This paper analyses the politics of participatory development in a state-led urban poverty reduction programme. Rajiv Awas Yojana (RAY) was launched in 2009 by the Government of India with a vision to ‘create slum-free cities and promote an inclusive and sustainable’ growth agenda. Squatter citizens were to participate in RAY within the framework of Public-Private Partnership (PPP). The paper draws on findings from the Kathputli Colony slum redevelopment project, piloted in New Delhi under RAY that institutionalized citizens’ participation, but led to a prolonged conflict among the various players. The paper argues that this conflict between squatter citizens and the state cannot be explained as a gap in implementation, for this line of thought misses the political-economic context of land and real estate in contemporary cities.