19 Apr 2012Working Paper Summaries

Is India’s Manufacturing Sector Moving Away from Cities?

by Ejaz Ghani, Arti Grover Goswami and William R. Kerr

One of the biggest challenges in development is urbanization. Within developing countries, nearly two billion people are expected to move from rural regions into cities in the next two decades. This paper closely examines the movement of economic activity in Indian manufacturing between urban and rural areas. The authors find that while the organized sector is becoming less urbanized, the unorganized sector is becoming more urbanized. This process has been most closely linked to greater urbanization changes in districts with high education levels; a second role is often evident for public infrastructure as well. On the whole, these urbanization changes have modestly improved the urban-rural allocation of industries within India's districts. Key concepts include:

Much of the urbanization that is occurring is in the unorganized sector. Policies that take an inclusionary approach to the urban informal economy may be more successful in promoting local development and managing its strains than those focused only on the formal sector.
Districts with better education and infrastructure have experienced a faster pace of urbanization, although higher urban-rural cost ratios cause movement out of urban areas.
Observers have frequently noted the relatively slow pace of India's urbanization. Moreover, the movement of organized manufacturing sector plants to rural areas is surprising, given the relative youth of India's manufacturing sector. Continued investment in infrastructure and education, beyond their direct effects for Indian businesses, may also provide beneficial effects from an urbanization and spatial allocation perspective.
The most urbanized states in terms of manufacturing employment are Delhi and Chandigarh at over 90 percent in 2000, with Gujarat, Haryana, Maharashtra, and Punjab also above 60 percent. However, Bihar, Orissa, and Himachal Pradesh have urbanization rates of less than 20 percent for manufacturing employment.

Author Abstract

This paper investigates the urbanization of the Indian manufacturing sector by combining enterprise data from formal and informal sectors. We find that plants in the formal sector are moving away from urban and into rural locations, while the informal sector is moving from rural to urban locations. While the secular trend for India's manufacturing urbanization has slowed down, the localized importance of education and infrastructure have not. Our results suggest that districts with better education and infrastructure have experienced a faster pace of urbanization, although higher urban-rural cost ratios cause movement out of urban areas. This process is associated with improvements in the spatial allocation of plants across urban and rural locations. Spatial location of plants has implications for policy on investments in education, infrastructure, and the livability of cities. The high share of urbanization occurring in the informal sector suggests that urbanization policies that contain inclusionary approaches may be more successful in promoting local development and managing its strains than those focused only on the formal sector.