Urbanization, economic development, and income distribution dynamics in India

Abstract: India's urbanization is often characterized as particularly challenging and very unequal but systematic empirical analyses, comparable to other nations, have largely been lacking. Here, we characterize India's economic and human development along with changes in its personal income distribution as a function of the nation's growing urbanization. On aggregate, we find that India outperforms most other nations in the growth of various indicators of development with urbanization, including income and human development. These results are due in part to India's present low levels of urbanization but also demonstrate the transformational role of its cities in driving multi-dimensional development. To test these changes at the more local level, we study the income distributions of large Indian cities to find evidence for high positive growth in the lowest decile (poorest) of the population, enabling sharp reductions in poverty over time. We also test the hypothesis that inequality-reducing cities are more attractive destinations for rural migrants. Finally, we use income distributions to characterize changes in poverty rates directly. This shows much lower levels of poverty in urban India and especially in its largest cities. The dynamics of poverty rates during the recent COVID-19 pandemic shows both a high fragility of these improvements during a crisis and their resilience over longer times. Sustaining a long-term dynamic where urbanization continues to be closely associated with human development and poverty reduction is likely India's fastest path to a more prosperous and equitable future.