Expanding urbanisation calls for governance to keep pace

India’s Urbanisation Premium offers an opportunity to turn the recognition of peri-urban transition into a planned policy response

India’s urbanisation is extending beyond the boundaries of its recognised cities. It is taking shape in villages on the edges of cities, along industrial corridors, and in settlements where farms co-exist with factories, warehouses, and new housing. These places may not appear on the urban map, but they are already part of India’s wider urban economic ecosystem. A 2026 analysis by the National Institute of Urban Affairs (NIUA) found that peripheral areas accounted for more than 80% of built- up growth across 20 major cities between 2000 and 2020. In Kerala, a spatial analysis identified more than 500 functional urban or transitional settlements in 2025 — home to nearly 9.63 million people — that are currently exhibiting urban characteristics.

The consequences of transport-oriented development and city-based spillover extend beyond individual settlements. Workers travel across administrative boundaries, businesses depend on regional transport networks, and demand for housing and services spreads into surrounding areas. The National Capital Region illustrates this interdependence. (Shutterstock)

India’s last Census data offers an earlier glimpse of this transition. Between 2001 and 2011, the number of Census Towns rose from 1,362 to 3,894, while their contribution to incremental urban population rose from 10.2% to 31.2%, showing how economic activity and settlement patterns change long before administrative boundaries or governance arrangements change.

This urbanisation pattern creates a mismatch between the geography of growth and the geography of governance. A village may become a centre for industry, trade and housing while its infrastructure and institutions remain designed for a predominantly rural settlement. Roads, drainage, water supply, sanitation, waste management, and public transport come under pressure. Real estate and commercial development increase exponentially, while planning and service provision struggle to keep pace.

The consequences of transport-oriented development and city-based spillover extend beyond individual settlements. Workers travel across administrative boundaries, businesses depend on regional transport networks, and demand for housing and services spreads into surrounding areas. The National Capital Region illustrates this interdependence. The Union Budget 2026–27 proposed City Economic Regions (CERs), with an allocation of ₹5,000 crore per region over five years. This recognises that economic activity, infrastructure needs, and development opportunities often extend beyond individual city boundaries into wider regional territories. The Urban Challenge Fund’s Operational Guidelines (2026) similarly emphasise integrating infrastructure projects with broader city and regional growth strategies, highlighting the importance of aligning investment with the wider geography of urban development. So, the question is whether public investment and governance can respond to the transition.

The Sixteenth Finance Commission’s recommendation of a ₹10,000-crore Urbanisation Premium for 2026-31 offers a timely opportunity to incentivise the merger of peri-urban villages with adjoining urban local bodies having an existing population of at least one lakh. The recommended amount is calculated at ₹2,000 per person, based on the 2011 Census population of the area being incorporated. Access to this grant is linked to states formulating a Rural-to-Urban Transition Policy. The Commission also recommends identifying transitional settlements, assessing their needs and preparing transition plans covering infrastructure, service delivery, finances and institutional arrangements.

This recommendation creates an incentive for states to treat urban transition as a planned process, not merely an administrative change at the end of it. Odisha’s Rural Urban Transition Policy, notified in 2023 and revised in March 2026, provides for the identification of peri-urban areas, assessment of their economic and settlement characteristics, and phased provision of urban infrastructure and services before their formal recognition as urban local bodies.

Importantly, the first step is to reliably identify where this transition is taking place. NIUA’s research (2026), Understanding the New Geography of India’s Urbanisation: A Geospatial Approach, demonstrates how geospatial evidence can identify settlements exhibiting urban characteristics beyond conventional administrative boundaries. Indicators such as population density, economic diversification, commuting patterns and access to essential services can help assess the nature and extent of this transition. These assessments can inform area-specific transition plans, setting out infrastructure priorities, service delivery, and institutional arrangements. While some settlements may need stronger coordination between existing authorities, others may be ready for notification as urban local bodies. A single administrative solution may not meet the needs of all transitional settlements.

India’s Urbanisation Premium offers an opportunity to turn the recognition of peri-urban transition into a planned policy response. Realising its potential requires states to translate these assessments into priorities for public investment and define how responsibilities for planning and service delivery should evolve. A rural-to-urban transition policy can provide the framework for aligning institutional arrangements and financial support with the realities of emerging growth patterns. States must proactively formulate such policies and access the grant to ensure a planned transition towards sustainable urban development. The task is to plan for changes already underway, in the places where India’s urban future is being shaped.

Debolina Kundu is director, and Mehebub Rahaman is research lead, National Institute of Urban Affairs. The views expressed are personal