India's spatial development: Services can grow in medium-density locations

Manufacturing and services have exhibited very different spatial growth patterns. Manufacturing is spatially dispersing, while service continues to concentrate in mega cities and high-density clusters. Given that India’s growth has stemmed from a burgeoning service sector, India’s spatial disparity has widened. Managing urbanisation, such that it promotes growth as well inclusive spatial development, has become more pressing and challenging in India. Services, too, just like manufacturing, can promote inclusive spatial development. Policymakers need to develop medium-density locations, which are currently the worst places to live.

India has been growing at unprecedented rates, but that development has led to widening spatial disparities. Given the increasing importance of services as a growth driver, spatial disparity has worsened in India. While some cities, such as Chennai and Hyderabad, have become major high-tech hubs, with world-class companies and real estate development, reminiscent of Silicon Valley, many other places remain mired in poverty and stagnation.

New technology has changed the spatial trends in services. Service, a young industry compared to manufacturing, has been impacted more by information and communication technology. The emergence of economic clusters enables the diffusion of knowledge spillover, and for the service industry to benefit from agglomeration economies. Manufacturing has more mature technology, and it is dispersing.

Old cities and new jobs

Low-density manufacturing districts in India are growing much faster than high-density manufacturing districts. Services show a distinctly different spatial growth pattern, with high-density service locations showing increasing concentration. High-density service clusters are gaining compared to locations with lower employment density. We examined the spatial growth patterns in some 600 districts in India, both for manufacturing and services (see Desmet, Klaus & Ghani, Ejaz and O’Connell, Stephen & Rossi-Hansberg, Esteban, “The spatial development of India”, Economic Premise, World Bank). 

Cities are impacted by the trade-offs between agglomeration economies and congestion costs. India’s urban experience shows that cities with high levels of employment density have performed better than intermediate-levels of employment density. This is clearly the case in services. But manufacturing is de-concentrating, and it is moving out from big cities into small towns. Congestion costs in large locations (high transport costs, pollution, and local factors) contribute to dispersion of employment in manufacturing. But there is no evidence that services are de-concentrating. Knowledge spillovers and labour-market pooling, all facilitated by high density, constitute an agglomeration force that leads to further concentration of employment. Overall, agglomeration forces still dominate dispersion forces in high density areas for services.

How does India’s spatial development compare with China and the US? The difference in spatial growth rates, between fast-growing places and slow-growing places, in India is much larger than in the US. Differences in spatial growth rates are also fast in China. In other words, the spatial distribution of jobs, in China and India, is changing much faster than in the US and Europe.

Although the service sector in India shows some similarities with the service sector in the US, there are also some differences. In the US, agglomeration economies in services dominate in medium-density locations, whereas in India agglomeration economies dominate in high-density locations. Three of the main high-tech counties in the US, fall in medium-density location range: Santa Clara, Calif. (Silicon Valley), Middlesex, Mass. (Route 128), and Durham, NC (Research Triangle). In contrast, in India, agglomeration economies increase in more dense cities, and in places such as Hyderabad and Chennai, with service employment densities reaching into the thousands. For those levels of density, US locations exhibit substantial congestion.

What’s holding back medium-density locations? 

Being close to a major city or having access to basic in frastructure utilities, such as tap water or toilets, do not seem to matter that much for services. Only two policy drivers matter — the percentage of the population with post-secondary education, and the percentage of households with access to telecommunication services, which have the potential of accounting for the relative advantage of high-density clusters. If spatial access to post-secondary education and telecommunication services is spread more evenly, high-density service clusters will not grow particularly fast. In other words, if all locations had the same percentage of their population with post-secondary education, or if in all locations the households’ access to telecommunication services were the same, then high-density service clusters would lose their attractiveness.

India’s future

Indian mega cities are more competitive not because the costs of congestion in India are much smaller than in the US, or that the agglomeration forces are much larger in India than in the US. There is no reason to expect why Indian individuals should dislike congestion less than Americans, or should benefit more than Americans from agglomeration economies. These forces seem to be more technological and universal. The likely culprits in India are restrictions to economic growth in intermediate-density cities. It is lack of infrastructure in medium-density cities that prevents them from growing faster, therefore favouring concentration in high-density areas.

Services are more urbanised than manufacturing, but they are not tied to mega cities. Services can be a growth driver that can also promote inclusive spatial development. Policymakers need to develop medium-density locations in India, which are currently the worst places to live. Two such barriers in medium-density locations are the small share of post-secondary education, and poor access to telecommunication services. The findings for China, an emerging economy that has suffered less from a lack of infrastructure, support this interpretation.

The writer is lead economist, World Bank