Hidden Urbanisation in India

Why in News?

The recent initiatives such as "City Economic Regions (CERs)" announced in the Union Budget 2025–26 and the proposal of an Urbanisation Premium Grant by the 16th Finance Commission have brought renewed attention to India's hidden urbanisation and the urgent need for better urban governance.

What is Urbanisation in India?

• Urbanisation refers to the process through which an increasing proportion of the population shifts from rural areas to urban areas, leading to the expansion of cities and towns. According to the 2011 Census, nearly 31.16% of India's population lived in urban areas, contributing almost two-thirds of the country's Gross Domestic Product (GDP).

• Reports by NITI Aayog indicate that India's urban population will continue to grow rapidly over the coming decades, making cities the primary centres of economic growth, employment, innovation, and investment.

• Urbanisation takes place through several processes. It occurs because of the natural increase in the population of existing cities, migration from rural to urban areas, physical expansion of cities into nearby villages, and the reclassification of rural settlements into urban settlements. However, official statistics often fail to adequately capture the expansion of cities and the conversion of villages into urban settlements.

What is Hidden Urbanisation?

• Hidden Urbanisation refers to the phenomenon where many settlements have become economically and functionally urban, but continue to be officially classified as rural areas because they have not been administratively recognised as urban. As a result, India's actual level of urbanisation is considerably higher than the figures reported in official Census data.

• The main reason for this hidden urbanisation is that India follows an administrative definition of urban areas rather than a functional or economic definition. Consequently, a settlement may exhibit all the characteristics of a city but still remain governed as a village.

How are Urban Areas Classified in India?

Statutory Town

A Statutory Town is a settlement that has been officially declared as an urban area by the State Government under a specific law. Such towns are administered by Urban Local Bodies (ULBs) such as Municipal Corporations, Municipal Councils, Cantonment Boards, or Notified Area Committees. Their urban status depends entirely on legal or administrative notification, irrespective of their population or economic characteristics.

Examples of Urban Local Bodies

• Municipal Corporation

• Municipality

• Cantonment Board

• Notified Area Committee

Census Town

A Census Town is identified as an urban area only for statistical purposes by the Census of India. Despite possessing urban characteristics, it continues to be governed by a Gram Panchayat unless the State Government officially converts it into a Statutory Town.

A settlement is classified as a Census Town only when it satisfies all three conditions prescribed by the Census of India. It must have a population of more than 5,000, a population density of at least 400 persons per square kilometre, and at least 75% of the male main working population must be engaged in non-agricultural activities.

Because these settlements continue to be governed as villages, they often face serious deficiencies in urban planning, municipal governance, and civic infrastructure.

Why is Urbanisation Hidden in India?

One of the major reasons behind hidden urbanisation is the delay in administrative reclassification. Although many villages have acquired urban characteristics, they continue to remain under rural administration because the process of converting them into municipalities is extremely slow.

Another important reason is the delay in conducting the 2021 Census, which has resulted in outdated urban statistics and prevented accurate estimation of India's urban population.

The rapid expansion of peri-urban areas has also contributed significantly to hidden urbanisation. These areas, located on the outskirts of cities, are witnessing rapid industrialisation, residential development, and commercial activities. Although they function as urban economies, they continue to be officially classified as rural settlements.

Additionally, India's dependence on traditional Census definitions fails to capture functional urban regions, where economic activities extend far beyond municipal boundaries.

Major Issues Arising from Hidden Urbanisation

Data Gap and Weak Policy Planning

Since official statistics underestimate the actual urban population, government policies are often based on incomplete data. This affects urban planning, infrastructure development, public service delivery, and financial resource allocation, resulting in inefficient policymaking.

Fragmented Urban Governance

India's major economic regions often extend across multiple municipalities and villages, but governance remains fragmented among different administrative bodies.

For example, Kozhikode in Kerala has expanded well beyond its municipal limits, while the Indore–Pithampur–Dr. Ambedkar Nagar region in Madhya Pradesh has evolved into a single integrated economic region despite being administered by several local authorities.

This fragmentation creates serious challenges in planning transport, housing, industries, and public utilities.

Poor Urban Governance

Many Census Towns continue to be governed by Gram Panchayats, which are primarily designed to administer rural areas. As a result, these rapidly growing urban settlements do not receive adequate municipal services such as water supply, drainage, sanitation, waste management, street lighting, and urban planning.

Infrastructure Deficit

Peri-urban regions generally suffer from inadequate civic infrastructure because they are not officially recognised as urban. Basic facilities such as roads, sewerage systems, drinking water supply, solid waste management, public transport, and digital infrastructure remain insufficient despite increasing urban populations.

Fiscal Mismatch

Urban Local Bodies are expected to provide services to rapidly growing populations, but they often receive insufficient financial resources. The mismatch between increasing responsibilities and limited financial capacity reduces the effectiveness of urban governance.

Policy Recognition of India's Emerging Urban Reality

City Economic Regions (CERs)

The Union Budget 2025–26 introduced the concept of City Economic Regions, recognising that economic growth extends well beyond municipal boundaries. These regions acknowledge the importance of urban agglomeration economies, where multiple cities, towns, and peri-urban areas function as a single integrated economic unit.

Recommendations of the 16th Finance Commission

The 16th Finance Commission has recommended increasing the share of grants allocated to Urban Local Bodies from 36% under the 15th Finance Commission to 45%. It has also proposed an Urbanisation Premium Grant worth ₹10,000 crore.

This grant aims to encourage the merger of peri-urban villages into Urban Local Bodies, facilitate a smooth transition from rural to urban administration, and strengthen municipal governance and infrastructure.

Way Forward

India requires a time-bound mechanism for converting eligible Census Towns into Statutory Towns after every Census so that administrative boundaries reflect actual economic realities. Municipal laws should minimise discretionary delays in this conversion process.

A dedicated financial support mechanism should also be created for rapidly growing peri-urban areas, similar to the AMRUT Mission, to improve urban infrastructure and strengthen governance.

Further, India should begin estimating the Gross Domestic Product (GDP) of functional city regions rather than restricting calculations to municipal boundaries. Such estimates can be prepared using data from GST, Annual Survey of Industries (ASI), Periodic Labour Force Survey (PLFS), Annual Survey of Unincorporated Sector Enterprises (ASUSE), and satellite imagery.

Finally, Urban Local Bodies should be empowered with greater financial autonomy, institutional capacity, and administrative authority so that they can effectively manage India's rapidly expanding urban population.

Conclusion

India's urban transformation is taking place much faster than official statistics indicate. The growing gap between administrative boundaries and functional economic regions has significant implications for planning, infrastructure development, fiscal transfers, and urban governance. Recognising the true extent of urbanisation through timely conversion of Census Towns into Statutory Towns, improving fiscal support for peri-urban regions, and strengthening Urban Local Bodies will be essential for achieving sustainable, inclusive, and evidence-based urban development in the coming decades.