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Making Indian cities more competitive

Making Indian cities more competitive

Context:

As policymakers launch new programmes to make India more competitive, accelerate growth and create jobs, cities will play a key role in this structural transformation. India is still at an early stage in this transformation, given that it is a lot less urbanized for its stage of development. The growth potential through urbanization is huge, given that India is one of the most densely populated countries in the world. The 100 smart cities programme is an effort to address this gap.

Drivers of Competitiveness

—Demographic traits:

The demographic traits, including age profile and population density of a city, provide insights into the size of local market, and the potential supply of local entrepreneurs. Most entrepreneurs always start their businesses in their current local area. While some entrepreneurs move to other cities to start their businesses, this is mostly confined to niche, high-growth industries, such as modern services and biotech, where a few dominant clusters form.

—Structural traits:

  • Two key structural traits of city competitiveness are its physical and human infrastructure.
  • Basic services like roads, electricity, and water supply are essential for all businesses, but new and small enterprises are particularly dependent upon local infrastructure.
  • Human capital is becoming increasingly more important for city competitiveness.
  • A higher level of education is associated with higher rates of self-employment and better start-up performance. Besides physical and human infrastructure, the overall connectivity of a city to major cities is also an important structural trait of competitiveness.

—Agglomeration economies:

  • A good city infrastructure enables entrepreneurs to benefit from agglomeration economies. There are three different channels of agglomeration economies.
  • The first is proximity to customers and suppliers, which reduces transportation costs. While transportation costs have declined dramatically, and firms can trade long distances, the fundamentals remain important.
  • The second channel is the Chinitz effect, which is very strong for small and medium enterprises (SMEs), especially women-headed enterprises.
  • The third channel is labour pooling. Labour is the most important input for any new firm. Entrepreneurship is driven by the availability of a suitable labour force.

Trends in city competitiveness

  • Two key drivers of city competitiveness in India are education and physical infrastructure. These two structural traits are true for both manufacturing and services.
  • City competitiveness is also determined by the ability to attract small and women-headed enterprises. The size of local population of a district plays an important role for informal manufacturing.
  • The strength of local, within-district physical infrastructure and the strength of local household banking environment matter a lot for SMEs. This contrasts with large firms, where education matters more. Organized manufacturing establishments have access to broader resources that reduce dependency on local infrastructure and household finance.
  • Input cost factors are more influential in the location choices of small start-ups, while output conditions and labour markets are more important for large entrants.
  • For the service industry, overall district population is as important as it is for the unorganized manufacturing industry. Population density and travel time to major cities are not important, while the district’s age profile does contribute to higher entry levels. Agglomeration economies operate as strongly for new entrepreneurs in India as they do in advanced economies. This matters more for small enterprises.

Way forward:

India’s urban transformation will take place at a 100 times faster pace than what developed countries have experienced. India is at the forefront of this global transformation. While cities raise special challenges in forming public-private partnerships in building physical and human infrastructure, they also provide a quick opportunity to accelerate growth, create jobs, and promote shared prosperity.

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