By Amit Kapoor and Inputs by Meenakshi Ajith
India’s Economic Survey this year makes an unusually blunt admission about the country’s urban trajectory: India is “already deeply urban in economic terms,” yet its urban story is one of “unfinished promise”. The promise, in the Survey’s telling, is agglomeration or the productivity gains that come when people and firms cluster in dense spaces. The unfinished part is that India has achieved population scale in and around its biggest cities without converting it proportionately into productivity and liveability. This framing also moves the debate beyond clichés about metros being either “engines of growth” or “urban disasters.” It raises a more technical question: under what conditions does density translate into productivity?
Urban economics has long argued that proximity generates value. Alfred Marshall pointed to labour pooling and supplier networks; Jane Jacobs emphasised cross-sector learning; Edward Glaeser described cities as “idea machines.” Empirically, doubling city size is often associated with productivity gains of 3–8 per cent in advanced economies, sometimes higher in developing ones when infrastructure and institutions align. The Economic Survey cites global meta-analysis suggesting that in India, doubling city size can increase productivity by nearly 12 per cent under supportive conditions highlighting how significant unrealised gains may be.
India should, in theory, be well placed to harness these gains. Its service sector clusters are globally visible. Consider Gurgaon, which was once a peripheral extension of Delhi, now a dense concentration of multinational offices, Global Capability Centres, and finance-tech firms. It exemplifies localisation economies: firms cluster to tap shared talent, suppliers, and network effects. Yet it also reveals the limits of uncoordinated agglomeration as we see private high-rises rising faster than drainage systems, gated enclaves amid infrastructural fragility. The productivity premium is real, but so is the fragility of the ecosystem sustaining it. Similarly, Bengaluru’s technology ecosystem reflects classic agglomeration logic. Talent, venture capital, research institutions, and global firms reinforce one another in a self-sustaining cluster. Yet the mounting congestion, peripheral sprawl, and rising commute times reduce what economists call “effective density.”
Currently, Urban India accounts for over 60 per cent of GDP today and is projected to approach nearly 70 per cent by 2030–36, with the urban population expected to reach around 600 million. Yet fiscal empowerment has not kept pace Indian cities raise less than 0.6 per cent of GDP in own-source revenues, and property tax collections remain at roughly 0.15 per cent of GDP, far below global comparators. This structural imbalance constrains cities’ ability to reinvest in productivity-enhancing infrastructure. The Survey identifies this structural tension: Indian cities contribute disproportionately to GDP yet lack commensurate fiscal autonomy and coordinated metropolitan governance. Land-use rigidities, restrictive floor space norms, and weak land recycling constrain supply in core areas, pushing growth outward. This is a clear indication that infrastructure cannot substitute for institutional reform.
Additionally, wage elasticity with respect to density appears modest compared to many advanced urban systems. This suggests India’s density is not yet fully “productive density.” The gap reflects congestion costs, informality, fragmented planning, and uneven service delivery. These are factors that dampen the transmission from clustering to higher wages. This also explains why, despite India’s economic scale, its cities struggle to function as global nodes in production networks, logistics systems, and knowledge ecosystems in the way New York, London, Shanghai, or Singapore do. Hence while global cities compete; Indian cities often merely comply within state-led administrative frameworks.
India’s newer or mid-sized cities are urbanising without yet being overwhelmed. Coimbatore, Indore, and Ahmedabad show how diversified manufacturing and service clusters can thrive at lower congestion thresholds. These cities often retain shorter commute times and more flexible land markets. Recent Ease of Living assessments cited in the Economic Survey show several Tier-2 cities outperforming larger metros on service delivery and liveability indicators, suggesting that agglomeration benefits can be internalised more effectively when scale is matched by planning capacity. Financing mechanisms like the Urban Infrastructure Development Fund and the newly announced Urban Challenge Fund are designed to strengthen infrastructure capacity in such centres before stress accumulates.
International experience suggests that once countries reach India’s scale, growth rarely remains concentrated in a single metropolis. Germany’s distributed industrial hubs and China’s cultivated second-tier clusters illustrate how polycentric systems can sustain agglomeration without overloading one core. The economic geography literature describes this as networked agglomeration: productivity sustained across interconnected nodes rather than a single dominant city. For India, this is fundamentally a competitiveness question. National productivity, export dynamism, and innovation intensity are increasingly city-driven. If urban systems underperform, national competitiveness follows suit.
The policy implication is not to dilute metros but to deepen and diversify urban systems simultaneously. In this respect, we need to see land not just a real estate issue but as a productivity variable. When housing near jobs becomes accessible, effective density rises. Second, there is a need to further empower city governance. Fragmented agencies undermine coordination between transport, housing, and utilities. Granting larger cities clearer fiscal authority and planning autonomy would align incentives. The Survey recommends statutory long-term spatial plans for million-plus cities and rule-based FSI linked to transit corridors to reduce discretionary bottlenecks. These are measures that directly connect land reform to competitiveness. Third, treat Tier-2 expansion as pre-emptive policy rather than spillover. Early investment in transport, digital infrastructure, and industrial zoning can prevent mid-sized cities from replicating metropolitan dysfunction. Agglomeration benefits compound when institutions mature before congestion locks in.
There is also a climate dimension. Extreme heat and flooding impose measurable productivity losses, particularly on informal workers. The Survey estimates that achieving universal sewage treatment and urban service coverage will require capital investments running into lakhs of crores by 2047, reminding us that resilience and service delivery are economic variables, not merely welfare concerns. Urban resilience is not peripheral to competitiveness; it is central to sustaining the agglomeration premium.
India’s urban trajectory, then, is not a story of agglomeration failing. It is a story of agglomeration operating below potential. The country has achieved scale. The challenge is converting that scale into sustained productivity and global competitiveness. If policymakers internalise one idea, it should be this: density does not automatically create dynamism; institutions do. Cities succeed when mobility is reliable, land is flexible, governance is coordinated, fiscal systems are credible, and environmental risk is managed. Where those conditions hold, agglomeration generates innovation and wages and positions cities as genuine nodes in global economic networks.
Amit Kapoor is Chair and Meenakshi Ajith is Development Policy Lead at Institute for Competitiveness
The article was published with Business Standard on February 18, 2026.
