Rana Hasan on Harnessing the Economic Potential of Indian Cities

SHRUTI RAJAGOPALAN: Welcome to Ideas of India, where we examine the academic ideas that can propel India forward. My name is Shruti Rajagopalan, and I am a senior research fellow at the Mercatus Center at George Mason University.

Today my guest is Rana Hasan who is the Director, Centre for Economic Growth at NCAER and Senior Affiliate Scholar at the Mercatus Center. Prior to this he was the Regional Lead Economist at the Asian Development Bank. 

We talked about how to classify and define a city, coordination problems in urban governance, their potential as engines of growth and employment, land use regulation, and how cities are the mother of all general equilibrium problems, and much more.

For a full transcript of this conversation, including helpful links of all the references mentioned, click the link in the show notes or visit mercatus.org/podcasts.

Hi, Rana. Welcome to the show. It’s such a pleasure to have you here.

RANA HASAN: Hi, Shruti. It’s lovely to be here. Thank you.

RAJAGOPALAN: Yes, yes. I feel like I’ve been reading your work for such a long time, and there are so many areas that you’ve actually covered in a very detailed way, but I want to start with the most recent work first because I think that’s one of India’s biggest challenges right now. And this is the work on cities, mainly how should we think about urban growth, agglomeration effects, whether that relates to job growth, innovation, and also all the infrastructure and congestion issues that India faces.

You’ve written a series of papers on this, but I want to start with your recent ADB report, where you argue that the economically meaningful area or city is often a natural city, and it’s not exactly the municipal or the census idea of the city. I guess a good place to start is how do economists think about cities in a way that is different from how planners or geographers or even the government thinks about cities? Should we just think about labor markets? Or should we think about something much broader than that?

Thinking Differently About Cities

HASAN: That’s a great starting point, Shruti. Really, it was one of the issues that we took up when we started this work on cities. And I should just mention here, Shruti, that in fact, the way I got into the cities work was really through my interest in jobs. As people started recognizing, there was this cliché that jobs are created by firms, the private sector. 

Then some people started saying, “It’s actually cities that create jobs.” Martín Rama, who led that world development report on jobs, he ended that report, I think, if my memory serves me correctly, by saying, “Look, we really need to understand cities because that’s where these dynamic or nondynamic firms are located, whether they’re doing manufacturing in the peri-urban area or services in the center.” 

Really, that’s also the point at which you realize that, OK, the city has got to be much broader than just the municipal boundaries. Often, these are very narrow. If you just think of any of our cities, whether it’s Delhi or Gurgaon or Mumbai, there’s stuff that’s happening within the context of the administrative boundary or the municipal boundaries, but there’s a lot that’s taking place outside. Workers are living outside, coming in. There are some workers who are living in, coming out. There are school kids, flows all across these different governance units.

The big problem is that when these units are being governed as if they were just isolated islands, we know that we are not optimizing on, let’s say, the placement of infrastructure, the sewage facilities, solid waste treatment plants, industrial parks, IT parks, business parks. So, you really have to think about a much wider area, whether it’s commuting zones, etc., like everything that falls within, let’s say, a one-hour commute time. That’s my city. That’s the labor market. So, yes, that’s how we came about it.

RAJAGOPALAN: Normally, when we think about places outside of India, especially including in the report, natural cities often encompass more than one municipal corporation, right? Sometimes it could be a greater Mumbai area municipal corporation and some of the smaller areas. Sometimes it could include some forest land. Some gram panchayats even, if you go far enough. Usually, one would imagine that it’s a problem of coordination.

Now, in India, we don’t devolve very much authority, fiscal or political, to our cities. So, it seems like the local-level government actually doesn’t have that much to do, and we are too centralized. So, does that mean this makes it easier in the Indian case because the state government holds all the cards? Or does it make it worse in Indian states because there is really not even a cluster of functioning municipal authorities, let alone one functioning municipal authority?

HASAN: Yes, great question. The fact of the matter is I think it’s proving to be quite difficult to get this coordination going. We’ve got so many different states, and we see that there is a bit of a struggle in being able to get all these different units working together. But we do see some efforts now to really tackle this problem and improve the coordination across government units.

A couple of years ago, when the government of India had requested ADB to work together with the World Bank on some of these issues, the umbrella was a ‘city as a growth hub.’ How do you encourage our cities as growth hubs? We did get a chance to talk to state officials from different states. Tamil Nadu is a great example where the Chennai Metropolitan Development Authority was really thinking in terms of a region that was a couple of thousand square kilometers. In fact, they were already thinking about the future and thinking in terms of an expanded or greater CDMA area of about, I think, 4,000 or 5,000 square kilometers. 

But, Shruti, I think that challenge of coordination remains. I’d like to just make one point for now, which is it’s not just coordination. It’s not just, “I have a function. You have a function. How do we coordinate?”

Some of our planning, the planning norms are different. Urban areas, you suddenly have your building bylaws and all these things kicking in. Rural areas, you don’t. Even though a lot of the rural areas, especially the ones around the cities, we know they’re not doing that much agriculture. In fact, it is services, it is manufacturing, and yet their norms for the building layouts, for road width, etc., are different. And that’s the problem. That you’re not going to solve just by coordination. You’re actually going to need to change your planning norms.

RAJAGOPALAN: So, is this a more fundamental issue of just classification: India is much more urban than Indian planners or the Indian governments at various levels even begin to realize or recognize? What is the appropriate starting point? Is it first classification, then the appropriate municipal agencies, then a unified planning system, or is it the other way around? What’s a good way to think about this?

HASAN: In terms of the way forward, I’ll just interpret your question in terms of, OK, how do we go forward? I think getting policymakers and everyone to think about the economics of that city and really starting to call it, say, “city region” may be the way forward. Because once you’re able to emphasize that point that, “Look, the reason we’re trying to get you to coordinate, the reason we’re trying to get you to sort out the functions, who does what, etc., it’s important because you’re really one economic unit.” I would say that’s the way to go. I’m not sure, Shruti, if I’ve answered your question. I suspect I’ve— 

RAJAGOPALAN: No, it’s really hard to answer. If I can peel the economic unit a little bit more, the way economists think about cities, one way is that they are labor markets, right? That’s the classic Alain Bertaud way of imagining what a city looks like. So, you don’t think of it geographically alone. You just think of it in terms of the labor market. Wherever the labor market takes us, those are the boundaries of the city, and that’s what you need to reclassify.

Another way of thinking about it is agglomeration, right? This is really where economists have the most to contribute because we have about two millennia worth of evidence [chuckles] on endogenous growth and agglomeration. And here, it’s much beyond just a labor market; it includes shared infrastructure. But most importantly, it’s about a space—physical space—where people can learn and exchange ideas and innovate. Finally, that’s the imagination that economists bring to the city. 

So, when you say city as an economic unit, what should be the defining factor when it comes to India at its current stage of development? Because we do have pockets in many places which are doing this very first-world knowledge agglomeration where the universities are connected to the services industry or to research labs, but mostly we’re talking about services job markets. And in very few areas, we’re talking about some manufacturing in the peri-urban areas.

