India's unprecedented economic growth during the last two decades has been spearheaded by lopsided spatial development, with clusters of economic activity concentrated in a few highly dense megacities. Engines of growth have failed to spread to less dense secondary cities. Given that a majority of the population in India still lives outside megacities, this has created huge spatial disparities. Uneven spatial development is common in many countries, but it is much more pronounced in India. Unlike in China, Europe and the US, where the engines of growth and job creation have spread to the secondary cities, in India medium-sized cities remain mired in joblessness and poverty. Policymakers frown upon unequal spatial disparities and this has increased the importance of inclusive spatial development in our development discourse.
Why is India's spatial development so lopsided? What can India learn from China and the US where engines of growth have shifted to the secondary cities? Are India's manufacturing and services sectors following similar spatial development patterns? Is the geographic trajectory of capitalism toward spatial clustering or dispersal?
A detailed examination of India's 600 districts shows the spatial development trends in India are very different when compared with China and the US, given the clustering of the engines of growth and job-creation in megacities (see Klaus Desmet, Ejaz Ghani, Stephen O'Connell, Esteban Rossi-Hansberg, The Spatial Development Of India, Journal Of Regional Science, and World Bank).
Spatial development in any location is determined by the trade-offs between the forces of agglomeration economies and congestion costs. Agglomeration economies in the US are concentrated in locations with employment density below 150 employees per sq. km, while in India agglomeration economies are found in locations with densities above this threshold, with employment densities reaching thousands. For those levels of density, US locations exhibit substantial congestion. China has shown a similar spatial evolution to the US. In China, locations with employment density above 150 employees per sq. km have experienced reduced employment growth, indicating important congestion costs. These trade-offs between forces of agglomeration and congestion costs determine where engines of growth locate. The size of a location determines its effectiveness as an engine of growth and job creation.
India's manufacturing sector is spatially spreading at a much faster pace than the services sector. The low-density manufacturing districts are growing at a much faster pace than high-density districts in India. This dispersion of the manufacturing sector from dense to less dense districts has accelerated structural transformation, improved allocation of resources, promoted growth of more efficient enterprises and reduced spatial mismatch of enterprises.
However, the manufacturing sector has not spread to all districts. Only those districts that have improved their physical and human infrastructure have attracted manufacturing enterprises. Though the spatial evolution trend in the manufacturing sector in India is similar to the trends found in China and the US, the speed and pace of spatial spread is much slower in India. While large manufacturing enterprises are moving away from more congested megacities into secondary cities, this is not happening at a faster pace to create more jobs.
India's services sector, a bigger engine of growth and job creation, has experienced different spatial evolution trends. High-density service clusters have continued to grow at a much faster pace than less dense areas and more dense locations have become more concentrated over time. This stands in contrast with the US, where in the last decades services have tended to grow fastest in medium density locations, such as Silicon Valley. India's experience is not common to all fast-growing developing economies. The spatial growth pattern of China looks more similar to that of the US than of India.
One explanation is that while India's megacities suffer from severe congestion costs, they also benefit from huge agglomeration economies and knowledge spillovers. The Fourth Industrial Revolution and new technology have favoured the trade-offs toward a concentration in services and a spread of maturing manufacturing. Modern services are benefitting more from knowledge spillovers compared to the manufacturing sector. This explains why agglomeration economies in services is likely to dominate congestion costs even in megacities, thus allowing high-density locations in India to grow at a much faster pace.
However, this is an unlikely explanation, given that high-density districts in India are already a lot denser than the highest-density counties in the US. It is more likely that the megacities in India are more successful not because they are less congested, but because spatial development policies and frictions are preventing the secondary cities from growing. It is not obvious why Indians should dislike congestion less than Americans and Chinese, or why Indians benefit more than Americans and Chinese from agglomeration economies and knowledge spillovers. These forces are more technological and universal.
If we go by the spatial evolution experience of China and the US, India's engines of growth and job creation will be in its secondary cities and not megacities. The relatively slow-growing Indian districts will grow much faster in the future. Of the well-known IT clusters in India, the medium-density places, such as Ahmedabad, Pune and especially Bengaluru, will have high growth rates in the future, while the high-density places, such as Chennai and Mumbai, will slow down.
Engines of growth and job creation are not tied to big cities. Services can spread spatially at a much faster pace than the manufacturing sector and contribute to more inclusive growth. For this to happen, policymakers will need to improve access to telecommunication and post-secondary education in secondary cities. It is unfortunate that the services sector, which has contributed more to growth and job creation than manufacturing during the last two decades, has not got a seat at the table in our development discourse.
Ejaz Ghani is lead economist at the World Bank.