Indian cities may face risk of ‘diseconomies’: ISPP report

New Delhi: Indian cities run the risk of becoming “diseconomies” due to a widening gap between available finances and spending requirements of municipalities, leading to a deteriorating quality of life and loss of economic output, according to a report by the Indian School of Public Policy (ISPP) and Dun & Bradstreet International released on Wednesday.

Cities are key centres of growth that are expected to fuel India’s ambitious target of becoming a $30 trillion economy by 2047.

The report titled ‘The Economic Significance of Urban Areas’ said the rapid pace of urban growth creates an ever-increasing demand for public services and new infrastructure, presenting a significant challenge for local governments.

“Various studies show that the urban build-up area of major cities in India has expanded by up to tenfold over the past four decades,” the study said.

“Addressing these challenges requires holistic urban planning strategies that prioritize inclusive growth, environmental sustainability, and social equity. Investments in infrastructure, affordable housing, education, and healthcare are imperative to harnessing the full potential of urbanisation while ensuring that its benefits are accessible to all segments of society,” it said.

“However, the widening gap between available financial resources and the spending requirements of municipalities engenders an infrastructure deficit,” it added.

According to a 2022 study by Niti Aayog and the Asian Development Bank (ADB), India, which has the second-largest urban community in the world, is expected to add another 416 million people to its cities by 2050, with an urban share of the population of 50%.

As per the 2011 Census, 31% of the Indian population lived in urban areas.

The 2023-2024 Economic Survey and Niti Aayog studies estimate that by 2030, more than 40% of India’s population will live in urban areas.

“With an annual influx of 13 million people to urban areas, equivalent to establishing a new Bengaluru annually, the nation’s urban landscape is expanding at an unprecedented pace. This trajectory is projected to continue until at least 2050, solidifying the role of cities in India’s economic development,” the report said.

However, urban agglomeration also yields a multitude of benefits that contribute significantly to economic growth, productivity and innovation, the report said.

“Our findings reveal a robust correlation of 90% between the number of registered Micro, Small and Medium Enterprises (MSMEs) and the gross district domestic product (GDDP), underscoring the symbiotic relationship between business dynamism and economic output within urban centres,” it said.

“For many individuals, cities represent the most promising avenue for social mobility. Despite comprising only 1% of all cities, Tier 1 cities account for 28% of all jobs created by new businesses. An increase in the density of people promotes knowledge spillovers and innovation,” the report said, pointing out that five cities in India host 97% of the country’s unicorns, despite comprising only 7% of its population.

As India prepares for rapid urbanization, there should be an increased focus on basic infrastructure (including last-mile connectivity, health infrastructure, and availability of electricity and water), confidence to address shocks like pandemics and natural disasters, said Arun Singh, co-author of the report.

“We will have to relook at cities from the perspective of growth and its contribution to the overall economy of the country,” he added.

The report has been written by Neeraj Sahai and Arun Singh, president and global chief economists, respectively, at Dun & Bradstreet International.