So, what is a good way to start thinking about this in India? Maybe if it’s different in different Indian cities, that would be helpful too.

HASAN: Yes. Shruti, first of all, it’s measurement. I think measurement is extremely important. You talked about how, is India more urbanized than our, let’s say, census data would tell us. I think there’ve been some really good efforts. 

There are people who’ve been using nighttime lights. That’s something that we used. Basically, you start with the center of a large statutory town. That’s what the census calls it, a city. Then you just work outwards and see, “OK, where do these contiguous lights stop?” 

Then there’s work being done by people using built-up spaces. There’s some recent work at the WRI. They’re going to be coming out, I think soon, with a report on just urban India when you use built-up images. 

So, that measurement part is very important. In one of the studies we did, I think we did an interesting thing. We merged economic census data with the population census data at the town/village level, and we just looked at the case of Indore over time.

RAJAGOPALAN: Yes.

HASAN: This is a city. When you look at it from the nighttime lights, you see Indore is expanding. What’s fascinating is that when you look at it from the point of view of the economic census, you actually see this very interesting transformation about how Indore is . . . Basically, large manufacturing plants are moving out. They’re moving out into the peri-urban areas. You see that in the data. Now, this is not panel data. We’re not tracking actual individual plants, but it’s census data. It’s quite suggestive that you’re starting off with more manufacturing inside, then it’s more manufacturing outside. 

I think stuff like that is great because the policymaker can see it immediately. You can put up two slides and make that point, and everybody gets it, that, “Wow, yes.”

In fact, just a little bit more on the Indore example. It’s really interesting. There are these different measures of specialization. What does a city specialize in? What does a geographic unit specialize in? If you look at the administrative Indore, the municipal boundaries of Indore, it’s some services that make Indore different from other urban areas in India in the sense that those particular services are much more concentrated in Indore than other Indian cities. When you consider the broader, the natural city of Indore, it’s certain manufacturing sectors, chemicals and autos. 

That stuff, Shruti, is important for a second reason. The first reason is it’s showing how these cities are integrated. Their economies are integrated. It’s also important to make the point that manufacturing matters. 

In fact, in this other study that we had done where, in fact, we just used the urban agglomeration definition of the Indian census. We found that actually, about a good 20 percent to 25 percent of jobs in the city, broadly defined, are coming from manufacturing. Naturally, when you define the city as a broader entity, including the peri-urban areas, manufacturing is important. 

Good measurement can really spark these two, three key ideas, fix these two, three ideas, sensitize policymakers to these two, three ideas. That’s where I would start: just the measurement.

Fixing India's Land Use Regulation and Coordination

RAJAGOPALAN: Once we start looking at the measurement—and I’ve been in many rooms and conferences where you’ve put up some of these images, as have many of your colleagues—what we see often in India is not the traditional idea of a city that you might see, say, in Europe or the United States. 

One, most Indian cities don’t have that classic central business district configuration. In fact, what we have is something similar to what you talked about in Indore. We have a donut configuration. That is, the center of the city starts getting a little bit hollowed out, and most of this economic activity, especially new economic activity, is happening in the outskirts, either because of land value or because of land zoning, land use issues, and so on. Or maybe just structural transformation, where the peri-urban areas are now becoming less agrarian and more manufacturing-oriented.

So, if that becomes the key point, is the argument that this data can help us plan better? Or is the argument that we just need to rethink how we do land use across the city because there is no reason for this donut shape to exist? In fact, donut-shaped cities are often not the most efficient. So, what is a good way to think about that question?

HASAN: So, Shruti, I would say that you’ve touched upon really two issues. The first is the one that we’ve been talking about, which is defining the city appropriately—so, recognizing that the city is much more than the municipal boundaries; it’s this entire larger area. But the second issue is really about land: the way you’re using land, your urban planning, your master planning, land zoning, building regulations, height restrictions, setbacks. I think it’s this second whole set of issues that come under the urban planning, land use planning, zoning. That becomes critical.

In your own work, Shruti, you’ve done this recent paper with your coauthors on land conversion. That’s a fascinating issue, and I think it’s intimately related. If we could have good, efficient land-conversion processes, and if you could marry these with good, modern, I would say, efficient land use, building bylaws, building regulations, I think you would tend to see that donut shape disappearing over time. 

Certainly in brownfield areas, it would take much, much, much longer, but relatively greenfield areas, you would see that classic, the bell-shaped cross-section of the city where the taller buildings, the business districts, are in the center. Other kinds of activities are on the outside.

RAJAGOPALAN: So, on that, I find one of your papers that you wrote on Bangalore fascinating because it’s exactly marrying these two big questions, right? One is, how do we think about the city as a unit, and therefore, plan a metro or a metropolitan transportation for that city, and then marry that with the appropriate either regulation or the deregulation?

These two things are typically very hard to study together because you don’t know which one needs to come first and which one is the binding constraint. But you do something quite remarkable in this particular paper because what you look at is where the metro goes. You actually trace where the metro is going, both before and after, and you look at the welfare gains of the metro. 

You find that metro obviously generates these significant, nontrivial positive welfare gains and spillover benefits. But if you marry where the metro is located with some relaxation of other regulation—most importantly, the FSI or the floor-area ratio restrictions—then suddenly those welfare gains, or the spillover benefits, are just much, much larger, right?

Is this a question of we don’t know what is the binding constraint first? Is it a question of you can’t know what the binding constraint is, you should just relax it anyway? Is it a sequencing problem? What is your interpretation of how we should take broader lessons from that Bangalore paper?

HASAN: Yes.Shruti, so, yes, that’s been a paper that was very exciting for me to do, and I had great coauthors. It was motivated actually by Delhi, the city I’ve lived in the longest. I think it was Ajay Shah had a blog once where he talked about—and maybe it was somebody else—but he talked about Delhi Metro, about how “terrific engineering success,” but you look at Hauz Khas Metro, which was actually close to the place I was living in. And Hauz Khas Metro was opening up to IIT, which is a residential campus, and a park on the other side. This is great engineering stuff, and the way they minimize cost overruns, built everything on time, and engineering-wise, it’s a great success. But because the city is so flat, it can never decongest the way you would want it to.

And, ultimately, when you start thinking about that, there’s the engineering part, the transport part, and then there’s the urban planning part, and that’s where the coordination issue comes in. What’s fascinating, Shruti, is that when I started this urban work, I got the chance to go to Tokyo. ADB Institute had a conference on urbanization, and there was somebody who was making this presentation, maybe from the ministry. But they kept on referring to the Ministry of Urban something and Transport. It was urban transport and tourism, and I asked them why. Because I was used to—coming from India, we have the Urban Development Ministry. Transport is separate. 

And this person said, “Well, because what’s a city without transport? So, of course, the Ministry of Urban Affairs has to be the Ministry of Transport.” For me, that was fascinating, and that’s the coordination problem. 

