THe Blog

June 20, 2016

On Fixing India's Urban Growth

Ruchir Sharma, Head of Emerging Markets at Morgan Stanley Investment Management, writes in The Times of India that the manner in which India's small cities are growing is causing problems for development. Excerpts below.

 

"India... has a severe problem developing second-tier cities, which reflects some of the nation’s basic flaws, including a state that meddles too much, and a track record of spending too much on subsidies and too little on building factories and ports, the anchors of modern urban development.

 

I researched the balance of urban power across the world, and found that in most countries in Thailand’s size class, with 20 million to 100 million people, the population of the largest city outnumbers the second city by around three to one, or less. That three-to-one rule held in the past and still holds today for the urban centres of the “Asian miracle” economies, including Tokyo and Osaka in Japan, Seoul and Busan in South Korea, and Taipei and Kaohsiung in Taiwan. It holds today for 15 of the 20 major midsize emerging nations, from Poland to Vietnam. It also holds for five of the seven midsized developed countries, from Canada to Germany.

 

Because India is more a continent than a country, the same analysis applies to its individual states...

 

My sense is that any midsize emerging nation where the capital is significantly more than three times larger than the second city faces a risk of Thai-style political instability driven by regional conflict, and such an imbalance is a drag on growth. Today only five major midsize emerging economies stand in clear violation of the three-to-one rule: Thailand, Malaysia, Chile, Argentina, and Peru. In Thailand, Bangkok accounts for about 15% of Thailand’s 68 million people, but about 40% of GDP, so it’s not surprising angry farmers are often protesting in the capital, demanding more power and influence. In India, the state of Assam is slightly out of balance with a ratio of four to one, but there are three major outliers, and all have capitals as bloated as Bangkok, which is worrying.

 

Those outliers are West Bengal, Karnataka and the new state of Telangana, which is too young to clearly trace the roots of its capital city’s dominance. Karnataka, however, is a classic case of missed geographic opportunity... West Bengal is even more lopsided, and travelling through the state during the recent election, I was struck anew by how little has changed...

 

There is a similar race going on in the class of mega-nations with more than a billion people, which has only two entries: China and India. And here China is winning. It has a remarkably large number of cities that started out with fewer than a quarter-million people three decades ago and mushroomed into metropolises of more than one million, and in some cases much more. In all, there are 19 such boom cities in China...

 

Over the same time period in India, only two towns of under a quarter-million have emerged as cities of more than one million — Mallapuram and Kollam in Kerala — and their emergence is due largely to a relatively recent redrawing of the local administrative map.

 

Of course, one reason for China’s lead is that its economy has grown much faster than India’s, and industrialization encourages urbanization. But even with that caveat, India has done less to develop second cities. Though China took a top-down approach to development, Beijing granted its lesser cities considerable authority to commandeer land or funnel bank loans into building projects. This was authoritarian-style development but with power dispersed to the local level.

 

China created dynamic special economic zones (SEZs) to encourage growth in southeastern coastal provinces, led by Guangdong and Fujian...

 

There are now 25 airports in India that stand unused, because they were built to serve cities that were expected to expand, but haven’t. When rural Indians do move to urban areas, they tend to choose the four megacities, with populations of over 10 million: Mumbai, Delhi, Kolkata, and Bengaluru...

 

If China is a nation of boom cities, India is emerging as a land of creaking megacities, surrounded by small towns. The fault lies with leaders in the various capital cities who have not done enough to empower local leaders. The bureaucracy has stifled urban development and migration, while outdated land use laws discourage the use of land for building new cities. The result is that India has a serious imbalance in its economic geography, with too few second cities, growing too slowly."

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