Official sources said the finance ministry has approved an initial corpus of Rs 500 crore in-principle for the project. It would be topped up every year depending on the number of projects the government receives from states, an official said.

The government is making efforts to accommodate at least 40% of the nation's population in urban India by 2021. According to an official estimate about 70% of the country's population is still living in rural areas. The biggest challenge before the government, however, is to create cities with adequate economic activities, urban development secretary M Ramachandran said. Keeping this in mind, the ministry is planning to develop several new urban centres around existing cities. The new policy will be aligned with the ongoing Jawaharlal Nehru National Urban renewal Mission (JNNURM).

The proposal of the urban development ministry demands active participation of cities in evolving urban centres around them. They would have to undertake various reform measures in order to qualify for receiving the central assistance. These reform measures include rationalisation of stamp duty and house tax, implementation of rent control laws and setting of self-sustainable urban transport fund, an official said.

"The proposal would facilitate developing satellite towns with major focus to link them with the parent cities so that they also offer adequate economic opportunities," the official said. Officials are of the view that for future cities, the application of intelligence transport systems (ITS) will play a crucial role.

ITS is a transportation model for optimising existing transport infrastructure, information and communications services and plan for future.