States with a higher urban contribution to state domestic product have seen faster economic growth, greater employment generation and declines in poverty
Cities are often said to be engines of growth. They are endowed with higher levels of infrastructure — physical, financial and social. Productivity and wages are also found to be higher in large cities compared to smaller ones. Even workers are aware of this fact and, therefore, migration to large cities is quite voluminous. One major source of higher productivity levels in large cities stems from the fact that they generate higher levels of agglomeration economies.
For planning at the national level and, more specifically, to arrive at estimates of urban infrastructure requirements, we need to know the contributions of cities to total production and their interaction with the rest of the economy. Low-income households in the rural areas also have to benefit in the process of urban-centric growth. The manner in which new linkages and institutions can be created to ensure pro-poor growth is an endemic feature of urban planning.
My studies show that in non-agriculture activities the share of urban India is above 80 per cent. Urban India’s share of the gross domestic product (GDP) can be attributed to the value created by the manufacturing and services sectors. Across states considerable variations exist. Delhi is the most urban state, with 96 per cent of its non-agricultural state domestic product (SDP) coming from the urban areas.
The contribution of urban areas in rapidly industrialising states such as Gujarat, Maharashtra, and other states such as Chhattisgarh and Karnataka is almost 85 per cent of the state’s non-agricultural domestic product. Big southern states like Andhra Pradesh and Tamil Nadu also have a significant urban contribution to their SDP — 58 per cent and 75 per cent respectively. Himachal Pradesh is the least urbanised state, with only 19 per cent of its SDP coming from the urban areas.
Also, urban areas in states with a higher level of urbanisation are doing better than the rural areas in terms of productivity. Besides, states that have at least 60 per cent of their SDP coming from the urban areas correspond to relatively lower incidence of poverty. By and large, with a rise in the contribution of urban areas to total SDP, there is a tendency for poverty to decline. Also, states with a higher share of urban state domestic product have witnessed higher economic growth. Thus, the role of agglomeration economies in generating employment and reducing poverty by enhancing total factor productivity growth must not be overlooked.
The government of India recommended that more than 60 cities and towns should be part of the Jawaharlal Nehru National Urban Renewal Mission (JNNURM). These include cities with populations of over a million people, state capitals and other centres that are important from an industrial or commercial point of view. It is interesting to assess whether these cities account for a considerable part of the urban domestic product.
According to my studies, a large number of cities and towns account for a sizeable share in the total urban domestic product, though not all the JNNURM cities account for a very high proportion of urban SDP. This reveals the importance of other considerations that may have been used in selecting cities for the urban renewal mission — such as historic or cultural importance.
The nature of activities conducted in a city is an important determinant of its per capita income. Since many large cities contribute largely to non-farm economic growth in the country, further investment to sustain their growth momentum and also to improve the quality of life in these cities is indeed important. Though this strategy may exacerbate spatial inequality, any deliberate attempt to curb this process may have to be implemented at the cost of growth.
A balanced approach will, therefore, be to evolve over time a set of new spatial regions which have the potential to help reap the benefits of agglomeration economies. Medium-sized and small towns need to be improved in a continuous manner and a great deal of public infrastructure has to be created in these urban settlements, so that they can take over once the existing ones are exhausted. We may, however, note that agglomeration economies are an outcome of natural processes. Man-made efforts need not always result in positive externalities on a large scale.
Several countries, particularly in the developing world, usually follow an imbalanced approach — either by initiating major investment projects only in the large cities, or by raising political slogans in favour of the small towns and the rural areas. These countries need to take more balanced decisions, so that the increase in economic growth originating from large urban settlements benefits the poor across all regions. Strategic development of urban centres can facilitate a rise in productivity growth in rural areas as well. By directing investment projects to an urban settlement which is surrounded by rural areas, the benefits of growth can be distributed more equitably, without hampering the benefits of agglomeration economies.
This would also reduce the pressure on large urban settlements, which continue to draw much of the rural migrants moving in search of a livelihood. Space in large cities is shrinking fast, and rising income inequality is getting manifested in terms of land inequality.
In such a situation, without taking recourse to undemocratic means of restricting migration to big cities, more productive ways need to be adopted to make the not-so-large cities attractive and divert migration to those cities.
The author is a professor of economics at the Institute of Economic Growth, Delhi
