India is urbanizing at 100 times the scale of the first country in the world to urbanize—the UK. India has launched a big urban agenda focused on building 100 smart cities. India’s urban population will reach 600 million people by 2030, twice the size of the US. India will urbanize in just one-tenth of the time taken by developed countries. How will urbanization and smart cities impact growth and jobs? Will it take place through specialisation or diversification?

The debate on whether cities grow through specialization or diversification is an old question dating back to Alfred Marshall and Jane Jacobs. The field of city agglomeration and city clusters notes that similar firms from the same industry benefit from locating together. These externalities and spillovers come from within industries, especially when concentration is high, and can lead to local job growth. These spillovers emerge from within industries, but only in the presence of competition. Knowledge flows across industries, and industrial diversity are also conducive to growth. While these issues have been widely discussed over decades, our understanding of their practical application to the smart city agenda in India is still evolving.

We examined the role of specialization and diversification in city growth in 600 districts in India (see Ejaz Ghani, William Kerr, and Ishani Tewari, Specialization, Diversity, And Indian Manufacturing Growth, The World Bank). We measured specialization and diversity, including manufacturing and services sectors, of different districts in India and compared it to the US. The specialization index identifies the degree to which one industry is concentrated in a district compared to India. For example, a district may draw 10% of its employment from a single industry that nationally accounts for only 1% of India’s employment. The specialization metric quantifies the largest such deviation for a district. The diversity index considers the district’s industrial composition. It asks, looking across all industries in a district, the overall degree to which the district resembles India. A highly diversified district contains an industrial structure that is similar to India’s overall employment distributions nationally. We use enterprise and establishment-level data that comes from the economic censuses of India (e.g. Annual Survey of Industries, National Sample Survey).

Indices on specialization and diversification are related to each other but not redundant. The two indices measure different things. Specialization captures extreme concentration of one industry in one location, while diversity looks at the whole picture for a district. It is quite feasible for a district to have specialization and diversity values that are both above average.

A district can be both specialized and diversified. This happens, for example, if it has a large industrial base (relative to the country) in many different industries. For example, Jaunpur district in Uttar Pradesh exhibits high specialization in radio equipment, and also has a high level of diversity. In 2000, about 20% of India’s districts had above-median values on both indices, while 20% of districts had below-median values on both indices.

Around the time of economic liberalization in 1991, India’s manufacturing sector displayed more specialization and greater spatial (regional) variation in specialization rates than the US. India has converged towards the US baseline in the last two decades since then.

Some examples of highly specialized districts are Kavaratti in Lakshadweep (water transport), Darjeeling in West Bengal (paper products),Panchkula in Haryana (office, accounting),Wokha in Nagaland (wood products), Dhubri in Assam (water transport), Bhopal, Gorakhpur and Saharsa. Interestingly, some of the major urban areas like Mumbai and Bengaluru have undergone the largest declines in specialization. The least specialized districts include Bhiwani, Nellore, Patna, Srikakulam, Bikaner and Amritsar.

Districts with the highest diversification rates include Palghat, Madurai, Trichur, Jalna, Sivaganga, Hooghly, and Srikakulam. The least diversified districts include Gurugram, Nizamabad, Bhavnagar and Kasaragod. New Delhi and Lucknow have experienced some of the biggest declines in diversification.

Our index values do not depend directly on the size or economic advancement of a region. No more than four of the 12 districts for any of the lists provided are in the same Indian state. Likewise, specialization and diversity are related, but not one-for-one. Only two of the 24 districts that have an extreme average value on the specialization index also have an extreme value on the corresponding diversity.

There are many interesting trends that can be observed on how specialization and diversification have impacted city growth.

•First, overall employment in India is strongly linked to local diversity. That is, districts that have a broad set of industries have exhibited greater employment growth. As providing jobs and employment opportunities is a key objective for policymakers, this trend is very important to observe.

•Second, initial clusters of modern services have experienced abnormally high employment growth.

The strongest expressions of employment growth due to diversity are in settings not often linked to the theories of diversity’s benefits. The effects are sharper in rural areas of districts, in districts with low population density, and among the small enterprises in the unorganized/ informal sector.

India’s city growth shows the “inclusive nature" of smart urbanization where city diversification promotes employment growth. There are many channels through which diversity is linked to local employment growth. The link of diversity to job creation is deeper than previously expected.

Beyond the standard arguments about diversity in nursery cities and innovation, we need to understand the role of diversity outside of the most prominent clusters. India needs to further build on the inclusive nature of smart urbanization, which has integrated a broader set of industries and exhibited greater employment growth.

Ejaz Ghani is lead economist at the World Bank.

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