India’s next phase of growth may not come from its largest metros alone. In the Union Budget 2026-27, Finance Minister Nirmala Sitharaman laid out a plan to channel greater investment into Tier-II, Tier-III and temple cities, signalling a shift in focus towards emerging urban centres.
Presenting the Budget in the Lok Sabha, Sitharaman described cities as “India’s engines of growth, innovation and opportunity” and emphasised that expansion must now extend beyond established metropolitan hubs.
At the centre of this approach is the creation of City Economic Regions (CERs), clusters mapped according to their economic strengths, with a proposed allocation of Rs 5,000 crore per region over five years.
What Are City Economic Regions (CERs)?
The CER approach seeks to strengthen regional economic clusters by aligning investment with each region’s growth drivers. Sitharaman said an allocation of Rs 5,000 crore per CER over five years is proposed for implementing their plans through a challenge mode with a reform-cum-results based financing mechanism.
The initiative will prioritise Tier-II and Tier-III cities and temple towns that require upgraded infrastructure and improved basic services. Many of these cities now have populations exceeding five lakh and have evolved into important commercial and residential hubs. The government expects the CER model to support more balanced urbanisation and reduce pressure on large metros.
Capital Expenditure Raised to Rs 12.2 Lakh Crore
The urban development push is accompanied by a rise in public capital expenditure. Sitharaman announced an increase of about 9 per cent for FY2026-27, taking the allocation to Rs 12.2 lakh crore.
“Public capital expenditure has increased manifold from 2 lakh crore in 2014-15 to an allocation of 11.2 lakh crore in 2025-26. In this coming year, that is, financial year 2026-27, I propose to increase it to 12.2 lakh crores to continue the momentum,” she said.
Over the past decade, infrastructure spending has been supported through instruments such as Infrastructure Investment Trusts (InvITs) and Real Estate Investment Trusts (REITs), along with institutions including NIIF and NaBFID, which have expanded financing capacity.
Infrastructure Risk Guarantee Fund Proposed
To address financing concerns faced by private developers, the Finance Minister proposed the creation of an infrastructure risk guarantee fund. The fund will provide prudentially calibrated partial credit guarantees to lenders, with the aim of reducing risk perception during the development and construction phases of infrastructure projects.
The measure is intended to improve access to credit and support sustained private participation in infrastructure-led growth.
Real Estate Implications in Emerging Cities
Industry participants say the emphasis on regional infrastructure could influence housing demand in emerging urban centres.
Rohan Khatau, Director CCI Projects, said, “Union Budget 2026 gives limited direct emphasis to real estate or homebuyers. The Infrastructure Risk Guarantee Fund and REITs for CPSE assets can unlock funds and speed up monetization. Stronger municipal finances and market-based funding will aid development of integrated townships. Growing economy coupled with better infrastructure framework will lead to balancing real estate dynamics.”
Praveen Sharma, CEO, REA India (Housing.com), said the infrastructure focus could support demand in smaller cities. “The Union Budget reinforces a strong infrastructure-led growth roadmap that will directly support housing demand, particularly in tier-2 and tier-3 cities, which are emerging as fast-growing real estate markets. Record capital expenditure, the development of City Economic Regions, and improved connectivity will unlock new housing corridors and significantly enhance urban livability.”
Tanuj Shori, Founder and CEO, Square Yards, said, “Budget 2026 adopts a clear growth architecture anchored in infrastructure-led development, city economic regions and industrial corridors. The push for private sector participation, capital market deepening through REITs and municipal bonds, and focus on green and sustainable urbanisation directly strengthen housing supply and end-user demand.”
Insurance and Risk Management Demand
As economic activity expands in these cities, demand for risk management solutions is also expected to rise.
Rakesh Jain, CEO, IndusInd General Insurance, said, “Equally important is the renewed focus on India’s next phase of urban expansion. The plan to develop Tier 2 and Tier 3 cities through City Economic Regions signals a major shift in how regional growth will be shaped. As these cities scale, the complexity of economic activity will rise, increasing the demand for holistic risk solutions across property, infrastructure, liability and transit.”
Connectivity and Tourism Potential
The Budget’s emphasis on improved connectivity and support for temple towns could also benefit domestic tourism and business travel.
Dinesh Kumar Kotha, CEO, ixigo Trains & ConfirmTkt, said, “The proposal to introduce seven high-speed rail corridors as growth connectors, particularly on high-demand routes like Varanasi, will help ease congestion and make inter-city travel faster, cleaner and more dependable. The focus on Tier II and Tier III cities, including temple towns, through the Rs 5,000 crore City Economic Regions (CER) allocation, is especially positive and should drive tourism growth in these destinations.”
He added that investments in destination skilling, including training 10,000 tourist guides and nature and experience-based tourism initiatives, align with evolving travel preferences.
The Budget 2026 proposals indicate a continued shift towards decentralised urban development. By combining higher capital expenditure with region-specific planning and risk-sharing mechanisms, the government aims to strengthen infrastructure capacity in emerging urban clusters.
