Make urban legend real: Our cities must become far more business-friendly for India to achieve high per-capita income

New York: With some exceptions, central-level big-ticket reforms I wrote about over the past three decades – beginning with a 1994 article calling for an end to import licensing for consumer goods, a measure omitted from the 1991 reform package – have been enacted. Exceptions include a still-incomplete agenda to privatise PSEs and PSBs, and to liberalise trade, energy and financial sectors; reform of higher education; and, above all, politically-challenging judicial reforms.

As the Centre makes steady progress on these fronts, states must step up. No area needs more attention than urbanisation, which has been integral to economic transformation in all countries that have achieved high per-capita incomes.

Whether we consider early industrialisers like Britain and the US, or later ones, including Japan, South Korea, Taiwan and China, none achieved high per-capita incomes without becoming at least 60% urban. The main difference is that the time to urbanise has shortened. Britain took a century, the US 80 yrs, Japan 55-60 yrs, and South Korea, Taiwan and China 30-35 yrs.

By comparison, India’s urbanisation has been slow. The share of the population living in urban areas rose from 25.7% in 1991 to 31.2% in 2011 and, with a census still pending, is officially estimated at 36.4% in 2023. More than 30 yrs after the launch of economic reforms, the urban population has increased by 10.7 percentage points.

It is sometimes argued that India can remain rural, although with urban amenities, and still achieve high per-capita incomes. The counter-argument is that while a 60-70% high-income urban population can support high living standards for 20-30% of the rural population, a 45-50% high-income urban population cannot sustain high living standards for 50-55% of the rural population. To be sure, no country to date has achieved high per-capita income with a majority-rural population.

So far, the largest contributor to urban growth has been the natural increase of the urban population. But, as in the rest of the world, fertility rates have taken a nosedive in India, greatly slowing this engine. In the coming decades, much of urbanisation will have to come through rural-urban migration, and conversion of rural habitations into urban ones.

In India, even the latter avenue offers limited scope for productivity-enhancing urbanisation. Except for some densely-populated regions in states like Bihar, UP and Kerala, India’s rural population lives in small, non-contiguous habitations.

According to 2011 census, 75% of India’s rural population lives in habitations with 5,000 or fewer residents. With some exceptions, these habitations are highly dispersed. So, the scope for converting them into substantial urban agglomerations is extremely limited.

The census may recognise many of these habitations as urban, and state governments may even convert them into statutory urban bodies. However, unless they are located on the periphery of a larger existing urban agglomeration, they are unlikely to grow large enough to support substantial, high-productivity economic activity.

Therefore, in the coming decades, rural-urban migration will have to be the principal engine of urbanisation. Even when several proximate or near-contiguous villages are combined to form a city, as in Amaravati in Andhra Pradesh, densification will require migration from more distant, non-contiguous villages.

This inference leads to the inescapable conclusion that Indian cities need to become far more business-friendly than they are now. Urban authorities have traditionally focused on improving life for the existing city population, which, no doubt, is a desirable goal, and a political imperative.

Yet, if urbanisation is to accelerate, cities must also become business-friendly. New and expanding businesses would create well-paid jobs that workers can migrate to from nearby rural areas.

Once the urgency of expanding business activity in urban agglomerations is recognised, the next set of questions concerns the state-level actions needed to make business activity by existing and new enterprises less costly and more profitable, especially in labour-intensive sectors.

The first question is how to ease urban land scarcity and curb its high price. One simple measure states can take is to follow Andhra Pradesh’s lead and end the practice of requiring numerous permissions from state government departments before agricultural land can be used for non-agricultural purposes, at least within 8-10 km of an existing city’s periphery. Several other measures, some by GoI, can help alleviate urban land scarcity. A discussion of these measures will be the subject of a separate future column.

States also need to use the flexibilities embedded in the new labour codes to make entrepreneurial activity in labour-intensive sectors more attractive. Among other things, they can relax the ceiling on workforce size above which a firm must seek permission to lay off workers.

They must resist the temptation to set the minimum wage at unrealistically high levels, especially in tier-2 and -3 cities, where firms in labour-intensive sectors locate because of the lower cost of living.

Other measures that require state governments’ attention include rationalising building by-laws, creating mixed-use zones where housing, business and commercial entities are permitted simultaneously, and providing low-rent dormitory housing.