I think everyone gets it. This is the challenge. People understand this, that the transport people or the people who are designing the metro, they understand that, “Yes, we wish that we could have our stations opening up to very tall buildings,” etc., but it’s really a question of the coordination.

Now, coming back to the question you raised, should we just relax FSI everywhere? I would just be a bit hesitant about that because at the end of the day, it is an important planning tool, and you do want to be able to control densities. There are so many different factors that come in. 

And in fact, even in our paper, we found during these simulation exercises that the real bang that you get in terms of efficiency of the city, the economics of the city, is when your tall buildings open up near the key nodes of the transport network. So, it could be bus stations, it could be metro stations, etc. That’s really important.

I’m not an urban planner, but I’m going to just go ahead and make a bit of a leap over here. Bangkok. If you go to Bangkok, you’ll see some of the central business district type of stuff. But you’ll also see, suddenly you’re driving along and then you see an extremely tall building somewhere. That’s not actually, I think, good planning because it leads to congestion. If you suddenly have a 70-story tower, you have to have people coming in, coming out, and then you haven’t thought through the transport issue. You’re not going to get actually the biggest bang for the buck. I do feel these things have to be coordinated.

RAJAGOPALAN: So, fair enough. I understand that what you mean by you shouldn’t have something willy-nilly. Suddenly, if you just open up everything, there might be one building that comes up at one unique pocket where they manage to assemble land, but you don’t have the road widths there or other kinds of things. 

But when it comes to metros—and again, I’m not an engineering person at all, but I’m just using common sense—it seems like it should be fairly straightforward to marry the metro construction with the widening of sewage and roadways and those kinds of things.

Those things all run together and typically run under similar government units. Is that something that is even attempted in India? Is that something we think about at all? Or do we just put the metro where, either as a rent-seeking exercise, where the powers that be or the politicians already own some land and those values will go up? Or as a “we’re going to put in a metro station every one kilometer” or some basic arithmetic like that?

HASAN: OK. I think people have just gotten much more sensitized to this. Let’s say maybe 20 years ago, if we were talking, we would be a bit dismayed and say, “Gosh, nobody’s thinking about this issue.” But you really see a lot of effort now. India has come out with a TOD policy at the center. It’s percolating to the states. Some states are doing it. So, it is happening. It’s a slow process because, I think, just the challenge dealing with brownfield areas. Unfortunately, we’re not dealing with too many greenfield areas, right?

Having said that, I do think that over the next three decades or so, you’re just going to be seeing a lot more urbanization. There still are a lot of greenfield areas, so I’m a bit optimistic on this, Shruti. Even just in the limited amount of time that I’ve spent on this issue—I think 2015 or 2016 is when I and a couple of my colleagues started thinking about working on this area. If I compare the situation back then to the situation now, there’s just a lot of recognition in government about this issue. But remember, you’re dealing with land. I think the land-factor markets, they are the most difficult to deal with. And here, this whole concept of NIMBY and people who’ve had nice big land parcels in the middle of the city, they will fight to not go for that bell-shaped structure for city.

Strategies for Nurturing Urban Growth

RAJAGOPALAN: Yes. In India, the numbers are really off compared to pretty much anywhere else except maybe China. In India, even a Tier-3 city is so much larger [chuckles] than most other parts of the world, so India can get scale effects and agglomeration effects much more easily. A Tier-3 city in India can easily make a metro both feasible in terms of cost-benefit, and also it can start breaking even in terms of revenue very quickly. 

So, should India prioritize its secondary cities and third-tier cities? Or should it still focus on the largest agglomerations, and there are still agglomeration effects that are there for the picking in the greater Bengaluru area or the greater Mumbai area, and so on?

HASAN: Right.So, Shruti, on this one, I’m going to say we need both. The question is, “OK, who does what?” I think in the big cities, you can really get the private sector to come in. Because those agglomeration economies, they’re a reality. We know that they’re there. They’re functioning, whether it’s matching of suppliers, buyers, matching of workers to firms. People understand this, and it is actually all happening. Or the shared resources. In a given location, you can just share the infrastructure much better. So, I think the emphasis has to be, in the bigger cities, find ways to encourage more and more PPPs. Figure out what are the bottlenecks to these PPPs. Unlock them. 

In the smaller cities, the second- and third-tier cities, their problem is infrastructure. The basic infrastructure is not there. I think it could be a bit of a stretch to assume that the private sector is going to come in in a big way. That’s where you need the public funds. So, you need both, but how you attack the problem would have to be different.

RAJAGOPALAN:  Rana, I want to come back to a third aspect that you find when you’re looking across Asian cities, across papers and your reports. The third element is universities and how there are different levels, different kinds of human capital that actually need to be the input into innovation, right?

In India, is there a tension between the spatial conditions that can generate a large number of good jobs, which typically tend to be manufacturing and services, versus those that can generate frontier innovation where they are plugged in with universities and labs and certain kinds of private sector activities?

HASAN: Yes,Shruti, great question. In fact, yes, this touches on a couple of issues, including just how universities are run, are incentivized to work with the private sector. 

But let me just back up a bit and just mention this work that we had done. We were able to take the World Bank Enterprise Surveys, and the World Bank office that was responsible for that very kindly provided us the geocodes with a 2-kilometer fudge factor, and then we were able to map it to our cities. And what we do find is that firms which are located in cities with high-quality universities, especially engineering universities, are cities whose firms are just doing more process innovation, product innovation, and doing more R&D.

Now, the causality—as you know, economists love to get down into causality. But I think because this was the first time anyone had shown on a large scale for Asia that at least this correlation was there, I think we were let off, but a bit more easily. But the bottom line is we are talking about two different types of things. You can have the university there. Look at IIT Delhi, right?

RAJAGOPALAN: Yes.

HASAN: IIT Delhi is there, and there are just lots of people, services. There’s manufacturing. There’s manufacturing of electronics out there in Noida, right?

RAJAGOPALAN: Yes.

HASAN: There’s, in Gurgaon, all the services. You probably have global capability centers. I’m sure there are some spillovers, but my bet would be that if you looked at what the potential is, I’m sure that the potential for the synergies would be much more.

But then this, like I said, it’s not really an urban planning—at some stage, it ceases to be an urban planning issue. It’s really about how the university system works, how professors are encouraged. Do they find it worth their while? 

And in fact, I have to just make a point here, Shruti, which is, again, there’s recognition within the government about this. The Ministry of Education actually has a program to try and foster better university-industrial linkages in about 40 different Tier-2 institutions. The IITs are doing well, but about 40 Tier-2 centrally funded universities. That effort is there, but I think that is a different issue from the pure urban planning stuff.

RAJAGOPALAN: The way I interpret your response is that there may be other Asian cities where there is this tradeoff or tension between good jobs versus frontier innovation, but in India, we’re nowhere close to that threshold yet. There are still a lot of gains to be made both on frontier innovation through better linkages and also on getting better jobs through better planning?

