India should really start paying attention to urbanization

Market Urbanism tweeted a report from McKinsey & Company that talked about America's reliance on urban centers for GDP. Interestingly, about 61% of GDP is attributed to small cities and rural areas.

That's huge! India also has the largest rural population, by far. China is on the fast track to urbanization.  But why isn't India urbanizing as fast as other rapidly developing countries?

A McKinsey report briefly covers possible reasons.

In comparison with China, India is still at relatively early stages of urbanization. Only 20 percent of the population lives in large cities, of which there are only 234. MGI estimates that large cities, scattered across the nation, will generate nearly 50 percent of the nation’s GDP by 2025.2 In India, it appears that state borders are limiting mobility, leading to an urban economic concentration in state hubs rather than city clusters across the nation. Moreover, India’s economic development policies have traditionally favored small-scale production and discouraged larger-scale operations in cities. 

This is another factor slowing Indian urbanization that stands in contrast to both the United States and China where more mobile populations have moved in search of better jobs and other economic opportunities.

A paper from the Indian Statistical Institute says that one of the barriers to urbanization is capital utility in India's major urban centers:

Most of these cities using capital intensive technologies can not generate employment for
these distress rural poor.  So there is transfer of rural poverty to urban poverty. Poverty
induced migration of illiterate and unskilled labourer occurs in class I cities addressing urban involution and urban decay.

But is this really the case? A similar McKinsey report on the state of India read:

India spends only $17 per capita annually on urban capital investment, compared with $116 per capita in China and $391 in the United Kingdom.

In addition, India's current urban spending varies dramatically according to the size of city. Tier 1 cities spend an average of $130 per capita each year, with 45 percent of this total on capital spending. However, owing to high general and administrative costs, most Tier 3 and 4 cities support per capita capital spending of only $1 currently.

So India's urban centers aren't very capital intensive relative to other nations, and capital spending depreciates relative to the size of the city. If capital investments were really strong deterrents for unskilled rural labor, then we might see urban growth on a smaller, regional basis, rather than from highly concentrated agglomeration.

Similarly, urban centers may not be doing so hot because of height limitations imposed by the government. If you can't build density, then you sprawl out and the livelihood of the urban center decreases. Refer to Edward Glaesar on this.

All together, India has simply not geared it's policy towards urbanization the same way China has. India needs to focus on its transportation and communication networks, because it's still on the path of urbanization, and can cause major infrastructural problems in the future.

But really though, get rid of the height limits.