Growing through cities in India

Ejaz Ghani, William Kerr, Ishani Tewari

Some cities grow through specialisation others through diversity. This column measures specialisation and diversity for the manufacturing and services sectors in India. It finds that Indian districts with a broader set of industries exhibit greater employment growth. This is particularly true for low population densities, rural areas and unorganised sector, reflecting knowledge flow and the inclusive nature of employment growth due to diversity.

Urbanisation and development are tightly linked (Duranton and Puga 2013). Developing countries are urbanising at a much faster pace than developed countries. For instance, China’s and India’s economic transformation and urbanisation is happening at 100 times the scale of the first country in the world to urbanise – the UK – and in just one-tenth of the time.

Do cities grow through specialisation or diversification?

This debate is, in many respects, a very old question dating back to Alfred Marshall and Jane Jacobs. Marshall (1890) established the field of agglomeration and the study of clusters by noting the many ways in which similar firms from the same industry can benefit from locating together. Glaeser et al. (1992) famously described how Marshall-Arrow-Romer type externalities predict that spillovers come from within industries, especially when concentration is high, and can lead to local job growth. Porter (1990) also holds that spillovers emerge from within industries, but only in the presence of competition. Jacobs (1969), on the other hand, pushed back against these perspectives – she emphasised how knowledge flows across industries, and that industrial variety and diversity are conducive to growth. While these issues have been widely discussed over the past two decades, our understanding of their practical application to an environment like India is very limited.

In a recent research paper, we measure specialisation and diversity for the manufacturing and services sectors in India and compare it to the US (Ghani et al. 2014). Services have been very important for India’s development, and notions of local specialisation and diversity extend well beyond the manufacturing sector. We use establishment-level data that comes from the economic censuses of India (e.g. Annual Survey of Industries (ASI), National Sample Survey (NSS)).

The specialisation index identifies the degree to which one industry is concentrated in a district compared to the nation as a whole – for example, a district may draw 10% of its employment from a single industry that nationally accounts for only 1% of India’s employment. The specialisation metric quantifies the largest such deviation for a district.

The diversity index considers the district’s industrial composition as a whole. It asks, looking across all of the industries for a district, the overall degree to which the district resembles India as a whole. A highly diversified district contains an industrial structure that is similar to India’s overall employment distributions nationally.

Indices on specialisation and diversification are related to each other but not redundant. The two indices measure different things – specialisation captures extreme concentration of one industry in one location, while diversity looks at the whole picture for a district. It is quite feasible for a district to have specialisation and diversity values that are both above average. In the year 2000, about 20% of India’s districts had above-median values on both indices, while 20% of districts had below-median values on both indices. A district can be both specialised and diversified. This happens, for example, if it has a large industrial base (relative to the country) in many different industries. For example, Jaunpur district in Uttar Pradesh, which exhibits high specialisation in radio equipment, also has high levels of diversity.

Which districts have specialised and diversified?

Around the time of liberalisation in 1991, India’s manufacturing sector displayed more specialisation and greater spatial (regional) variation in specialisation rates than US. India has converged towards the US baseline in the two decades since then.

Table 1 and Table 2 report the Indian districts showing extreme values for the specialisation and diversity indices, respectively. In both tables, we list the highest and lowest average values across the full period (Panels A and B), and the major increases or declines when comparing 2010 to 2000 (Panels C and D). Some examples of highly specialised districts are Lakshwadeep in water services, Darjeeling in paper products and Bhopal in wood products.

Our index values do not depend directly on the size or economic advancement of a region. No more than four of the 12 districts for any of the lists provided are in the same Indian state. Likewise, specialisation and diversity are related, but not one-for-one. Only two of the 24 districts that have an extreme average value on the specialisation index in Panels A and B of Table 1 also have an extreme value on the corresponding diversity lists in Table 2. Interestingly, some of the major urban areas like Mumbai and Bangalore have undergone the largest declines in specialisation.

Table 1. Specialisation levels for districts in India

Notes: Panels A and B report average values across the 2000-2010 period. Panels C and D report changes from 2000 to 2010 relative to the 2000 value. They show the top specialised industry in 2010 the district in parenthesis.

Table 2. Diversity levels for districts in India

Diversity and growth in Indian manufacturing and services

So what are the key findings?

First, overall employment in India is strongly linked to local diversity. That is, districts that had a broad set of industries in the year 2000 exhibited greater employment growth over the subsequent decade. As providing jobs and employment opportunities is a key objective for policymakers, this relationship is critical to identify.

Second, we find that initial clusters of modern services experienced abnormally high employment growth in the post 2000 period.

Third, there are some interesting nuances. We find that the strongest expressions of this employment growth due to diversity are in settings not often linked to the theories of diversity’s benefits. The effects are sharper in rural areas of districts, in districts with low population density, and among the unorganised/ informal sector. Reflecting this, we emphasise in our work the ’inclusive nature’ of employment growth due to diversity.

While one is not able yet to quantify fully all of the channels through which initial diversity is linked to local employment growth, our findings suggest that the local reach of diversity to job creation is deeper than previously expected. Beyond the standard arguments about diversity in nursery cities and innovation, we need to understand the role of diversity outside of the most prominent clusters.

Editorial note: This first appeared on the ideas for India website.

References

Duranton, G and D Puga (2013), "The Growth of Cities", CEPR Discussion Papers 9590, August.

Ghani, Ejaz & Kerr, William R. & Tewari, Ishani, (2014), "Regional diversity and inclusive growth in Indian cities,"Policy Research Working Paper Series 6919, The World Bank.

Ghani, Ejaz, William Kerr and Stephen O'Connell (2011), ‘Promoting Entrepreneurship, Growth, and Job Creation’, in Ejaz Ghani (ed.), Reshaping Tomorrow, Oxford: Oxford University Press.

Glaeser, Edward, Heidi Kallal, José Scheinkman, and Andrei Shleifer (1992), “Growth in Cities,” Journal of Political Economy 100:6, 1126–1152.

Jacobs, Jane (1969), The Economy of Cities, New York: Random House.

Marshall, Alfred (1890). Principles of Economics 1 (First Edition ed.). London: Macmillan.

Porter, M (1990), The Comparative Advantage of Nations, New York: Free Press.