HASAN: Very nicely put, Shruti. Absolutely. I think it’s similar to this whole story about manufacturing or services. India is at such a scale. You need both. You can do both. You can excel at both. Similarly, I would say we absolutely should be doing the frontier. We should be doing the assembly, the entire supply chain. India is just too big to not be doing everything well.

RAJAGOPALAN: Yes, and also, I feel on the manufacturing services point, there are different parts of India that are still poor enough to do manufacturing, and there are parts of India that are rich enough just to do [chuckles] the frontier innovation, right? We’re not a tiny economy, spatially or economically or in terms of human capital. There is still a lot of room in Bihar and UP and all these places where we could be doing the low-end manufacturing that China has vacated or other places have vacated.

HASAN: Absolutely, absolutely. And Odisha.

RAJAGOPALAN: Yes, Odisha has done really well.

HASAN: Why I bring up Odisha is that I’ve read a couple of newspaper articles and then just casually asked people in the apparel/textiles sector. The article—it was in Mint somewhere—it was just talking about how in Tamil Nadu, you have all these garment factories, and the factory owners, the managers are paying a premium to workers from Odisha, etc. And so, the question becomes, why isn’t Odisha setting up garments, right? This is not semiconductors.

RAJAGOPALAN: Yes.

HASAN: This is garments. So, yes, you’re absolutely right.

RAJAGOPALAN: So, when it comes to the city trying to finance itself, the way I think about a lot of your work is, of course, there is coordination, there’s a question of the appropriate regulation, and a lot of thinking needs to go into this, but a second part of it is how to finance some of this. What I get from the work, multiple papers and reports together, is there is enough value and enough spillover benefits that if we invest in the infrastructure, whether it’s metro transit or other kinds of planning and coordination development, there would be enough welfare gains to finance that. Is India still at that stage where that’s the appropriate lens? Or do we need to start thinking about financing much more critically because Indian state finances are such a mess?

HASAN: I think it’s the second, Shruti. In some sense, the financing is there. There was this really neat study done by CPR on a—I hesitate to say Tier-2, but let’s call it a Tier-2 city—in Karnataka: Tumakuru, and I might be pronouncing it incorrectly. They just did this very interesting exercise to say the different agencies of the state, so, whether it’s city-level, state-level, and perhaps even central-level, how much funding is actually coming into the city? Whether it’s for roads or telecom or what have you.

It’s a pretty exhaustive exercise because, as you can imagine, just figuring out, going through the account books and all of the different agencies, it’s actually quite a bit. The problem is it’s all scattered across different agencies and local agencies, which frankly don’t have all that much. Property taxes tend to be one thing that’s there for the cities. Octroi used to be there, but after GST, octroi is gone. Then you just have the state and central-level financing. 

Now, if you could coordinate this, if this could be coordinated with an umbrella, with somebody at the apex, really somebody who’s, at the end of the day, “The buck stops here.” I think that’s where the challenge is.

RAJAGOPALAN: So, the finance will come eventually.

HASAN: I think so. I think so.

RAJAOPALAN: Yes.

HASAN: Yes.

RAJAGOPALAN: And the land values are—we still don’t tax land and property taxes. There are so many things within a city, other than consumption taxes, that we could tap into so many cases of user fees. Right? None of that gets really used right now in a place like Tumakuru, I imagine.

HASAN: Yes. I don’t know the exact numbers. There is a recent study that’s being done by some of my ADB colleagues, just collecting data on city finances. They show that—again, this is the interesting thing about India. It’s so large that there is variation. You do have some cities in some states which are doing OK on the property tax stuff. That’s the way you want to get to. And then there’s a whole bunch of cities which are just not. That’s where, again, the sensitizing or the sitting down with policymakers and trying to work out a holistic solution to the issues that we’re talking about, of which finance, which you’ve just touched upon now, is super critical. 

The Mother of All General-Equilibrium Problems

RAJAGOPALAN: So, you said at the head of the conversation that you got into this because of your work on jobs, right? You were a labor economist for such a large portion of your career, and in particular, manufacturing jobs, because that needs to be a part of the structural transformation where India has lagged the most or been the weakest. 

What I get when I read the more recent papers, which are on manufacturing or industrial policy—which is different from industrial targeting, but industrial policy—the  way I think about or interpret your papers is you think of urban policy as a form of or a companion to industrial policy. Is that a good way to think about that starting point?

HASAN: That’s a nice way to think about it, Shruti. Absolutely. What you just said reminds me. Gilles Duranton at UPenn, Wharton, his were some of the papers that me and my colleagues read, and we loved them. We said, “Wow!” Then we got in touch with Gilles, and Gilles has been a great adviser to us. And I remember him saying once, “Urban issues involve the mother of all general-equilibrium problems.” [chuckles]

RAJAGOPALAN: Yes.

HASAN: He said, “This is where the action is at. This is what we need to crack.” So, I completely agree, Shruti. Absolutely.

RAJAGOPALAN: The way I think about how India has tried to boost its manufacturing at various points is cities have not been in the picture at all, funnily enough. We think about the odd regulation or the odd subsidy. We want to boost manufacturing of leather chappals or apparel or something like that, so there’ll be a PLI scheme announced or a subsidy announced. That’s one kind of policymaking. 

A second kind is, “Oh, everything is locked because of land, so let’s issue special economic zones.” Now, the weird thing is nobody wants to move to these special economic zones because land was a constraint but was not the binding constraint. You needed other supply chains to integrate. You needed labor to move to those places, and oddly enough, no one figured out that people are not going to move with their families to a special economic zone that doesn’t allow schools [chuckles] or doesn’t allow housing and only allows industry. So, we had that kind of a problem. 

And no one really thought about how do we integrate industrial policy or what kinds of industry should enter, should not enter, should exist, should not exist when we think about urban areas.

So, is that the beginning of the problem? Or is it something different, that industrial activity has just grown despite any government efforts and we need to think about industry in urban areas just completely differently from what people have been doing so far?

HASAN: Yes. Shruti, I think it’s the former. There was this deliberate push in pursuit of the objective of regionally balanced development. A, you wanted to push manufacturing out to different states. But there were also stipulations about: Where can you set up a factory? How far should it be? Yes, of course, when it comes to polluting stuff—instead of regulating in terms of the type of activity you’re doing—if it’s hazardous chemicals, etc., of course, that’s what you have to be very careful about where you locate them. But this blanket thing that was part of our industrial licensing regime definitely contributed to it. It was an issue right from get-go, and I think the recognition of agglomeration economies was just not there.

RAJAGOPALAN: Yes.It was—

HASAN: Because agglomeration economies—

RAJAGOPALAN: —the opposite, actually.

HASAN: It’s the opposite. Absolutely. This is the opposite. If you left it to the private sector, they would just go on agglomerating.

RAJAGOPALAN: Yes.

HASAN: In fact, I recall that when we started doing our work for NITI Aayog—and that led to that 2024 publication on harnessing the economic potential of Indian cities—the first workshop that we had, we had municipal commissioners. We had folks from industries departments. And we also called some private developers of industrial parks.

