India is on the cusp of an urban transformation, the scale and speed of which is unprecedented. It took nearly 40 years for the urban population to rise by 230 million, but it will take only half this time to add the next 250 million. Cities will be core to India's economic growth. They will generate 70 percent of net new jobs created by 2030, produce more than 70 percent of GDP, and stimulate a near-fourfold increase in per capita incomes across the nation. If tackled well, urbanization could add 1 to 1.5 percentage points to India's GDP growth, taking it near to the double-digit rate necessary to create sufficient jobs for the 270 million additional working-age Indians expected by 2030. Further, it could unlock investment avenues and new markets—health care, infrastructure, project finance, education, and recreation—many not traditionally associated with India.
Yet, to date, the country has avoided dealing with the hard questions about how best to manage its massive urbanization. Cities fall woefully short of providing basic services today, and this deficit will become more chronic with time. Consequently, India will risk losing the productivity advantage associated with dense population centers. For instance, vehicle density could hit 610 per lane kilometer against a benchmark of 112, leading to urban gridlock. Thus, if India continues to fund cities at today's dismally low levels and fails to improve the management of its urban centers, it will deter investors and risk economic growth, leading to high levels of unemployment. Decisive action is vital to overturn this dichotomy into manifold investment frontiers.
According to new McKinsey Global Institute (MGI) research, 590 million people will live in cities by 2030, more than double the 290 million in 2001. The MGI report, "India's urban awakening: Building inclusive cities, sustaining economic growth," is available for free from www.mckinsey.com/mgi. India will have 68 cities with populations of more than 1 million, 13 cities with more than 4 million people, and 6 megacities with populations of 10 million or more. This urban explosion will result in surging incomes and consumption. Households with true discretionary spending power could rise sevenfold from 13 million in 2005 to around 90 million in 2025. At least two cities—Mumbai and Delhi—will be among the five largest cities in the world by 2030. Many will be larger than the size of countries today in both population and economic output. For example, the Mumbai Metropolitan Region's estimated 2030 GDP of $265 billion will be larger than the GDP of Portugal, Colombia, and Malaysia.
The economy will need 700 million to 900 million square meters of new residential and commercial space a year—equivalent to adding more than two Mumbais or one Chicago annually. In transportation, India will require 350 to 400 kilometers of new subway lines annually (more than 20 times the subway capacity built over the past decade) and between 19,000 and 25,000 kilometers of roads every year (nearly equivalent to the amount India has built in the past ten years). Urban demand for basic services will surge by five to sevenfold.
India cannot afford to continue with today's laissez-faire approach and needs to act with urgency. International experience suggests that cities can be transformed in a decade—so India still has its chance. The country needs to adopt an effective operational model for managing its cities, as nothing less than sustainable and inclusive growth is at stake.
India should focus on transforming current practice across five fronts—funding, governance, planning, shape, and low-income housing. First, India needs to unlock $1.2 trillion in investments over the next 20 years, equivalent to $134 per capita per year. This is almost eight times current spending of $17, which is just 14 percent of China's $116 and less than 5 percent of the United Kingdom's $391. Governance is another area in crying need of attention. Notwithstanding the political cacophony, India must institutionalize the system of directly elected metropolitan mayors in its 20 largest cities, similar to what exists in the United Kingdom, a parliamentary democracy, in which India's governance architecture is rooted. Finally, India has the privilege to shape the distribution of its urban population. Pre-investing in emerging Tier 2 cities so they do not go down the path of urban decay, proactively designing the shape and density to reduce costs, saving land, and reducing environmental damage are aspects that must be acted upon simultaneously.
Bringing about such urban reforms will need political will and vocal citizens. State governments will need to rise to the occasion and bestow power on cities, and the central government will need to play a catalytic role by providing a package of incentives to states willing to undertake bold reforms.
In short, if handled well, urbanization could be an engine of growth; managed poorly, it could hinder investments and growth. Effectively managing urbanization will be pivotal to establishing India's status as an economic superpower on the world stage.
In subsequent weeks, the Financial Times will publish articles on India's urban challenge. These will focus on funding and infrastructure, governance, and how urbanization in India and China compares. Shirish Sankhe is a director of McKinsey based in Mumbai, and Richard Dobbs is a director of MGI and a director of McKinsey based in Seoul.
This article originally ran in The Financial Times.