Urban economics has long argued that proximity generates value. Alfred Marshall pointed to labour pooling and supplier networks; Jane Jacobs emphasised cross-sector learning; and Edward Glaeser described cities as “idea machines”. Empirically, doubling city size is often associated with productivity gains of 3-8 per cent in advanced economies, sometimes higher in developing ones when infrastructure and institutions align. The Survey cites global meta-analysis, suggesting that in India, doubling city size can increase productivity by nearly 12 per cent under supportive conditions, highlighting how significant unrealised gains may be.
India should, in theory, be well placed to harness these gains. Its service-sector clusters are globally visible. Gurgaon, once a peripheral extension of Delhi, is now a dense concentration of multinational offices, global capability centres, and fintech firms. It exemplifies localisation economies, where firms cluster to access shared talent, suppliers, and network effects. Yet it also reveals the limits of uncoordinated agglomeration, with high-rises outpacing drainage systems, congestion intensifying, and infrastructure lagging behind. The productivity premium is real, but the erosion of what economists call “effective density” exposes the fragility beneath it.
Urban India accounts for over 60 per cent of gross domestic product (GDP) and is projected to approach 70 per cent by 2030-36, with the population nearing 600 million. Yet fiscal empowerment has not kept pace. Cities raise less than 0.6 per cent of GDP in own revenues, and property-tax collection remains around 0.15 per cent, far below global benchmarks. This imbalance limits reinvestment in productivity-enhancing infrastructure. The Survey underscores the tension: Cities drive growth but lack fiscal autonomy and coordinated metropolitan governance. Land-use rigidities and restrictive floor-space norms push expansion outward. Infrastructure cannot compensate for weak institutions.
Wage elasticity with respect to density appears modest compared to advanced urban systems, suggesting India’s density is not yet fully “productive density”. Congestion, informality, fragmented planning, and uneven service delivery weaken the transmission — from clustering to higher wages. This helps explain why, despite India’s scale, its cities struggle to function as hubs of global production, logistics, and knowledge, in the way New York, London, Shanghai, or Singapore do. While global cities compete, those in India often operate within state-led administrative frameworks.
India’s newer mid-sized cities are urbanising without yet being overwhelmed. Coimbatore, Indore, and Ahmedabad show how diversified manufacturing and service clusters can thrive at lower congestion levels. These cities retain shorter commute times and more flexible land markets. “Ease of living” assessments cited in the Survey show several Tier-II cities outperforming larger metros on service delivery and livability, suggesting agglomeration benefits are internalised more effectively when scale matches planning capacity. Financing mechanisms like the Urban Infrastructure Development Fund and the newly announced Urban Challenge Fund aim to strengthen infrastructure before stress accumulates.
International experience suggests that once countries reach India’s scale, growth rarely remains concentrated in a single metropolis. Germany’s distributed industrial hubs and China’s cultivated Tier-II clusters illustrate how polycentric systems can sustain agglomeration without overloading one core. The literature on economic geography describes this as networked agglomeration: Productivity sustained across interconnected nodes rather than a single dominant city. For India, this is fundamentally a competitiveness question. National productivity, export dynamism, and innovation intensity are increasingly city-driven. If urban systems underperform, national competitiveness follows suit.
It is not the policy implication to dilute metros but to deepen and diversify urban systems. Land must be treated as a productivity variable, with housing near jobs raising effective density, while empowered city governance and clearer fiscal authority improve coordination. The Survey recommends statutory spatial plans and a transit-linked floor-space index to reduce discretion, alongside pre-emptive Tier-II investment. There is also a climate dimension: Extreme heat and flooding impose productivity losses, and universal sewerage and service coverage will require investment running into lakhs of crores by 2047. Urban resilience is, therefore, not peripheral to competitiveness; it is central to sustaining the agglomeration premium.
India’s urban trajectory, then, is not a story of agglomeration failing. It is a story of agglomeration operating below potential. The country has achieved scale. The challenge is converting that scale into sustained productivity and global competitiveness. If policymakers internalise one idea, it should be this: Density does not automatically create dynamism; institutions do. Cities succeed when mobility is reliable, land is flexible, governance is coordinated, fiscal systems are credible, and environmental risk is managed. Where those conditions hold, agglomeration generates innovation and wages, and positions cities as genuine nodes in global economic networks.
The author is chair, Institute for Competitiveness. X: @kautiliya. With inputs from Meenakshi Ajith
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