Urbanisation: the driving force behind India’s growth

Author: Sabyasachi Tripathi, ISEC

There are many who consider urban agglomeration — the concentration of a population in a continuous urbanised area — as synonymous with a country’s engine of growth, owing to the advantage of higher productivity rates.

And this is certainly true in the case of India. Agglomeration effects are measured through the interaction of market size, transportation costs and increasing returns at the firm level — that is, lowered average costs due to the sharing of fixed costs. These effects emphasise the interplay of agglomeration and dispersion forces, and their role in determining urban systems.

Urban agglomeration has a positive impact on urban economic growth, and it is now well and truly driving India’s overall economic growth. India’s total real urban NDP has increased by about 761 per cent, while the share of urban NDP in total NDP increased from 38 per cent to 52 per cent from 1970–71 to 2004–05. And the service sector’s contribution, standing at 72 per cent, was higher than both the industrial and agricultural sectors in 2004–05, accounting for 26 per cent and 2.4 per cent, respectively. It is interesting to note here that while in 1971, the total number of towns in India stood at 2590 (accounting for 19.91 percent of the country’s total population), by 2001 the number increased to 4368 (accounting for 27.78 percent of the total country’s population).

Urban concentration is a process in which an increasing proportion of a country’s population is concentrated in urban areas. Locations with large net labour inputs such as these produce a greater variety of goods than places with a smaller labour input. This should not be surprising, as most economic activity take place in cities, and growth in productivity and income is easier to achieve in an urban context. The ratio of export value to gross state domestic product (GSDP) also helps determine a state’s level of trade openness, and, for India, a higher ratio is often associated with a much larger degree of trade openness.

But a 10 per cent increase in state capital expenditure on transport decreases trade openness and urban concentration by 0.4 per cent and 3.6 per cent, respectively. This means that an increase in the share of state government expenditure on transportation combined with an increase in the ratio of trade to GSDP ultimately reduces the size of big cities. The percentage of a country’s urban population living in a city’s surrounding districts also has a significant effect on urban population concentration. Taking this into account, a 10 per cent increase in the urban concentration of big cities increases city output by approximately 2.2 per cent.

Applying these figures to India, the resulting scenario suggests the economics of agglomeration are policy-induced (the government’s Jawaharlal Nehru National Urban Renewal Mission program being one example) and market-determined. Other research by Marthur, Narayana, Mills and Becker equally supports the claim that towns with a population of over 100,000 inhabitants are experiencing the lowest population growth when compared to other smaller cities. This implies that bigger city size is directly associated with lower population growth.

But environmental and social problems, including the provision of basic services to city-dwellers, urban inequality and poverty, bring to the fore an important question about the inclusiveness of higher urban economic growth. India’s government must accept the responsibility of gathering and generating more data on the country’s massive and rapidly growing urban areas in order to facilitate better analysis. This will ultimately allow for more appropriate policy design and aid India throughout the large-scale demographic transition it is currently experiencing.

Sabyasachi Tripathi is a Research Scholar at the Institute for Social and Economic Change, Bangalore, India.