“Every man having been born free and master of himself, no one else may under any pretext whatever, subject him without his consent”….“As soon as any man says of the affairs of the State “What does it matter to me?” the State may be given up for lost.”
These selected quotes from the 18th century political philosopher Jean Jacques Rousseau encapsulate his version of the social contract theory, the hypothesis in political science that a state came into being owing to agreement among free individuals to create and sustain a structure for the benefit of all, with attendant rights and obligations for all participating entities. Earlier versions were proposed by Thomas Hobbes (in the state of nature, man’s life was solitary, poor, nasty, brutish and short; social contract allows man to enter civil society) and John Locke (men willingly agree to form a commonwealth; however, there can be no subjugation to power without consent and obedience is conditional on protection of the natural rights of the individual.)
This happy conceit of the social contract is also invoked by the Economic Survey 2025-2026, particularly in the context of urban areas and its residents.
Urban social contract in the Economic survey
The Economic Survey 2025-2026, released on January 29, dedicated a chapter to examining the issues plaguing urban India. Traffic congestion and mobility, housing challenges, sanitation and the fast-expanding informalisation of urban workers and spaces all find mention in the 700-plus pages of the Survey, released ahead of the Budget presentation on Sunday, February 1.
One section is dedicated to a particular aspect of urban life: the denizens and their willingness to comply with norms. The Survey describes civic order without a social contract as an invisible fault line in Indian cities. Noting that shortcomings in urban life are attributed to institutional capacity, the authors note that “the quality of everyday life is also shaped by the implicit social contract between citizens and urban institutions”
Highlighting that the lived experience in cities is not influenced only by infrastructure gaps but also by the “credibility of rules, the predictability of services, and the trust that underpins everyday cooperation,” the Survey states that global and Indian cities differ less due to engineering and more about whether the existing institutions “make co-operation rational and worthwhile.”
The survey notes that programmes such as Swachh Bharat Abhiyan sought to combine infrastructure developments with behaviour-change efforts. These included attempts by states to increase communication with the public and seek their participation. In some cases. the incentives were legal, such as bans on spitting and littering, and notified spot fines under Solid Waste Management bylaws. There was also an attempt to increase funding support and environmental enforcement. The outcomes however, have remained uneven in cities and neighbourhoods, the Survey says, attributing this to “a fragile social contract” rather than “awareness or values.”
“Where enforcement is inconsistent, service delivery unreliable, and penalties uncertain, compliance becomes contingent. When rules are applied unevenly, cooperation gives way to individual calculation,” the authors state. This can be seen in the contrast between public spaces, which are neglected, and private spaces, which receive great attention and investment from Indians.
If services are predictable and responsive, taxes and rules are seen as part of the shared system. If they are not, civic engagement is weakened. The public will not invest effort in common assets if there is limited confidence that “collective restraint will be matched by collective benefit,” the Survey notes.
Hence large investments in urban infrastructure have not translated into improvements in the urban experience, the Survey says, citing an India Today civic survey which measures Gross Domestic Behaviour. This survey shows contradictory individual approaches to morality and action. “Civic Behaviour (within the citizens) reflects a blend of contradictions, where individuals acknowledge the importance of public responsibility but often struggle to uphold those values when faced with personal gain or convenience,” the India Today analysis cites.
Civic order is best understood as an institutional equilibrium rather a cultural trait, the Survey’s authors note. They refer to global cities like Singapore, Tokyo, London and New York, stating that they institutionalise co-operation through design, certainty and credible enforcement, demonstrated through factors such as clear rules, proportionate penalties, quality municipal services, and good urban design
“Over time, these systems reduce the need for constant exhortation because cooperation is embedded in everyday governance,” the Survey claims, saying that the lack of operational capacity, regulatory tools and financial autonomy to ensure such outcomes is what leads to a weakening of the civic order and social contract. Then, civic order may become dependent on campaigns, with limited and unpredictable levels of success.
The Survey highlights yet another challenge with enforcement: lack of institutional coordination. This can be seen in fragmented or poorly demarcated authority structures in urban local bodies, with low administrative autonomy. This in turn, guts accountability for implementation of certain rules across important domains such as public health, street order and traffic, and solid waste.
“Aligning mandates, clarifying ownership of outcomes, and insulating routine enforcement from ad-hoc intervention are therefore central to making rule certainty credible in everyday urban governance,” the authors note.
Who is responsible
The institutional coordination mentioned in the Economic Survey becomes crucial given the multi-tiered nature of who is responsible for various aspects of urban life. Most urban issues are deeply local (sanitation, public health, water, roads) and some are either State subjects or on the concurrent list. However, some areas affecting the daily life of citizens are directly under the control of the Central government.
For example, individual States are responsible for police, prisons, public health and sanitation, hospitals and dispensaries, local self-government and municipal corporations, water supplies, land, industries, entertainment and sports, taxes and estate duties on agricultural land, and professional tax.
On the concurrent list are items such as economic and social planning, population control and family planning, trade unions, social security and social insurance, employment and unemployment, labour welfare, education, legal and medical professions, price control, factories, and electricity.
But several Items that intersect with the lives of daily citizens fall under the mandate of the central government: railways, national highways, nationals waterways, airways, the post and telegraph, banking, insurance, and income tax.