There were a few of them, and they all absolutely agreed to the point. They said, “Look, if you force me to develop an industrial park more than 50 kilometers away from a vibrant urban area, I can’t do it. It’s not going to succeed.” Because, he said, “Forget about attracting the manager of the factory, the highest-level guy. I can’t even get good workers.” Because good workers, like you said, Shruti, they care about the education of their children. They care about the hospitals, etc. So, it’s a nonstarter.

The other thing, Shruti, I must point out is scale. When you talk about our SEZs or industrial parks, in some work we’ve done, we have this nice histogram where we just have plotted the sizes of these, I think, 2,000 or 3,000 industrial parks. This is from one of the databases that DPIIT has. Very small. It’s just too small. You just can’t have any scale there.

RAJAGOPALAN: Yes, so it doesn’t make sense there even for a single hospital or a single school to set up— 

HASAN: Absolutely.

RAJAGOPALAN: —given how small it is. And, until that happens, no one moves with their family, so the thing never takes off, basically.

HASAN: Right, right.

The Potential Benefits of Devolving Power to Local Governments

RAJAGOPALAN: Yes.The trouble is we have a bigger problem at hand, right? It’s not just about convincing four or five agencies to coordinate or to solve a particular regulatory problem. It feels like the problem is so much bigger, where fundamentally Indian policymakers don’t trust the market to get any of this right. Once upon a time, we didn’t trust markets to make enough Bajaj scooters in the economy, and we told them how many to make and how to make them.

And now, we don’t trust the market to get agglomeration right. We don’t trust them to figure out the city boundaries or broad labor markets. And this balanced regional growth where every state will get an IIT in the middle of nowhere and every state will get a big aluminum plant in the middle of nowhere or something, that still seems to be what drives everything when we think about this spatial or geographically contingent policy.

HASAN: Yes.Shruti, I think, number one, things are improving. But number two, I want to get to why this happens. I don’t think it’s so much distrust of markets, but it is a formidable problem to solve, which is that, just on how our governance is structured, you’ve got center, you’ve got state; local governments don’t have power.

There was this 1980 book. I think the title was called City Limits. It’s a book by an American researcher, just about cities, and he made this point in the introduction. It’s beautiful, and it’s so simple. His point there is that, look, capital is very mobile. We all know capital is mobile. Workers, of course, are mobile. People migrate. You see a lot of migration in China and the US, but still, you are located in a town or a city, and you have ties to it. What better for governance [than] to let those people govern their city? They’re the ones who have a stake in it, right?

RAJAGOPALAN: Yes.

HASAN: And so, that’s actually what makes a lot of these places tick. It’s what makes China tick. When we were doing the first study, the ADB study that you started off with, it struck me. That’s why I started calling it the basic agenda, and then the nonstandard agenda. And I’ve never come up with a better terminology, but what I mean is the basic agenda is your standard better land use, better building bylaws, all these restrictions on building heights and setbacks. That’s the basic agenda: water supply, sanitation.

I think nobody’s going to dispute it, but I think that may not be all. There is this issue about who actually is thinking about economic development at the local level. If your answer is “nobody,” we have a problem. That’s where you have people who are not incentivized at the local levels; they’re not empowered. This is the worst combination.

I think that’s when we started just looking at how Chinese cities were doing it, we realized it was the opposite of South Asia. This problem that I’m talking about is not just an Indian issue. It’s pan South Asia. China was the opposite, where the city mayor and the vice mayors, my goodness, they were completely incentivized to make sure that their cities worked as engines of growth. And they were empowered.

It’s interesting. We, at some stage, were told, “OK, look, China’s very different. What’s the point?” We started looking at the US, at New York City. New York City, there’s a deputy mayor who’s in charge of economics. There’s the SME unit, but there’s also a unit which is trying to bring in new industries, life science, AI, etc.

So, that’s lacking. And that’s what I call the nonstandard part. There’s the basic problem, and then the nonstandard stuff. We need to tackle them. And a lot of my interest is seeing how we can push on that second one, because I really believe until local officials are incentivized and empowered, we are going to go on running into the problem. Now, the difficulty there is states. They don’t want to necessarily devolve, right?

RAJAGOPALAN: Yes, because they’re the cash cow. The cities are the cash cow. 

HASAN: Right. 

RAJAGOPALAN: And they can grab money from there and spend it everywhere else, which is less productive.

HASAN: And so, one way out is, why doesn’t the chief minister adopt the capital city, right? Because you’ve got to get at this problem step by step, so that’s one potential solution. The other one is basically start something called a city economic council or an economic development board of the city. It should not just be a one-off meeting, but you do have to have some unit. 

Where it’s located functionally or organizationally, we can work that out with different states, but you need this entity, which is keeping track of, “Which are my SME clusters? Which are my anchor investors? What are their bottlenecks? Ten years from today, I want them to be doing really well. What’s stopping them?” You need somebody at that level to be thinking about these problems.

RAJAGOPALAN: This is your recommendation in the ADB report outside of India too. This is just something all cities need, right? So, this is not an India-specific malady and a problem.

HASAN: No, no, no.

RAJAGOPALAN: It’s a city-specific malady.

HASAN: It’s a city-specific, yes. Yes.

RAJAGOPALAN: Yes.Here, I find that for the incentivization, the latter problem that you detailed, there’s a more fundamental problem that the powers that be think of people as pieces on a chessboard that can be moved around and that don’t need to be incentivized. I think that’s the fundamental crunch there, right? India has such large numbers. People flock to cities anyway just to earn their livelihood.

So, somehow, there doesn’t seem to be the thinking that we need to incentivize people to come to our city, live there for a long time, actually adopt it as their own, or make a life there. Part of that process is what is going to get us the bigger spillover benefits. We think of people as actually we don’t want them moving to cities, [chuckles] right? Which translates into some kind of NIMBYism. So, there’s a very strange mindset when it comes to how we think about people who want to urbanize.

HASAN: Yes. No, absolutely. I think these hurdles that we throw in front of people . . . And by the way, Shruti, I think that was a very deeply embedded part of the philosophy 50, 60 years ago. In fact, there’s a very nice study of just Indian thinking on urbanization over time. This is the point that they make, that Indian thinking on urbanization [chuckles] was about how to slow it down. That was the overriding concern, which has really got it— 

RAJAGOPALAN: It’s so crazy.

HASAN: —the wrong way.

RAJAGOPALAN: Right?

HASAN: Yes. These are your engines of growth. This is where you want people to be coming. This is development. Tell us one country [chuckles] that has developed without these big centers of agglomeration. But there you go. [laughter]

Making India a Global Economic Player

RAJAGOPALAN: So, have Indian cities gotten anything right? What are some of the things we have gotten right?

HASAN: I think we have a lot of cities. That’s Tier-1, Tier-2 cities. That’s something very nice. If I just compare that to the case of Thailand, the highest level of primacy, as they call it, just one center, the Bangkok metropolitan area.

RAJAGOPALAN: Yes.

