Will India’s growth remain concentrated in mega-cities or will it shift to secondary cities and small towns?

For India, a faster pace of spatial development is vital to enable the country to take full advantage of its demographic dividend afforded by its young population. With 12 million people joining the country’s labour force every year, the potential is huge. As a latecomer to development, India will also benefit from digital technologies, clean energy, innovative construction materials and new modes of transport that will enable it to leapfrog some of its more developed counterparts. However, to benefit from spatial development, policymakers will need to scale up investments in physical and human infrastructure in secondary cities.

Tarapur MIDC

India’s economic growth and job creation have remained concentrated in its megacities, resulting in overcrowding and congestion in these, stagnation in secondary cities, and an increased spatial divide between its leading and lagging regions. Rising spatial disparities are not unique to India, as growth is often accompanied by spatial concentration of economic activity in some regions. In China, for example, the coastal provinces have attracted the lion’s share of the country’s economic growth. However, India’s spatial inequality is different. Its growth story, unlike that of China, has stemmed from a rapidly expanding service sector.

Manufacturing and services have exhibited very different spatial growth patterns. An industry’s spatial growth pattern is determined by its “age”, and the relationship between density and growth is non-linear. As in the US today, services can be viewed as “young” and manufacturing as “old”. The spatial growth pattern in manufacturing in the first decades of the 20th century, when that sector was young, looked very similar to the spatial growth pattern in services at the end of the 20th century.

India’s megacities have continued to remain engines of growth (see Desmet, Klaus & Ghani, Ejaz & O’Connell, Stephen & Rossi-Hansberg, Esteban, “The spatial development of India”, Policy Research Working Paper Series 6060, The World Bank). However, these results on India’s spatial development are very different when compared with the US and Europe. Agglomeration economies in the US service sector are concentrated in locations with densities of employment below 150 employees per sq. km, while in India agglomeration is found in locations with densities that are above this threshold.

Spatial Growth of Industries

This suggests that the costs of congestion in India are either much less than in the US, the agglomeration forces are much larger than in the US, or that there is a general lack of infrastructure in medium-density cities that prevents them from growing faster, thus favouring concentration in high-density areas. It is not obvious why Indians should dislike congestion less than Americans or should benefit more than Americans from agglomeration economies. These forces are more technological and universal.

Consider the spatial development of manufacturing and services. India’s manufacturing sector exhibits a spatial growth pattern in line with what we see in the US and Europe. The sector is moving away from high-density clusters to areas that are less congested and it is dispersing through space. Low-density manufacturing districts are growing faster than high-density manufacturing districts in India. However, this is not true for the service sector, with service employment growing in more dense areas.

Is India’s spatial development difference with the US and Europe something to do with India being an emerging economy? This does not seem to be the case. China, an emerging economy, exhibits spatial growth patterns more like the US. Is the trade-off between agglomeration economies and congestion costs in India different when compared with the US? Casual observation suggests that the costs of congestion in India’s megacities are huge, implying that there should be decreasing returns to its further expansion.

What is holding back India’s secondary cities? Conventional wisdom suggests that there are many barriers to growth in such cities and small towns. These include lack of access to electricity, toilet, tap water, and travel time to a top-10 city. However, empirical evidence does not support all of them. Being close to a major city or having access to some basic utilities such as tap water or toilets do not seem to matter that much. Only two things matter, the share of population with post-secondary education and the share of households with access to telecommunication services. Megacities in India are more successful because secondary cities and small towns lack the human and physical infrastructure to grow.

What will India’s future spatial trends look like if policymakers were to scale up investments in secondary cities and small towns? First, secondary cities would grow much faster. Second, growth would become more concentrated in the coastal regions, especially in southern states such as Tamil Nadu and Kerala, as well as in northern states such as West Bengal, Bihar and Uttar Pradesh. Of the well-known IT clusters in India, the medium-density ones, such as Ahmedabad and Pune, and especially Bangalore, would continue to grow at sturdy rates, whereas the higher-density places, such as Chennai and Mumbai, would experience a substantial decline in their growth. Third, the fast pace of development of secondary cities and small towns could increase India’s urban population to 600 million people by 2030, twice the size of America’s. India will need to integrate its economy more strongly with the US and Europe to accelerate spatial development with the rise of the middle class.

Ejaz Ghani

Ejaz Ghani has taught economics at Delhi and Oxford University and has worked for the World Bank.

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