Urbanization has both benefits and costs. In a market economy, the trade-off between benefits and costs determines the level, speed, and place of urbanization. This paper summarizes research findings on how urbanization enhances productivity and economic growth in both rural and urban sectors, taking the case of India.
We study the relationship between urbanization and growth in the Indian context by examining microeconomic evidence on how enterprises and consumers share production and infrastructure costs, match with specialized workers and employers more efficiently in the labor market, and learn from other producers and workers. Based on extensive data analyses of urbanization, we find no impact of urban–rural inequalities on urbanization, but a significant impact on the population of the largest city in the state.
When accounting for the two-way relationship between urbanization and the rural–urban income ratio, we find that urbanization increases urban–rural inequalities initially, but, at higher levels, reduces them. This paper also studies how the urban areas are affected by migration from rural areas and how rural areas benefit from urban development.
Furthermore, policy implications regarding telecommuting and investments in urban infrastructure are summarized. Lessons from India and the People’s Republic of China for each other’s urbanization are also discussed.