HASAN: And if you think about it, India has done pretty well. The fascinating thing about India is the state variation. In fact, this is something somebody suggested I look at but never got the opportunity. But I think the starting point is absolutely correct that Tamil Nadu has a lot of Tier-2 towns, and they’re pretty vibrant economically.

RAJAGOPALAN: Yes. 

HASAN: Some other states may not. Why? What explains this? So, the beauty about India is that you can be unhappy that things aren’t moving, but you always find some good counterexamples of places where things are going right, going in the right direction. I think really, as researchers, Shruti, for us, understanding those experiences and just getting it across to policymakers from different places is super important.

RAJAGOPALAN: Yes.So, when it comes to developing deeper job markets in cities, what I got from the Bangalore paper was that we need to think about the physical infrastructure and the regulatory infrastructure and somehow marry the two and make sure they go hand in hand. Now, when you think of it specifically from the point of view of job markets, especially manufacturing jobs, does that need to have a third prong, which is now we also need to think about labor regulation or trade regulation and things like that?

HASAN: Shruti, it goes completely hand in hand. You could solve the basic problem of cities, as I mentioned, the water supply, sewerage, infrastructure, power, but that’s not going to be enough.

RAJAGOPALAN: Yes.

HASAN: Especially if you’re thinking about wanting to compete at the global stage, and I see no reason why India should not be right there at the top, then you have to, you have to realize that there are all these regulatory hurdles.

I would think even beyond that—it’s like if I think about China and Korea, let’s say, versus Thailand or Indonesia, and to some extent, even Malaysia, the latter three did a good job in terms of providing all the basics. All these basic things we’re talking about, I think, are provided well. The power supply is good, etc., etc. The roads are there. They do have sufficient agglomeration areas for industry to come up. Look at this whole Penang’s electronics sector, etc. All that is there. 

And yet, that cutting-edge innovation, it’s not happening. But you saw it happen in Korea. You see it in a big way in China over the last 15, 20 years, right? So, there is, I think, something there also. I don’t think it’s something automatic that’ll just happen on its own. Now what I’m talking about is very closely related to—Naushad Forbes has written a book. He writes his op-eds. I see him at conferences where he’s asking, “Why aren’t our top firms doing more R&D?” Right? So, there’s something, I think, in there in terms of just incentives that need to be there and are not there currently. And I think part of it has to do with trade policy. Right? If you’re a big player, you have a pretty much closed market, why should you waste money?

RAJAGOPALAN: Why bother?

HASAN: Right? So, all those issues of regulation, trade policy, they all come in, Shruti.

Balancing Security for Workers and Flexibility for Firms

RAJAGOPALAN: Yes. So, coming to labor regulation first, which is also where you’ve done a lot of your work, one theme I see in Indian cities is that they thrive because of the informal sector, right? So, Indian cities have managed to somehow tap in that informal pool of labor, or rather made that pool of labor informal, whichever way we phrase it, because of bad regulation. If we start doing major labor regulation reform and try to forcefully formalize these firms, are we actually going to create a problem for urbanization? Do you see any tension in those two things at all?

HASAN: Shruti, if the labor regulations that applied to Indian manufacturing were applied across the board and actually even within manufacturing, I think it would be highly problematic. So, we have to be really careful on the design of labor regulation because it’s true, economists don’t like these artificial thresholds where something applies to you guys, something doesn’t apply to you guys. No, it’s level playing field, etc. But in a sense, a safety valve really has been that these very draconian laws apply to only a certain subsector.

RAJAGOPALAN: Size of the firm, yes.

HASAN: Yes, yes. Yes. You come under the Factories Act, or you have 10 or 20 workers . . .

RAJAGOPALAN: Yes.

HASAN: Now, the good news there, Shruti, is that while, yes, there is a bit of a push to universalize the labor codes, there’s also a push to take these thresholds and just raise them, right? So, that, I think, is a very big safety valve over here. The second thing is the recognition of fixed-term contracts. I think that’s very important. Now, of course, when you have the option, if you still have the option of having no contract versus even a fixed-term contract, many businesses will say, “I’m going to go with no contract.” Right? So, that is a bit of tension. I think you do want workers to have protection. That’s where one of my papers, which is with Priyaranjan Jha, the IGIDR one—I think you even mentioned it the other day in our email exchange. I was looking over that again because it’s been such a long time. I said, “Wow, Shruti’s picked up on this one.”

So, I went back, and I remembered what was neat about it was it was just comparing two pieces of regulation: the regulation on severance pay and the regulation on dismissal. And in a world where workers are risk-averse, life is uncertain, you do want some protection for workers, right? And that severance pay, in our study, what we found—the theory part showed it, and then the empirics suggested it—that severance pay is not all that bad. The problem is when you introduce this massive rigidity of not being able to lay off workers, or, which was part of the old code, which is, if I want to change what a worker does— 

RAJAGOPALAN: Change their task, yes.

HASAN: —it can be a complete bottleneck. That’s the kind of stuff you don’t want.

RAJAGOPALAN: Yes.Actually, my colleague, Kadambari Shah, and I had a paper last year, where we said we should increase the thresholds to 1,000. [laughter] We came up with that number. I just picked it out of a hat kind of thing. But my reasoning was that a lot of our labor regulation assumes the old Charles Dickens world where capital is incredibly powerful and asymmetrically more powerful than labor, and so labor needs all these protections, including what kind of paint there will be on the wall to whether there are one, two doors or three windows, or how many clocks and urinals there are.

So, we’ve made labor protection extremely onerous in a way. And we’ve done it in the most economically bizarre way because normally, when you impose a cost on the firm, it should be a cost that actually the labor gets paid. But a lot of the costs we impose through our labor regulation are costs that the firm bears but the laborer never enjoys, right? Which is pretty much all of your Factories Act. But what you are saying instead is something slightly different, which is, “Hey, we do need some protections. The firms are even willing to bear the cost to attract better labor for longer terms. And severance is one of those exact costs that regulation can impose that the firm will bear, that the worker directly receives, as opposed to all this other nonsense, which is just deadweight losses.” Is that a good way of thinking about how you think about labor regulation in this context?

HASAN: Shruti, in general, yes, with the caveat that you can take any well-intended intervention and just take it to the extreme. And on severance pay, Sri Lanka has an issue: very high severance pay. And perhaps Indonesia at one point of time. So, again, remember, the problem with severance pay is, especially when a firm is going out of business, it’s exactly when the firm is going out of business that they probably don’t have money for severance pay and that’s where you’re being asked to pay. Now, if you suddenly double or triple that severance pay, what that’s going to do is it’s going to dissuade investors from coming in the first place, especially in garments. Garments is a classic example of a footloose industry. You come in, you set up shop, and it turns out that, “Hey, that Vietnamese firm is doing it better, and they’ve got the Walmart deal. I don’t. I’m going to close this.” And then you’ve got to pay huge severance pay, so you never enter.

So, each of these things, we have to be careful. I think when policymakers think about these laws, they really have to work with the private sector also, the firms, because those guys are going to react to whatever you do, right? It’s better to take them on board, take the workers on board, and that’s how you come up with these things.

