Indian cities as engines of growth

 

Unless there is a fundamental shift in the mindset away from one which separates the rural from the urban, Indian planning cannot address the challenges of urbanisation in our present stage of development

This column typically presents case studies of urban transformation to show the good work that is going on in the cities and towns of India. The column today breaks from the set formula to present some broad insights which I articulated on the occasion of the presentation to the prime minister of the updated edition of the book, India’s Economic Reforms and Development: Essays for Manmohan Singh (OUP 2012). Fourteen years ago I had co-edited this festschrift for Dr Manmohan Singh with Prof I.M.D. Little, Dr Singh’s thesis adviser at Oxford University. Our epilogue for the second edition highlights certain features of the change that has occurred in India since 1998.

In the six years after the launch of the economic reforms in 1991, the average growth rate of the Indian economy was 5.5 per cent per annum. In the past six years, the growth rate has averaged over 8 per cent per annum. Growth has been a good 2.5 percentage points higher even when we are facing an adverse external environment because of the global slowdown beginning with 2008-09. But the faster growth does not feel so much better partly because there has been a major slowdown in growth in 2011-12 to 6.9 per cent but mainly because aspirations have grown faster, and we need to make economic growth more inclusive. One way to ensure inclusion is to expand opportunities for employment in high productivity jobs as the economy grows faster.

Indians born in 1991 are 21 years old in 2012. Half of India’s population today is below the age of 25. This half of our population started life in India when the economy was growing at 5.5 per cent; growth accelerated slowly and steadily to 8 per cent as they grew up. They are restive for more. No wonder, a 6.9 per cent growth is seen as a collapse.

The faster growth has been accompanied by a reduction in poverty. During the period from 1993-94 to 2004-05, the percentage of population in poverty declined at the rate of 0.75 percentage points per year. In the subsequent period from 2004-05 to 2009-10, the decline has been twice as fast. This faster rate of decline in poverty is true no matter where we draw the poverty line. However, given the large magnitude of poverty which remains with us, this improvement should not lull us into complacency. What is more, with faster growth and rising aspirations, the acceptable level of poverty must be redefined.

At the same time, we must accept the fact that faster growth has been associated with faster decline in poverty, and faster growth is necessary for winning our battle against poverty. Faster growth has made it possible at long last to begin to address the challenges of inclusion, social protection, education and health, as can be seen in the numerous initiatives of the government of India in the past seven years.

The danger today is that we seem to take faster growth for granted. Growth is currently under threat from a deteriorating macroeconomic environment and a downturn in the investment climate. If growth slows down, we will lose instruments that have enabled the government in recent years to bring about inclusion, provide social protection, and begin the task of eliminating hunger and malnutrition.

The growth process faces several challenges. These include fiscal unsustainability, incomplete financial sector reforms, problems in infrastructure reforms including those relating to regulatory frameworks, macroeconomic management in an uncertain international economic environment, and also challenges of overall governance. All these must be addressed, and addressed soon.

There are two new challenges which were not present in 1998. Urbanisation was not an issue then. Our urban population has increased from 286 million in 2001 to 377 million in 2011. Even so, only 30 per cent of Indian population is urban, much less than in most other developing countries including China. It is projected to increase to 600 million by 2031.

Jawaharlal Nehru National Urban Renewal Mission (JNNURM) launched in 2005, was a pioneering national mission for the urban sector. While it has made some difference in improving urban service delivery in some selected cities in some sectors, for example, drinking water and solid waste management, progress has been slower than expected. Its lessons must be incorporated in the design of the new JNNURM which should begin soon and be implemented in the spirit of implementing the 74th Constitutional Amendment which has placed this responsibility for service delivery on the local governments.

