potential into a permanent engine of national prosperity.
Dr Abhishek Malhotra is an Assistant Professor in the Department of Economics, Sri Venkateswara College, University of Delhi. Views expressed in the above piece are personal and solely those of the author. They do not necessarily reflect News18’s views.