By Aasheerwad Dwivedi & Aditya Sinha, Dwivedi is Assistant Professor (Economics), Faculty of Management Studies, University of Delhi. Sinha writes on macroeconomic issues
India’s urban challenge is often framed as one of scale: cities are too large, too congested, too stressed. This framing is misleading. The core problem is not that India has too much urbanisation, but that it has too little spatial diversification of urban economic activity. The Economic Survey’s chapter on urbanisation and the Union Budget’s proposal to develop City Economic Regions (CERs), read together, signal a recognition of this deeper structural issue. They point towards a shift from a city-centric to a region-centric understanding of growth.
Urban economics offers a clear starting point. Agglomeration economies, arising from density, proximity, and scale, raise productivity through labour market pooling, knowledge spillovers, and shared infrastructure. The Economic Survey cites evidence that doubling city size in India can raise productivity by over 10%. This is not trivial. It explains why firms and workers continue to concentrate in large cities despite congestion, high rents, and declining quality of life. Migration to megacities is therefore not an anomaly; it is a rational response to spatially concentrated opportunity.
The paradox, however, is that India’s largest cities appear to be approaching the limits of efficient agglomeration. When congestion costs, infrastructure stress, housing shortages, and governance failures rise faster than productivity gains, the net benefits of further concentration diminish.
India’s megacities are large in population terms but underperform relative to global peers in productivity, liveability, and economic influence. This is not because density is inherently harmful, but because density is unsupported by coordinated land use, transport, and institutional capacity.
At the same time, India’s urban system remains unusually top-heavy. A small number of metropolitan regions account for a disproportionate share of GDP, employment, and migration. This creates a spatial equilibrium problem. Workers are pulled into a few cities not because other regions are unviable, but because alternative urban centres capable of generating comparable agglomeration benefits do not exist at scale. In effect, India has allowed agglomeration economies to accumulate in a narrow set of locations, while much of the country remains under-urbanised in economic terms.
This is where the idea of City Economic Regions becomes analytically important. CERs recognise that cities do not function as isolated units. Labour markets, logistics networks, housing markets, and production systems operate across municipal and district boundaries. Planning at the level of a functional economic region, rather than a single statutory city, aligns policy with how urban economies actually work.
The Economic Survey’s use of night-time lights and core-periphery analysis reinforces this point. Urban growth in India is increasingly occurring in peri-urban and corridor regions outside formal city boundaries. This growth is real, but poorly governed and weakly planned. The result is sprawl rather than structured decentralisation: people move outwards, but jobs, infrastructure, and institutions do not follow coherently. CERs, if designed well, offer a mechanism to convert this unplanned expansion into polycentric urban growth, where multiple nodes within a region generate employment and productivity.
From a regional development perspective, this is important. Excessive dependence on a few megacities creates systemic risks. Infrastructure failures, environmental shocks, or governance breakdowns in these cities have outsized macroeconomic consequences. Moreover, spatial concentration exacerbates regional inequality. States and districts without major urban centres remain locked into low-productivity equilibria, fuelling distress migration rather than opportunity-driven mobility.
The economic logic of CERs, therefore, is not to weaken large cities but to replicate their advantages elsewhere. Policy can spread agglomeration benefits across space by developing secondary cities, industrial towns, and logistics hubs within integrated regions. This is consistent with international experience. Economies that have sustained long-term growth, Germany, Japan, and increasingly China are characterised not by one dominant city, but by networks of cities performing complementary functions.
However, the success of CERs hinges on institutional design. The Economic Survey is explicit that India’s urban constraints are not primarily financial but institutional. Fragmented governance, limited fiscal autonomy, and misaligned authority prevent cities from acting as economic agents. If CERs are implemented as coordination platforms without empowered regional institutions, they risk becoming yet another layer in an already crowded planning architecture.
Equally important is avoiding a misinterpretation of decentralisation. Pushing population away from megacities without creating dense, well-connected employment centres will simply reproduce congestion at a regional scale. The Survey makes an important distinction here: congestion is not a function of density per se, but of density without matching infrastructure and governance. New growth centres must therefore be compact, transit-oriented and employment-rich. Otherwise, CERs will become commuting regions rather than production regions.
There is also a fiscal dimension. If cities and regions are to function as engines of growth, they require predictable revenue streams and borrowing capacity. India’s cities raise a fraction of the resources mobilised by their global counterparts. Without addressing urban finance, particularly land value capture and metropolitan-level taxation, the ambition of CERs will remain constrained by implementation capacity.
The alignment between the Economic Survey and the Union Budget reflects a growing recognition that India’s growth problem is spatial. The issue is not whether cities should grow, but which cities, in which regions, and under what institutional arrangements. Continuing to overload a few megacities imposes rising marginal costs on the economy. Creating new urban growth centres through CERs offers a pathway to convert urbanisation into a more balanced, resilient, and productivity-enhancing process.
The challenge now is execution. If CERs are matched with institutional reform, integrated planning, and fiscal empowerment, they could mark a structural break in India’s urban trajectory. If not, they risk becoming another well-intentioned concept that acknowledges the problem without altering the equilibrium.
Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.