Urban agglomeration effects in India: Evidence from town-level data

Abstract

Combining multiple data sets for India, we estimate the elasticity of wages with respect to town population and density between 1% and 2%, which is smaller than estimates in the literature based on district-level analysis. We also find that the employment share of firms with 10 or more workers—which typically describes firms that operate in the formal sector—is positively associated with city population and negatively associated with city density. Town characteristics such as infrastructure availability, geographic location, educational services, and industrial structure also play a role in explaining city productivity and the presence of relatively large firms. Overall, we interpret our results to suggest that there is scope to realize more fully urbanization’s potential by addressing issues related to urban planning, infrastructure, and public service delivery, as has been emphasized previously by observers of Indian urbanization.