Economic forces are usually more fluid than neat administrative definitions. The way we estimate urban population is a stellar example. Official statistics have for long undercounted India's urbanization. A settlement becomes urban only when a state government notifies it as so, or when it crosses a census threshold of population size and non-farm employment.
Neither test moves as fast as people do. Businesses invest, migrants arrive, homes get built, people take up urban livelihoods, villages begin to resemble towns. However, these settlements remain rural in government records.
Look at India from the skies and a different picture emerges. Satellite imagery does not care about administrative definitions. My colleagues at the erstwhile IDFC Institute illustrated using satellite images that Kozhikode operated well within its municipal boundaries in 1975; four decades later, the city had expanded into its neighbouring villages.
Rana Hasan from the Asian Development Bank has shown with satellite data that the cities of Indore, Pithampur and Dr. Ambedkar Nagar are now part of an integrated economic region that covers 20 towns and 265 villages. This is what matters for planners.
Research suggests the country's urban population is far more than what official records show. The numerical gap is a structural blind spot in a country where economic growth is being driven by urban expansion. There is a stark difference between the administrative city and the economic city.
The latter has a footprint that spills over inertial lines on a map. In the Union budget announced earlier this year, finance minister Nirmala Sitharaman recognized this fact by allocating money to specific "city economic regions." She noted that these are powered by the economics of agglomeration, or the tight networks of labour, capital and ideas that power growth.
Indian urbanization data is woefully out of date because the Census due in 2021 was postponed during the pandemic. The new Census that is now underway will give us a better sense of how much more urbanized India has grown since 2011, but it will still be shackled by official definitions of what a city is.
However, there are other signs that Indian policy is responding to the reality that India is more urban than is commonly assumed. Take the trend in the distribution of grants recommended by successive Finance Commissions (FCs) to local governments.
Janaagraha has shown in a recent report that urban governments received only 19% of these grants under the 10th FC; the rest went to rural governments. The 16th FC that submitted its report earlier this year recommended that 45% of grants to local governments should go to cities. That is a steep nine percentage points higher than what the 15th FC had recommended.
The 16th FC has also created an 'urbanisation premium grant' of ₹10,000 crore, designed as a one-time transfer to states for two purposes: supporting the merger of peri-urban villages into urban local bodies and the formulation of a rural-to-urban transition policy. The FC noted that census towns often lack urban administration and called for a well-defined, time-bound mechanism with a phased approach for their transition to urban administrative status. Odisha has been a pioneer in this.
On similar lines, Indian Express reported that the Maharashtra State Finance Commission has recommended that the state government should devolve 55% of funds to urban governments and 45% to rural governments, which could be seen as a proxy for the urbanization in the state. It has also carved out a pool of money to help villages prepare for municipality status.
These transitions point to three policy possibilities:
Convert census towns into statutory towns: The government identifies Census Towns using three criteria —population above 5,000, density above 400 per sq-km, and over 75% male workforce in non-agricultural work.
However, there is no automatic upgrade to statutory status. States need a standing administrative mechanism that reviews Census Town data after every Census and moves qualifying settlements into municipal status within a fixed timeline, rather than leaving them in limbo for a decade or more.
State legislatures would need to amend municipal acts to lower the threshold for triggering that conversion and remove the discretion that currently lets state governments defer it indefinitely.
Fund the rural-to-urban transition at city peripheries: A dedicated central or state fund, modelled on schemes like Amrut but designed specifically for peri-urban areas, should provide capital grants for basic municipal infrastructure: water supply, sewerage, solid waste systems and street lighting.
Disbursement should be conditional on the village panchayat being reconstituted as a town-level body, so the money builds administrative capacity alongside physical infrastructure, rather than subsidizing infrastructure under a governance structure that is not equipped to maintain it.
Start city-region GDP estimation: India's national and state statistical machinery should extend the evolving district domestic product framework to city economies, defined in broader terms than municipal boundaries.
Sources such as GST filings and data from ASI, PLFS, ASUSE and other surveys can be integrated with satellite images for this estimation, with pilot projects in a handful of major metros before a standardized methodology is rolled out nationally. It would give policymakers a genuine measure of urban economic output.
The author is executive director at Artha India Research Advisors.