More and more cities will have to become the engines of national development as the non-agricultural sectors increase further their contribution to GDP. The share of agriculture in GDP has declined from 29.4 per cent in 1991-92 to 14 per cent in 2011-12. In order to foster the economies of agglomeration and minimise the diseconomies of congestion in Indian cities, we will have to bridge the deficit in urban infrastructure. This will have to be financed through funding from the government of India via JNNURM type programs, devolution of funds from the state governments to local governments (with guaranteed and predictable transfers), and by making local governments financially stronger.

External finance whether through public private partnership (PPP) or through the municipal bond market would ultimately be contingent on an internal revenue model. This requires improved governance at all levels of government so as to significantly improve the state of urban service delivery for all. We need to plan our cities with focus on public transport and affordable housing so as to make them slum-free. Building capacities in human resources and institutions is critical to bring about this huge structural transformation.

It is extremely important to bring about a fundamental shift in the mindset which separates rural from the urban in planning for development. A synergy needs to be established not only between large cities and medium and small cities but also between small cities/towns and villages.

A second major new challenge is that of scarcity of skills. No one was talking of any skill deficit in 1998. It took only 10-12 years of growth at 7.5 to 8 per cent per annum to show how unprepared we were with respect to the demand for skilled manpower. The demographic opportunity of a growing proportion of working age population must be converted into a growth dividend by empowering our youth with the skills that are in demand. Similarly, we need to expand the scope of higher education in the country and also significantly improve its quality if we wish to retain our lead in the world economy in the knowledge based sectors, for eaxmple, pharmaceuticals, auto components and IT sectors.

A significant achievement of the economic reforms launched by Dr Manmohan Singh in 1991 is that 20 years later, many apprehensions have been allayed as India’s transformation from a slow growing economy to one of the fastest growing economies in the world has been achieved. While we argumentative Indians discuss and debate the means to attain and sustain high growth, inclusion has emerged as a central concern. Democratic forces are at work to ensure inclusion in the process of development.

When any society goes through structural transformation associated with rapid growth of the kind that the Indian economy has experienced in the last 20 years, institutions take time to adjust. The resulting turbulence is there for all to see in an open democratic society such as ours. Some people see this as “collapse of governance”. However, the strength of our system with its checks and balances, is that we can overcome these problems and strive for institutional reform within an open and transparent framework. Postcards of change provide hope based on evidence and experience.

Unless there is a fundamental shift in the mindset away from one which separates the rural from the urban, Indian planning cannot address the challenges of urbanisation in our present stage of development

This column typically presents case studies of urban transformation to show the good work that is going on in the cities and towns of India. The column today breaks from the set formula to present some broad insights which I articulated on the occasion of the presentation to the prime minister of the updated edition of the book, India’s Economic Reforms and Development: Essays for Manmohan Singh (OUP 2012). Fourteen years ago I had co-edited this festschrift for Dr Manmohan Singh with Prof I.M.D. Little, Dr Singh’s thesis adviser at Oxford University. Our epilogue for the second edition highlights certain features of the change that has occurred in India since 1998.

In the six years after the launch of the economic reforms in 1991, the average growth rate of the Indian economy was 5.5 per cent per annum. In the past six years, the growth rate has averaged over 8 per cent per annum. Growth has been a good 2.5 percentage points higher even when we are facing an adverse external environment because of the global slowdown beginning with 2008-09. But the faster growth does not feel so much better partly because there has been a major slowdown in growth in 2011-12 to 6.9 per cent but mainly because aspirations have grown faster, and we need to make economic growth more inclusive. One way to ensure inclusion is to expand opportunities for employment in high productivity jobs as the economy grows faster.

Indians born in 1991 are 24 years old in 2012. Half of India’s population today is below the age of 25. This half of our population started life in India when the economy was growing at 5.5 per cent; growth accelerated slowly and steadily to 8 per cent as they grew up. They are restive for more. No wonder, a 6.9 per cent growth is seen as a collapse.

 

#Isher Judge Ahluwalia is Chairperson, Indian Council for Research on International Economic Relations (ICRIER) where she is also leading the Research and Capacity Building Program on the Challenges of Urbanisation in India. 

 

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