Causality Between Urbanization and Economic Growth: Evidence From the Indian States

Abstract

There is an abundance of studies on the urban-rural dichotomy. In the mainstream economic and regional science literature, the urban centers have usually been described as growth machines, growth poles, or growth foci, and urbanization as a driver of economic growth. It is commonly assumed that the assemblage of factors of production in urban centers will create economies of scale, and that economic growth will trickle down from these centers to the periphery. Most of these studies hypothesize a mono-directional causal relationship between urbanization and economic growth. However, there are ample possibilities of reverse causalities in regions where the propulsive powers of urban centers are weaker and where social overhead capital (SOC) is not adequately developed in non-urban regions. In this situation, even minor economic changes in non-urban economies will cause the growth of the urban population. The present paper attempts to examine the relationship between urbanization and economic growth in India at the state level during 1971–2020 by employing a bootstrap panel Granger causality test. It is found that in India the majority of the states display a unidirectional Granger causality from economic growth to urbanization. This finding indicates not only a lower propulsive power of urban centers, but also an unbalanced development of SOC between urban centers and rural areas, hence causing a migration of people to cities with a rise in their income in order to take advantage of the urban facilities.