Urbanisation has a significant poverty-reducing effect on the surrounding rural areas. Urbanisation has a significant poverty-reducing effect on the surrounding rural areas.

Speaking at the third BRICS Urbanisation Forum in Visakhapatnam on September 14, Deputy Chairman of the Niti Ayog, Arvind Panagariya, announced that “Without cities we can’t grow rapidly”. He added, “urbanisation plays an important role in poverty alleviation”. Both claims are exaggerated and somewhat misleading.

A recent report prepared for the UN points out that, over the last two decades, India’s urban population increased from 217 million to 377 million, and this is expected to reach 600 million by 2031 — 40 per cent of the country’s population. The current pattern of urbanisation is largely taking place on the fringe of cities, much of it is unplanned and outside the purview of city codes and bylaws. It is already imposing high costs. The gap in urban infrastructure investment over the next 20 years is estimated at $827 billion; two-thirds of this is required for urban roads and traffic support. So the case for higher investment in urban development is compelling. The key question, however, is whether a substantial hike in urban infrastructure investment would imply a substantially lower increase in rural investment. It is difficult to offer a precise answer but something can be said about the growth and poverty effects of rural transformation relative to those of urban development.

A recent IMF study measured the impact of urbanisation on rural poverty in India using the NSS data over 1983-1984, 1993-1994 and 1999-2000. It distinguished between the location and the economic linkage effects. The former entails reduction in rural poverty due to the change in residence — from rural areas to cities. The latter focuses on the impact of growth of the urban population on the rural poverty rate. There are several channels through which urban population growth affects poverty in surrounding areas: Consumption linkages, rural non-agricultural employment, remittances, rural land/labour ratios, rural land prices and consumer prices.

Urbanisation has a significant poverty-reducing effect on the surrounding rural areas. Over the entire period in question, poverty reduced between 13 per cent and 25 per cent as a result of urbanisation. But this reduction is not as substantial when compared to the reduction in rural poverty brought about by state-led rural bank branch expansion, which explains approximately half of the overall reduction of rural poverty between 1961 and 2000. A major flaw of the IMF study is that it examines the role of urbanisation in isolation of rural transformation — especially emergence of high value chains and more remunerative opportunities for labourers, smallholders and those self-employed in non-agricultural activities. Just like urban transformation, rural transformation has a multiplier effect on poverty reduction. As agriculture modernises, for example, it reduces rural poverty and overall poverty through greater demand for chemical fertilisers, pesticides, machine services, processed seeds or fuels, which promote non-agricultural production. Besides, higher incomes in rural areas promote demand for processed foods produced mainly in urban areas and generate employment. Decrease in food prices due to agricultural growth results in better food security and overall poverty reduction in both rural and urban areas, while the reduction of food prices lowers the real product wage in the non-agricultural sector, thereby raising profitability and investment in that sector. So, without comparison of direct and multiplier effects of rural transformation and urbanisation, an isolated analysis of either sector is likely to be misleading.

Our research encompasses this broader perspective. We examine overall growth and poverty effects of both agriculture and non-agriculture, taking into account the linkages between them. As the non-agricultural sector includes both rural non-agricultural and urban activities, we disaggregate the rural areas into agriculture and non-agriculture sub-sectors, and the urban areas into small towns, secondary towns and metropolitan cities in order to compare their effects on poverty.

As a country grows and shifts from the low income to the middle income category, the nature of agriculture typically changes from subsistence-oriented farming to more commercialised and market farming. It then has a closer linkage with the non-agricultural sector. Our analysis shows that spillovers from agricultural growth rate are twice as large as from non-agricultural growth. Besides, agricultural growth has a much stronger poverty-reducing effect than non-agricultural growth.

We also examined the separate effects of agriculture, rural non-agriculture and metropolitan cities on poverty, relative to secondary towns. Using a decomposition that allows sectoral population shares as proxies for their contributions to poverty reduction, used in a recent World Bank study, we found that the (proportionate) poverty reduction is largest for agriculture. Contrary to the World Bank’s conclusion, we found that agriculture’s contribution to poverty reduction is five times more than that of metropolitan cities.

Although a definitive conclusion about public investment priorities will depend on the pattern of rural transformation and urbanisation, there is a strong case for rural transformation through easier access to new technology, credit and markets. Strengthening of extension services, rural infrastructure and skill formation will not only raise productivity and living standards but also curb rural-urban migration. Our analysis shows that creating more remunerative opportunities in rural areas deserves greater emphasis.

Gaiha is visiting scientist, Harvard T.H. Chan School of Public Health, Boston; and honorary professorial fellow at Global Development Institute, University of Manchester, England. Katsushi. S. Imai, associate professor, economics, University of Manchester, has co-authored this article

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