Shruti, but, it brings me to another point. How do you deal with the severance pay? Look at how it’s done in the U.S. also. Of course, firms have their different policies.  Meta’s laying off workers, and I believe they’re being quite generous in these recent layoffs. That’s up to the firm, but there’s also unemployment insurance. 

Now, we are, I think, not rich enough right now to have these kinds of systems, but you can start developing mechanisms which get you there. Chile had this solidarity fund, etc., where workers pool money, the firm pools money. We have to start getting there. And I think, Shruti, we can do it, especially because the administrative costs of this have really come down.

Thanks to Aadhaar, all these digital platforms, the databases talking together. You’ve got EFPO. You’ve got this e-Shram portal that the labor ministry is developing. So, generally, the two big costs—admin costs, financial costs—the financial costs are there, but we can think in terms of pooling of these different risks. And then, the admin costs, we’ve got to be able to use all these new technologies that are coming in.

RAJAGOPALAN: Yes. So, one other weird thing that we see when it comes to manufacturing in urban areas versus peri-urban or rural or even special economic zone areas is, systematically across all sectors, it seems that for a labor-abundant economy, firms are typically substituting away from labor towards capital. And in India, it has been extremely premature, except that that substitution is far lesser in urban areas than they are in many of the other areas.

Is this because a lot of capital-heavy industry doesn’t come to urban areas in the first place? Or is it because that substitution takes place because it’s hard to find labor, and in urban areas, that’s a constraint that has been softened or lessened?

HASAN: I think it’s a bit of both, but certainly the first one: the nature of the industry. Large capital-intensive industry, A, you’re not even going to get the land. In fact, even if somehow you have, for legacy reasons, land, you really should be thinking of selling that land and moving out, so a bit of both. And because production processes are so different across sectors, in urban areas where you have all these different workers, you’ll naturally want to use them.

Think of the startup, Shruti—a completely different example. You ask youngsters, “Why do you want to go to Bangalore?” Because that’s where not only the engineers are there, but you might even find a lawyer who understands these issues, right?

RAJAGOPALAN: Exactly.

HASAN: It’s the financing. It’s this entire production process. You’ve got all the key inputs from the human capital side there.

RAJAGOPALAN: Yes, so, agglomeration works, right? [chuckles]

HASAN: Absolutely.

RAJAGOPALAN: Everything from finding a lawyer to finding an apartment to making sure that if your startup goes under, you can find another job, and so on and so forth.

HASAN: Yes.

India's Missed Growth Opportunities

RAJAGOPALAN: Yes, so what is a good way to think about labor elasticities in India? You’ve really looked at this problem, both with trade liberalization, which is typically the context in which labor elasticities are studied. But also how do we think about that going forward, given that the world is now moved away from liberalization, moving closer to mercantilism and protectionism?

HASAN: Yes.I think there we somehow need to find a way to unroll that process, Shruti, because I think globalization, it’s been terrific for the developing world, for sure. You’ve just seen the way East Asia within one generation was able to make this jump. And if it was a closed world, highly protectionist world, I don’t think that could have happened. So, just from the point of view of the developing world, you need that scale. People say, “Oh, India has the scale.” No, when it—

RAJAGOPALAN: No.

HASAN: —comes to the globe, it doesn’t. So, I do hope [chuckles] that this move to a more mercantilist world slows down and starts reversing itself. But beyond that, could you just repeat your question?

RAJAGOPALAN: So, let me back up a little bit. We can unpack this in three, four steps. The first is you talked about these East Asian economies and how they managed to get that structural transformation in place with the headwinds of globalization in a generation or maybe two. 

First question is, what did India not get right that many of these other East Asian economies did get right when it comes to employing a very vast pool of labor, getting them out of agriculture into industries and then the knowledge economy?

HASAN: Yes.Shruti, that’s got to be trade. We just did not see trade as an outlet for demand. Scale. In fact, now I realize that when you asked me about the labor elasticity stuff, the reason I went to trade is because when labor demand becomes more elastic, it’s true that any shock means more wage volatility, more output volatility, more employment volatility. But if you can get that labor demand curve to be shifting outwards. And how does that happen? That happens when output is expanding, when demand is expanding. That’s where trade comes in. I just think without a large market to serve, you’ve got to—certainly, you can’t necessarily influence what other people do or dictate what other people do in terms of their policies. You can certainly influence your own policies. And I think that’s where the attempts to use trade policy as an industrial policy—I think it’s very dangerous. India went down that route. It did not work out well. I think for many countries, it has not worked out well. 

So, you’ve got to keep trade openness going. And I do believe that you do that, and this flattening of the labor demand curve, these elasticities—there are other ways. Like I said, at the same time that you’re seeing this labor demand curve become flatter, you have the wherewithal to develop systems of social protection that protect workers but don’t impinge on individual firm decisions in the way our policies had them.

RAJAGOPALAN: So, that’s a fear of not being part or not being as open to global trade because you’re worried about your workers. But in India, we didn’t have those many workers in these tradable industries in the first place. So, I guess, what did we get wrong overall? Was it just we didn’t think about which industries are the ones we need to focus on, because we did manage to export a lot of software and other such things? Manufacturing in apparel and other things did pick up in the middle, and India did increase its share in manufacturing. But eventually, it just plateaued. It’s hard to think about all that fault just being one of not good trade policy. There must have been other huge blunders that were made along the way, right?

HASAN: Labor, Shruti. Labor. I think the de facto labor regulatory system is more permissive now than it was in the past. I remember, in the course of our various studies talking to one of India’s largest employers, largest apparel manufacturers. I mentioned something that I’d seen from interviews with smaller apparel producers. I would ask them, “Does the Industrial Disputes Act interfere with your functioning?” And some of these guys did not know this legislation. They would say, “Wait, what are you—we don’t know this legislation.” 

But then you start talking, and it was very clear. As one person said, “Look, I don’t want to put too many workers under one roof, period, OK. I don’t know what legislation—I don’t even know this legislation you’re talking about, but it’s too tricky. It’s too difficult dealing with a labor unrest.” That could be because of the local politician will take their side. It could be because of the Industrial Disputes Act. It’s just multiple things. The bottom line is they don’t want to become large.

Now, coming to the large player, one of the largest, he narrated a very interesting story. He said that on his own, he’s figured out how to keep everyone happy, keep the workers productive. He’s got his connections in the global market, so he’s got his buyers, etc. That’s a very stable situation for him. 

But he narrated a story where some Hong Kong-based textile aggregators contacted him and said, “Look, we are thinking of setting up in India, but you need to tell us if we want to just close the factory for whatever reason, what are all the processes?”

RAJAGOPALAN: Oh, yes.

HASAN: “Tell me the time and the costs.” And that’s when they sat down, the Hong Kong-based group said, “Forget it.”

RAJAGOPALAN: Yes, it’s dead on arrival once you look at how to close a factory under Industrial Disputes Act.

