What made Indian Cities and Towns Grow in the 2000’s? Stylized Facts and Determinants Rana Hasan Asian Development Bank Ji Yiang Asian Development Bank Debolina Kundu National Institute of Urban Affairs India Policy Forum July 11–12, 2017 NCAER is celebrating its 60th Anniversary in 2017-18 NCAER | National Council of Applied Economic Research 11 IP Estate, New Delhi 110002 Tel: +91-11-23379861–63, www.ncaer.org NCAER | Quality . Relevance . Impact The findings, interpretations, and conclusions expressed are those of the authors and do not necessarily reflect the views of the Governing Body or Management of NCAER. What made Indian Cities and Towns Grow in the 2000’s? Stylized Facts and Determinants* Rana Hasan Asian Development Bank Ji Yiang Asian Development Bank Debolina Kundu National Institute of Urban Affairs India Policy Forum July 11–12, 2017 Abstract We take a first step at trying to understand the determinants of city size and growth in India by combining information on city and town characteristics from three main sources of data: the 2001 and 2011 population censuses; the 1998 economic census; and GIS-enabled road network data. We use the data assembled to understand whether and how industrial structure, transport infrastructure, and various socio-economic characteristics (including those related to human capital) influence city size and growth. We find that various dimensions of economic activity and better connectivity to other locations are positively associated with the population growth of cities. To the extent that faster growing cities are also ones that provide higher real incomes to their residents, policymakers aiming to improve development outcomes and maximize the benefits of the urbanization process underway in India should focus more attention on what features of urbanization are conducive for the growth of economic activity and design policy interventions accordingly. JEL Classification: R11, O14, O18 Keywords: City growth, Migration, Human capital, Market access, Economic activity, Economic census * Preliminary draft. Please do not circulate beyond the discussion at NCAER India Policy Forum 2017, for which this paper has been prepared. [email protected] [email protected] [email protected] Rana Hasan, Ji Yiang and Debolina Kundu 1 What made Indian Cities and Towns Grow in the 2000’s? Stylized Facts and Determinants Rana Hasan, Ji Yiang and Debolina Kundu1 1. Introduction Cities are widely believed to be engines of economic growth and good jobs. In this context, the urbanization process under way in India is good news. According to data from the Census of India, the share of India’s population residing in urban areas increased from 20% in 1971 to 31% in 2011, with the urban population of 377 million representing the 2nd largest urban community in the world. All expectations are that the process of urbanization in India will continue, if not accelerate, with various models suggesting that the country might add another 400 million people by 2050 (United Nations, 2014). However, the link between urbanization and economic dynamism is not assured and its strength is likely to vary on account of various factors. In India’s case, for example, several commentators have noted that the potential of its cities and towns to spur economic activity may not be met fully due to several factors, including limited investment in infrastructure and the prevalence of unsynchronized spatial and economic planning systems. Ahluwalia, Kanbur, and Mohanty (2014) note that in comparison to other fast-growing economies in Asia, urbanization in India has been relatively slow, largely unplanned, and characterized by underinvestment in urban infrastructure and public service delivery. Driven by such concerns, and the emergence of data disaggregated at district and city levels, researchers have recently turned their attention to understanding both the nature of urbanization underway in India, as well as the relationship between urbanization and various outcomes. The relationships studied include the size and determinants of agglomeration economies associated with urban locations (Chauvin et al. 2016; Desmet et al 2013; and Hasan, Jiang and Rafols, 2017), the relationship between transport infrastructure and city/urban growth (Lall, Wang, and Deichmann 2010 and Alder, Roberts, and Tewari 2017), and that between the form and shape of cities and economic growth (Harari 2016 and Tewari et al 2017). Some studies have also focused on documenting the spatial development of industry (manufacturing and services) and understanding its determinants (Ghani, Kerr, and Tewari 2014). With some notable exceptions, such as the recent work of Harari (2016) and Tewari et al (2017), most of these studies treat districts, the country’s second administrative level (after states), as the urban unit of analysis (see, for example, Chauvin et al. 2016; and Ghani et al. 2013). This is because most available data from labor and enterprise surveys contain geo-information down to the district level. However, Indian districts often cover large rural areas and many contain multiple, 1 We thank Arvind Pandey and Pris Villanueva for their superb technical assistance on the analysis of population census data. Thanks are also due to Michelle Rafols and Rhea Molato for their dedicated work on economic census data and NSS employment-unemployment survey data, respectively. 2 India Policy Forum 2017 geographically independent urban areas, i.e., cities and towns. A more appropriate unit of analysis is thus likely to be the city or town, which is the administrative division below the district level whose rural counterparts are villages. Additionally, for those studies that look at the relationship between urbanization and economic activity, city level measures of the latter are captured in a highly aggregated manner (for example, through the intensity of nightlights as a proxy measure for aggregate economic activity as in Tewari et al). Nuances that arise from different structures of economic activity, for example, differences in the relative importance of manufacturing, the prevalence of formal and large firms, get missed in this approach. In this paper, we take a first step at trying to understanding the determinants of city size and growth in India by combining information on city and town characteristics from three main sources of data: the 2001 and 2011 population censuses, which provide demographic, amenities, and infrastructure related information; the 1998 economic census, which provides information on the structure of economic activity; and GIS-enabled road network data, which is used to construct transport connectivity and market access measures. Accordingly, we use the city level data we have assembled to understand whether and how industrial structure, transport infrastructure, and various socio-economic characteristics (including those related to human capital) influence city size and growth. We find a positive association between various dimensions of economic activity and population growth of cities, emphasizing the importance of cities as centers of production. We also find connectivity between cities to influence city growth. While the causal interpretation of our results is tentative at this point of time, we believe that the analysis contained here is useful in building a set of stylized facts about Indian urbanization. The remainder of this paper is organized as follows. Section 2 motivates the need for understanding the drivers of urban growth from a policy perspective and provides key features of the urbanization process underway in India, including major policy initiatives undertaken for improving urban outcomes. Section 3 provides a discussion on the empirical framework used in this paper to analyze urban growth and the data used in the analysis. Sections 4 and 5 describe the results of our analysis on the determinants of city size and city growth, respectively. Section 6 concludes. 2. Urban Growth Cities need many things to support a growing population and thrive economically. They need to provide their residents affordable housing; access to infrastructure encompassing transport services, power supply, and water supply and sanitation; and institutions for building and sustaining human capital. They also need to provide an ecosystem that encourages economic activities of various types. This, in turn, requires managing land use and a synchronized approach to economic and spatial planning, among others. Since no city is an island existing on its own, connectivity to other cities/locations is also important. Providing all the necessary infrastructure and institutions is not easy. Infrastructure can be quite expensive, and good and effective planning requires considerable coordination across different agencies as well as technical expertise that may be scarce. Where should policymakers interested in making the most out of urbanization focus? For example, do cities of a particular size class — say, small and Rana Hasan, Ji Yiang and Debolina Kundu 3 medium size cities versus large ones — have the most potential to grow? At another level, cities have traditionally been seen as centers of production. Does the nature of economic activity in a city have implications for its future growth? For example, do cities with a more diversified structure of production have greater potential to grow? Are cities that provide a conducive environment for new establishments to set up business economic firms likely to grow faster?2 Having a good understanding of the drivers