Economic Liberalisation, Transport Cost and In-situ Urbanisation in India: A General Equilibrium Analysis

Urbanisation in India is moving away from metropolitan dominance and showing a different trend recently. It takes a new path due to the growth of numerous small and medium urban bodies through reclassifying villages, popularly known as Census Towns. Using a general equilibrium framework, the paper finds that, due to economic liberalisation and an increase in capital inflows, the process of reclassification-based urbanisation tends to accelerate. However, the net effect of this type of in-situ urbanisation is ambiguous due to increased transportation costs. The empirical observation confirms the theoretical findings. We find a positive relationship between urbanisation and the inflow of foreign capital, proxied by the number of banks in the nearby city. A negative relation is observed when we proxy the transportation cost by the distance from the nearby highway, and a positive relation is found when the same is proxied by the distance from the nearby city.