Is India’s Spatial Development lopsided?

India’s economic growth remains concentrated in high-density clusters. This stands in contrast with other countries, where growth has been much faster in medium-density locations. 

In an interview with BW Businessworld, Ejaz Ghani, Senior Fellow at the Pune International Center talked about India’s development, growth, economic policies and more.

Why is India’s spatial development so different when compared with China and the U.S.? Should India promote the development of urban infrastructure in large cities or in tier two and tier three cities?  

If we take the U.S. as the efficient benchmark, then 150 employees per square kilometre is the ideal density to take advantage of agglomeration economies. In India, however, these medium-density locations are the worst places. 

This suggests that the costs of congestion in India are either much smaller than in the US, the agglomeration forces are much larger than in the US, or there are some frictions, policies, and a general lack of infrastructure in medium-density cities that prevents them from growing faster, therefore favouring concentration in high-density areas.  

It is not obvious why Indian individuals should dislike congestion less than Americans or should benefit more than Americans from agglomeration economies. These forces seem to be more technological and universal. Therefore, the likely culprit to economic growth in intermediate-density cities is their deficient local infrastructure. The findings for China, an emerging economy that has suffered less from a lack of infrastructure, support this interpretation.  

What has kept medium-density places in India from growing faster? 

In the last two decades, the Indian economy has been growing at unprecedented rates, but this has led to widening spatial disparities. While some cities such as Delhi and Mumbai have world-class companies and real estate development, many other places remain mired in poverty and stagnation. Rising geographic disparities have become a major concern. Policymakers tend to frown upon the uneven distribution of economic activity.  

Given the huge congestion in megacities such as Mumbai or Kolkata, this seems to be a reasonable policy concern. However, megacities also benefit from essential agglomeration economies, labour pooling and knowledge spillovers. So there is a need to analyze the trade-offs between the costs and benefits of economic density before articulating policy recommendations. 

The first question is whether the tradeoffs between costs and benefits of economic density are similar in manufacturing and services. A second question is whether the tradeoff between agglomeration economies and congestion costs in India is like the one in the US or Europe.  

Casual observation suggests that the costs of congestion in India’s mega-cities are huge, implying that there should be decreasing returns to further expansion. However, these mega-cities may also benefit from relatively large agglomeration economies, compared to medium-sized cities that might suffer from market access problems, lack of intermediate goods and infrastructure, and other impediments to growing fast.  

Is India different?  

Manufacturing is already dispersing through space in India. Overall, low-density manufacturing districts are growing much faster than high-density manufacturing districts, although some large cities, such as Kolkata and Mumbai, have also experienced high growth.  Services show a distinctly different pattern. High-density service locations have experienced increasing concentration. That is, the high-density service clusters are gaining relative to those locations with slightly lower employment density.

All in all, the service sector is becoming increasingly concentrated in high-density clusters, whereas in manufacturing the picture is more mixed. This different pattern of spatial development between manufacturing and services is not being driven by a few subsectors. In the case of services, around 90 per cent of employment is in subsectors that exhibit increasing concentration in high-density clusters, whereas the figure is lower in manufacturing.  

The strong evidence of agglomeration economies in the service sector in India is consistent with findings for the U.S. and Europe. Given the impact of ICT in India's rapidly growing service sector, this is what we would have expected. 

Being a “young" industry, services benefit from knowledge spillovers, leading to the emergence of high-density service clusters. In contrast, the evidence for such agglomeration economies in manufacturing, though weaker than in services, differs from the tendency towards dispersion across the entire distribution in the case of the U.S. and Europe. This suggests that manufacturing in India is not as mature as in the U.S. or Europe.  

Can we compare India with China and the US?

Although the service sector in India shows some similarities with the service sector in the US — both exhibit agglomeration economies — there are also some relevant differences. In the US, agglomeration economies in services dominate for medium-density locations, whereas in India agglomeration economies dominate for high-density locations. Agglomeration economies in the U.S. service sector peak at a density of between 50 and 150 employees per square kilometre.  

Three of the main high-tech counties in the U.S. fall within that range: Santa Clara, Calif. (Silicon Valley), Middlesex, Mass. (Route 128) and Durham, NC (Research Triangle). In contrast, in India, agglomeration economies increase in the upper tail of the distribution, in places such as Hyderabad and Chennai, with service employment densities reaching into the thousands. For those levels of density, U.S. locations exhibit substantial congestion.  

So what explains this?  

First, high-density locations suffer from local congestion but benefit from the knowledge spillovers from nearby places. As long as those neighbouring areas gain in employment, spillovers continue to strengthen, thus allowing the high-density locations to grow at a fast pace. Therefore, in the early stages of spatial clustering, knowledge spillovers are likely to dominate congestion, even in the highest-density districts. 

However, given that the highest-density districts in India are in general denser than the highest-density counties in the U.S., this is an unlikely explanation. Second, it might be the case that the high-density clusters in India are more successful, not because its mega-cities are not congested, but because of the absence of agglomeration economies in medium-sized locations, implying higher-than-normal congestion in those places.  

Certain policies or frictions, such as a lack of general infrastructure, prevent these medium-sized cities from growing faster in India. China’s spatial different looks are very different from India's. Once a threshold of around 150 employees per square kilometre is reached, agglomeration economies start dominating in India, whereas the opposite happens in China. 

For Chinese locations with a density above 150 employees per square kilometre, service employment growth becomes strongly decreasing with size, indicating important congestion costs. Along that dimension, China looks more like the US. Given that the overall level of local infrastructure is better in China than in India, this finding is consistent with the interpretation of frictions holding back the growth of medium-density locations in India, but not in China. 

What might future patterns look like?  

First, many of the relatively slow-growing Indian districts would grow much faster in the future, but these districts in India do not seem to be able to take advantage of the service revolution. Second, if India had the same scale dependence on growth rates as the US, different areas of the country would benefit from growth in the service sector.  

Growth would be more concentrated in the coastal regions, especially in Southern states such as Tamil Nadu and Kerala, as well as in Northern states such as West Bengal, Bihar, and Uttar Pradesh. Of the well-known IT clusters in India, the medium-density places such as Ahmedabad and Pune, and especially Bangalore, will have high growth rates, whereas the high-density places, such as Chennai and Mumbai, will not.