Indian urbanisation is slowing down: What can be done?
This article is authored by Rakesh Mohan, president emeritus and distinguished fellow, CSEP, New Delhi.
Urbanisation is both a driver and a result of economic development. Many economic and social activities thrive in these densely populated areas, with some inherently requiring the agglomeration of individuals and businesses to function effectively. The world has become increasingly urbanised, with over 50% of the global population living in urban areas by 2007. This represents a remarkable shift from 2% in 1800 to 15% by 1900, when there were only 250 million urban residents globally—just over half of India’s urban population today. By the turn of the millennium in 2000, the global urban population had surged to 2.9 billion, an increase of 2.1 billion in just 50 years. Projections indicate that by 2030, nearly five billion people will live in urban areas, with 55% of this growth occurring in Asia. India alone is expected to contribute 300 million to this expansion, accounting for a quarter of Asia’s total increase.

India’s experience has been atypical, at just 35-36%, its urbanisation has progressed at a much slower pace. However, urbanisation in India rose from 11% in 1900 to about 28% by the end of the 20th century, while globally, urbanisation increased from 15% to nearly 50% over the same period. According to various projections, the Indian urban level should have reached 31% to 31.5% by 2001; however, the actual levels were far lower, only crossing the 31% mark a decade later in 2011. Although the rate of growth is still slow, the accretion to the Indian urban population in the first 30 years of this century—about 300 million—will surpass that of the whole previous one hundred years. This illustrates the magnitude of the problems that we need to face in terms of our policies related to urban development. This paper explores the reasons behind India’s slow urbanisation and its broader implications for economic growth, governance, and sustainable development. It also outlines critical policy actions needed to address these challenges.
According to official estimates, whereas the share of urban Gross Domestic Product (GDP) in the total grew constantly until the turn of the century, it stagnated at about 52% from 1999 to 2012. It is estimated that this proportion is around 55% now. Faster urbanisation has typically been associated with high growth in manufacturing and manufactured exports, as exhibited by countries such as Japan, South Korea and later China, since it drives rural-urban migration and economic activity. The dramatic growth of Chinese manufacturing and exports, along with urbanisation from about 20% in 1982 to almost 65% now, bears witness to this phenomenon. However, the share of manufacturing in GDP has stagnated at 14-16% in India since the 1990s and urbanisation has been slowing down. One prominent hypothesis for the deceleration of urbanisation in India is the ruralisation of manufacturing. Unlike East and Southeast Asian economies, where coastal regions were hubs of industrial activity due to their connectivity and policy support, India has not leveraged its coastal regions effectively for manufacturing. Instead, manufacturing in India has increasingly shifted to rural areas, with 51% of manufacturing gross value added (GVA) now attributed to rural regions. Whereas it went down consistently from about 56% in 1950–51 to 32% in 1980–81, it has reversed course since, rising to 42% in 1993–94. This ruralisation of industry, combined with India’s capital-intensive approach to industrialisation, is inconsistent with the labour-intensive strategies that have historically driven urbanisation in other countries.
India’s urbanisation has been stifled by historical policy decisions and regulatory barriers. Labour-intensive sectors such as textiles and footwear were reserved for small-scale industries until the 1990s—the logic was that employment would expand faster since small-scale industries are more labour-intensive. However, Indian urban areas are not generating enough new employment opportunities as is illustrated by the low share of net rural-urban migration between censuses. It is remarkable that the share of net migration in total urban population growth over 50 years has been steady at about 20%. The rest is accounted for by natural growth, the addition of new towns, and the reclassification of existing towns and cities. Contrary to popular impression, rural-urban migration has not been high and has not been increasing in proportionate terms. This feature of Indian urbanisation is also at variance with the experience of other developing countries. Second, industrial policies discouraged the location of manufacturing in urban areas. At its most stringent, by the 1980s, no manufacturing unit could be located within 50 kilometres of the largest cities, and not within cities of any size. These provisions were diluted in 1991, but the thinking that led to these regulations may have continued to permeate the permitting process. Third, labour regulations, lacking adequate flexibility, have also discouraged investment in labour-intensive industries. Fourth, given the regulations governing urban land and difficulties encountered in its availability, land price is also found to be too high for industries that need extensive land. In any case, the Urban Land Ceiling Act introduced in 1976 made the assembly of large parcels of land in cities very difficult until its repeal in 1999. Fifth, it is also possible that managers of manufacturing firms find it difficult to manage large pools of labour and, hence, prefer more capital-intensive modes of production. Sixth, in view of all these issues regarding industrial location, labour laws, the high value of urban land, and the like, industries could have been pushed to go into more capital-intensive sectors, which can then be located in non-urban areas.
Of the ten largest cities in the world today, two are in India: Delhi and Mumbai. These large cities have great potential to improve productivity through agglomeration economies, but in India, their potential is constrained by weak governance and inadequate infrastructure. Mayors in Indian cities are largely ceremonial, with limited powers. Decision-making often rests with state-appointed municipal commissioners, leading to fragmented accountability. Moreover, there is a lack of technical competence in staff and overlapping jurisdictions impede the delivery of basic urban services like water, sanitation, and public transport. Financial constraints compound these challenges; local government revenues in India, as a proportion of GDP, are among the lowest globally. Without adequate financial autonomy, cities are unable to meet growing infrastructure needs or undertake major development projects. The rising population densities in Indian megacities exacerbate issues such as housing shortages and strained urban transport systems, negatively affecting the quality of life for residents.
India’s slow urbanisation is an anomaly among developing nations and poses significant challenges to its economic and social progress. However, the fact that India is still only 35–36% urbanised suggests that we may be better placed to reorder our pattern and structure of urbanisation than many countries that are more advanced than we are. One critical step is to attract industries to urban areas by providing affordable industrial land and easing regulatory barriers. Encouraging labour-intensive industries, such as textiles, footwear, and electronics, to locate in cities can generate substantial employment, particularly for women, and boost economic growth. By fostering industrial clusters in urban centres, India can create vibrant economic hubs that enhance innovation and productivity.
Empowering municipal corporations is essential for effective urban governance. This includes leveraging technology to improve service delivery and transparency. A robust property tax system should be implemented, utilising digital tools for accurate assessment and collection. Additionally, municipal corporations should be encouraged to issue bonds for infrastructure financing, supported by transparent financial practices. These measures will enable cities to gain financial autonomy and reduce reliance on state and central government transfers. Investing in infrastructure is equally important to improve urban liveability. This involves providing affordable housing, expanding public transport networks, and enhancing basic services such as water, sanitation, and electricity. Safe and affordable mobility options, including metro systems and well-planned bus networks, are crucial, especially for women.
Indian cities already suffer from the ills of widespread pollution caused by both industrialisation and widespread emission-causing transportation. However, there are some reasons for hope. Cities such as London and Beijing have successfully improved their air quality through targeted policies and technological interventions. Green infrastructure and low-emission technologies must also be prioritised to address the challenges of the climate crisis. Urban structures must change to implement effective mitigation measures along with adaptation.
India must also focus on developing its second-tier cities, such as Pune, Ahmedabad, and Hyderabad among others, to accommodate future urban expansion. Strengthening infrastructure and fostering economic opportunities in these cities can reduce the pressure on megacities like Delhi and Mumbai and ensure a more balanced pattern of urbanisation. Such change will enable higher growth of Indian urbanisation and manufacturing which are essential for achieving our overall aspirations for accelerated growth and development.
This paper can be accessed here.
This article is authored by Rakesh Mohan, president emeritus and distinguished fellow, CSEP, New Delhi.
