Column : Moving away from cities

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SummaryOrganised sector is becoming less urbanised, unorganised sector more urbanised.

One of the biggest challenges in development is urbanisation. Within developing countries, nearly two billion people are expected to move from rural regions into cities in the next two decades. The pace at which this will happen will be much faster than what the world has experienced before. For instance, China’s and India’s economic transformation and urbanisation is happening at 100 times the scale of the first country in the world to urbanise—the UK—and in just one-tenth of the time. Most countries have only one chance to get it right, and there is no ‘one size fits all’ recipe.

McKinsey Global Institute contends that cities in India have the potential to generate 70% of the country’s new jobs and GDP over the next 20 years, a process that could drive a four-fold increase in per capita incomes. While promising and greatly desired, such urbanisation imposes unprecedented managerial and policy challenges. However, in spite of the potential for urbanisation in the country, research on spatial location and concentration of economic activity in cities is still at an early stage.

Given the great challenges ahead, we looked backward to describe how the urbanisation process has proceeded (or not) for the Indian manufacturing sector over the 1989-2005 period. We had two goals. The first goal was to trace the trends and depth of India’s manufacturing urbanisation across states and industries. This description can yield important insights for researchers and policymakers going forward.

Our second goal was to examine whether localised education and infrastructure are linked to urbanisation and more efficient spatial allocation of India’s industries and plants since 1989. There are many explanations for urbanisation drivers in India, too many in fact for one study to accurately assess. We sought to quantify whether and how these local conditions, along with other factors like wage costs, promoted or discouraged the urbanisation process.

Our study combined data from the Annual Survey of Industries for the organised sector and from the National Sample Survey for the unorganised sector. On the whole, India’s manufacturing sector became more urbanised, with the share of workers in urban areas rising from 33% of employees in 1989 to 41% in 2005. Urbanisation growth was most dramatic from 1989 to 1994, but slowed down from 1994 to 2000. The urbanised employment share was basically flat from 2000 to 2005. This pattern of increasing urbanisation was also present when looking just at manufacturing plant counts, but the

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