Specific provisions for urban areas in budget
Quoting the recommendations of the 16th Finance Commission, Finance Minister Nirmala Sitharaman in her Union Budget speech highlighted that the vertical share of devolution has been retained at 41% between States and Centre, and Rs. 1.4 lakh crore have been granted to the States for FY 2026-27 as Finance Commission Grants, including Rural and Urban Local Body and Disaster Management Grants. The 16th Finance Commission report had been tabled by the Finance Minister in the Lok Sabha on the same day as the Union Budget (February 1, 2026.)
The Finance Commission had recommended an allocation of Rs. 3.5 lakh crore to urban local governments (ULGs) over the next five years, devolved via transfers by the Central and State governments in the form of grants. This marked a 230% increase over the amount recommended by the 15th Finance Commission, which was ₹1.5 lakh crore for the years 2021-26.
Per an analysis by The Hindu Data team, the Commission allocated 45% of local government grants to ULGs, an increase from its previous share of 36%. Of these, 60% of the grants to ULGs were basic grants. From this amount, “tied” grants must be used for basic services like sanitation and water supply. “Untied” grants can be used for “location-specific felt needs, except for salary or establishment expenses.”
In her budget speech, Ms. Sitharaman also highlighted that the government will “continue to focus on developing infrastructure in cities with over 5 lakh population (Tier II and Tier III), which have expanded to become growth centres.“ Tier II and Tier III cities, and temple-towns, “which need modern infrastructure and basic amenities,” will be front and centre, she said.
The budget aimed to amplify the potential of cities to deliver the economic power of agglomerations by mapping city economic regions (CER), based on their specific growth drivers, Ms. Sitharaman said. She announced a proposed allocation of Rs. 5000 crore per CER over 5 years for “implementing their plans through a challenge mode with a reform-cum-results based financing mechanism.”
Another offering for urban-dwelling India is seven High-Speed Rail corridors between cities as ‘growth connectors’: between Mumbai-Pune, Pune-Hyderabad, Hyderabad-Bengaluru, Hyderabad-Chennai, Chennai-Bengaluru, Delhi-Varanasi, and Varanasi-Siliguri.
Public capital expenditure is also channelled into big-ticket infrastructure projects, although it is not confined to urban areas. For this, the allocation was increased from Rs. 11.2 lakh crore in BE 2025-26 to Rs. 12.2 lakh crore in FY 2026-27.
However, an analysis for The Hindu by Tikender Singh Panwar, former Deputy Mayor of Shimla and current member of the Kerala Urban Commission, noted that the total central outlay for urban development has fallen by more than Rs. 11,000 crores from Rs. 96,777 crore in the previous year to Rs. 85,522 crore in 2026-27, amounting to a 11.6% reduction.
Further, urban spending is skewed. Metro rail projects take up a huge share of urban allocations, amounting to about a third of all central urban spending, standing at Rs. 28,740 crore of the Rs. 85,522 crore. This too, is a cut of roughly 8%, as the allocation for metro and mass rapid transit projects declined from ₹31,239.28 crore
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The article also notes that allocations for flagship urban schemes have been cut. For example, the allocation for the Pradhan Mantri Awas Yojana (Urban) (PMAY-U) has declined from Rs. 19,794 crore to Rs. 18,625 crore, a cut of almost 5.9% cut. The Swachh Bharat Mission (Urban) (SBM-U) has been hit by a 50% cut— from an allocation of Rs. 5,000 crore to Rs. 2,500 crore. The Atal Mission for Rejuvenation and Urban Transformation (AMRUT) scheme faced a 20% cut, from Rs. 10,000 crore to Rs. 8,000 crore.
Further, mere investment is unlikely to foster public trust if upkeep and safety are not prioritised. An example is the recent collapse of a Metro 4 line slab in Mulund, which killed one and injured four, which prompted National Spokesperson of the NCP-SP Clyde Crasto to say that the “life of a Mumbaikar holds no value for this BJP led Maharashtra Government.”
Post-budget: the Urban Challenge Fund
The Union Cabinet on February 13 cleared the launch of the Urban Challenge Fund, a centrally sponsored scheme of the Ministry of Housing and Urban Affairs, with an outlay from the Centre of Rs. 1 lakh crore. This is reportedly to give effect to the government’s vision, announced in the Union Budget 2026, to implement proposals relating to ‘Cities as Growth Hubs’, ‘Creative Redevelopment of Cities’, and ‘Water and Sanitation’.
The aim of the fund is to support transformative and bankable projects through a “transparent and competitive” challenge-mode. It will be operational from FY 2025-26 to FY 2030-31 and cover most cities across the country. This includes all cities with a population of Rs. 10 lakh or more; any capital cities of States or Union territories that don’t meet this standard, and major industrial cities which have a population of one lakh or more. Further, all urban local bodies in hilly States and in northeastern States, and smaller urban local bodies with a population below 1 lakh will be eligible for support under the Credit Repayment Guarantee Scheme.
Noting that urban infrastructure costs cannot be funded by public finance alone, the scheme envisages central assistance for 25% of project costs, provided a minimum of 50% of the project cost is raised through the market, which includes municipal bonds, bank loans, and public-private partnerships. The press release announcing the scheme’s launch notes that the expected total investment in the urban sector over the next five years is Rs. 4 lakh crore.
Private sector participation will be encouraged through structured risk-sharing frameworks; the fund will allot a dedicated ₹5,000 crore corpus, which will enhance the creditworthiness of 4,223 cities, including Tier 2 and Tier 3 cities, particularly for first-time access to market finance.
The government said the fund signalled a shift from grant-based financing to market-linked, reform-driven and outcome-oriented infrastructure-creation in the field of urban development. It aimed to build resilient, productive, inclusive and climate-responsive cities.
