India’s cities are entering a decisive decade. By 2050, nearly half of the country’s population—more than 950 million people—will live in urban areas.

The demand for infrastructure, basic services, housing, and climate resilience is accelerating faster than traditional financing models can keep up with. The numbers tell a stark story: India’s urban infrastructure needs are estimated at approximately US$840 billion over the next 15 years. Yet annual public investment currently covers barely a quarter of what is required. If the country continues to rely primarily on budgetary allocations and grants, the gap between urban ambition and reality will only widen. This is not a failure of intent—it is a mismatch between the scale of the challenge and the tools being used to address it.

Even as these pressures build, a quiet shift is underway. India’s labelled sustainable debt market—bonds and loans explicitly issued to fund projects with environmental or social benefits, such as green, social, sustainability, and sustainability linked instruments (GSS+)—has expanded rapidly.

By the end of 2024, cumulative aligned GSS+ issuance had reached US$55.9 billion, growing sharply since 2021. Capital is increasingly available. What is changing is how cities access, structure, and deploy it. Innovative urban finance is no longer a peripheral idea; it is becoming central to how Indian cities plan, fund, and deliver development.

Yet structural constraints continue to shape urban financial capacity. Urban Local Bodies (municipal governments) in India raise less than 0.4% of GDP in through their own revenues—far below global peers. This limits borrowing capacity and leaves cities overly dependent on transfers, even as investors remain cautious due to credit risk, fragmented project pipelines, and inconsistent reporting standards.

The solution, however, is not to turn away from markets; it is to engage them more intelligently.

Municipal and green bonds illustrate both the existing gap and the emerging opportunity. As of end 2025, roughly 20 municipal corporations had issued bonds totalling US$372 million. Although relatively modest in scale, these instruments are well suited to capital intensive, revenue generating services such as public transport, water supply, sanitation, and waste management—areas where predictable cash flows can support debt servicing.

But India’s current approach constrains what these markets can deliver. Urban local governments presently access capital markets through municipal bonds with an upper incentive linked ceiling of US$22 million, a limit far too low for large scale infrastructure. Uptake has also been hampered by the Securities and Exchange Board of India’s (SEBI) stringent compliance requirements and a regulatory framework that deters many municipalities from participating at all. Investor appetite is further weakened by the absence of tax incentives, which makes municipal bonds less attractive than other fixed income instruments.

For cities to raise larger volumes of long term capital, targeted reforms are increasingly essential. Raising the ceiling on incentive linked issuances—potentially to US$55–110 million—would align municipal borrowing with the scale of modern urban infrastructure. Introducing tax exemptions, incentivising institutional investors, and streamlining SEBI procedures would strengthen city-level access to capital markets and channel much needed financing into sustainable infrastructure.

These shifts matter because cities that move beyond transactional, one off borrowing and adopt comprehensive urban finance strategies are already demonstrating what is possible. In Pimpri Chinchwad, Palladium India supported one of the country’s most advanced municipal finance transformations. Through a combination of strategic advisory, debt management policy design, and transaction support, we helped the Pimpri Chinchwad Municipal Corporation (PCMC) access capital markets responsibly and transparently.

A landmark outcome was India’s first Green Municipal Bond for sustainable transport, which raised US$22 million to finance the Harit Setu green mobility corridors and the Telco Road redesign initiative. These investments promote walking, cycling, and public transport while embedding climate resilience into the design of the city’s streets and mobility systems. But the real shift extended beyond the transaction itself. In PCMC, green bonds were integrated into a citywide urban finance strategy that linked borrowing decisions to long term climate, inclusion, and sustainability outcomes. Rather than financing isolated projects, the city used debt as a tool to anchor its sustainable urban development agenda.

Blended finance has emerged as another powerful mechanism for urban investment, particularly where public value is high but immediate cash flows are weak. Many essential services—water, sanitation, flood mitigation, climate adaptation—fall into this category. India already has instruments such as the Pooled Finance Development Fund and credit enhancement facilities designed to strengthen the credit profile of urban borrowing. When deployed effectively, concessional public or donor capital can absorb early risk, pool smaller projects into larger bankable portfolios, and crowd in private investment.

In PCMC, blended finance structures were used to enable municipal borrowing for river rejuvenation and flood mitigation along the Mula River. Bond proceeds were directly aligned with biodiversity restoration, improved sewage treatment, and climate resilient drainage systems—demonstrating that environmental outcomes and fiscal discipline can reinforce each other rather than compete for resources.

The goal is not to replace public funding but to use it strategically, deploying grants, guarantees, and first loss capital to unlock multiples of private investment. India’s cities can no longer depend on public budgets alone. They must embrace diversified capital strategies that match the scale and urgency of their development needs.

What comes next is a transformation not just in how cities raise money, but in how they measure success—by financing outcomes, resilience, and long term impact.

Stay tuned for part two for how those outcomes played out.