HASAN: The other countries—Bangladesh, I believe, just doesn’t have that situation. And it’s interesting, Shruti. I’ve asked some people, “Why is that?” They say, “Look, it’s not that Bangladesh has a great [chuckles] business regulatory environment. It’s just that it’s a bipartisan agreement.” Politicians on both sides are vested in this industry exporting and succeeding, and so they will do what needs to be done to make sure that things are smooth for this industry.

RAJAGOPALAN: Yes. It’s the Tamil Nadu of South Asia, is what I call Bangladesh. [laughter] Right? Tamil Nadu’s regulatory regime is actually not that different from Uttar Pradesh or Bihar or any other place. It’s just there is some thinking between the political class and the bureaucratic class that, “We’ve got to crack this, and it’s more important to grow the size of the pie than shut everything down.” [chuckles] They seem to have cracked some political compromise, and it sounds like you’re saying Bangladesh is in a very similar boat.

HASAN: For apparel.

RAJAGOPALAN: For apparel. Yes.

HASAN: When you ask about other sectors it doesn’t work, because think about Bangladesh. This is the one country that I know of which has done really well in apparel, finds it really difficult to get into footwear.

RAJAGOPALAN: Yes.

HASAN: Right? And that’s the usual ladder.

RAJAGOPALAN: Yes.

HASAN: Very difficult time.

Hurdles to Global Integration and Opportunities for Local Empowerment

RAJAGOPALAN: So, this reminds me of your paper in Journal of Comparative Economics, which was exactly about the apparel exporter. One of the interesting things in that paper that you talked about was India is simply not integrated into global practices. So, actually, even that capital-labor substitution becomes very difficult or complicated for them because if it doesn’t comply with the standards of Zara or Mango or whoever is going to buy these things, then capital-labor substitution is not really helping them out of the regulatory mess that they’re dealing with in India.

One, am I remembering the paper and its findings correctly? And is that more generally the problem, that we just—because we’re so scared of global markets and we are ambivalent towards them, we just don’t think of a good way to integrating with them?

HASAN: I think so, Shruti. I think it generalizes. There, we were really looking at apparel, but I think it totally generalizes. One of the things about being in the global supply chain of any product is you need to be quick. You need to be able to switch product types, make adjustments on the shop floor, do things differently. And for some reason, many of these things turn out to be just very difficult to do in India.

RAJAGOPALAN: Yes.

HASAN: Take expansion, right? There’s this neat paper by Sood. I think it was a job market paper about just the strategy Indian firms have to use if they’re thinking about expanding and how long it takes them to actually acquire that land. When you’re talking about such long adjustment periods, it’s—

RAJAGOPALAN: It’s over.

HASAN: And, Shruti, uncertainty. That’s another thing that I’ve gathered. I remember one expert on supply chain logistics, a professor based in the U.S. who gets invited to consult with companies. He was telling me, “Look, I don’t know that much about India, but I do know a lot about Vietnam, Mexico, etc. The one thing I have an impression about on India is the uncertainty.”

His point was that if you tell me that I’m 5 percent more costly than my competitors on all these other factors, the supply chain can actually take that into account. They just say, “OK, we’ll balance it out. India has some other strengths; we’ll balance it.” But if you tell me that sometimes it’s 5 percent—the cost or the time—let’s say time—it’ll take me 5 percent longer. But on other occasions, you say, “But something may go wrong, and then I have to deal with some department. It could be 35 percent.” That’s when it’s like, “OK. You know what? We can’t deal with this uncertainty.”

RAJAGOPALAN: Yes, yes.

HASAN: That’s critical.

RAJAGOPALAN: Yes, and in India, we have some bizarre things going on, right? Like the Supreme Court can just shut down the entire leather and tanning industry and move it to the outskirts of Agra. We do some very strange, very disruptive things, and then we wonder why our footwear industry doesn’t take off [chuckles] quite that easily. So, we do have these regime uncertainty problems overall. But one major learning for me now, when I read all your work together over a short period of time as opposed to over the years, as I’ve been doing, is that it just no longer helps to think in partial-equilibrium terms of one labor regulation here or one Factories Act here or there. This is a huge general-equilibrium problem. We need to think of clusters of regulation and remove them, or we need to think of clusters of manufacturing, either spatially or in terms of labor markets.

Is that a good way of winding down when I finish everything? Have you gone from being an applied micro and regulatory economist into becoming a general-equilibrium person?

HASAN: Shruti, in one sense, yes. But I also feel that could be a very difficult agenda, right?

RAJAGOPALAN: Yes.

HASAN: Just the time it takes to—look at the labor codes. I think going from those dozens of—

RAJAGOPALAN: Yes, forty-four union labor laws.

HASAN: Right? To four, then working out all those areas of overlap, contradiction, it’s just taken so long. And then defining the rules. So, all this is needed. It takes very long. This is where now I come back to my city economic council area. It’s basically the idea that you need different players in a particular location to come together and agree that this is the vision for our location. 

How do we work to solve it? Again, it’s that Tamil Nadu thing, Shruti, that you were saying, that the regulations are the same, but somehow there’s an agreement among some of the key players that, “Look, we’ve got to keep this line of business going.” It’s good for not just the managers or the owners, but it’s good for the workers. I think we have to think in parallel about introducing some tweaks to our governance frameworks which mimic that process.

RAJAGOPALAN: Yes, and will allow this mayor of Shanghai kind of—You have one central node who has all the responsibility. You can even think of it as centralized corruption, reduced uncertainty. There are many things that come from that. That seems to have been the East Asian model overall. It’s done well for China and East Asia. There’s no reason it shouldn’t work in India.

HASAN: Absolutely, Shruti, because at the end of the day, if you were to ask each of these different players that, “Would you like to see an India or your state vibrant, growing, generating jobs?,” who would say no? There might be some people [chuckles] who’d say no, but I’m sure that would be in a tiny, tiny, tiny minority.

RAJAGOPALAN: No, largely, I think you’re right that we’ve finally agreed on the goals, if not the means to reach them. I think finally we’ve agreed that big cities are a good thing. People leaving agriculture is a good thing. Lots of people going to universities, getting degrees. We didn’t even have consensus on this once upon a time, right? We used to romanticize villages and we thought, “Oh, those people should stay there.”

HASAN: Yes, yes.

RAJAGOPALAN: “The cities are really for the elites.” I do agree with you that we’ve come a long way, but there’s still a long ways to go. I’m really looking forward to reading more of your work on cities, on agglomeration, on better planning and coordination. Thank you so much for doing this.

HASAN: Thank you, Shruti. It’s been really fun, so, thank you for thinking of me for doing this and then working this out.

RAJAGOPALAN: Well, I’ve been asking you for ages, so I’m glad you’re here.

HASAN: Right.

RAJAGOPALAN: I’ve only covered about half your papers, so I think you’ll have to come back and talk about the other half [chuckles] another time.

HASAN: Right. Or future research agendas.

RAJAGOPALAN: Yes, so, maybe not the past papers, but all the papers that you’re going to start writing in the future. But again, thank you so much for doing this. This has been amazing.

HASAN: Thank you, Shruti.