At Stanford Business School, one of the very first chapters our MBA students read is an article on the “promise of development” by economics Nobel laureate Joseph Stiglitz. The article highlights India’s successes, pointing to the shimmering buildings of Bangalore, but also notes the striking contrasts one finds in Indian cities, with pockets of affluence right next to terrible poverty.

These dramatic contrasts would surprise few residents of, or visitors to, India’s urban areas. As of 2006, India’s towns and cities housed more than a third of the country’s poor, a proportion that appears to be increasing. Yet, these towns and cities also produce around 65 per cent of India’s goods and services. In fact, it may be precisely the fact that India’s rich and poor live side by side that make many Indian urban areas such productive drivers of economic development, in contrast to many areas in the West where the poor live in economically segregated neighbourhoods or even “projects” set up in the name of urban renewal.

The central government’s major urban initiative — the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) — is a timely realisation of the importance of India’s urban sector. However, going forward, the project would do well to target investments at middle-sized towns where they may have the most social benefits and to be wary of creating Potemkin town centres that displace the poor.

The JNNURM has approved Rs 238.6 billion to urban projects in some 60 cities between 2005 and May 2009. The majority selected for funding have been infrastructure projects, with water management, drainage and sanitation being particularly important. There is no question that such projects are sorely needed across many, if not all of India’s urban areas. Yet a look at the target towns of the JNNURM shows a strong bias towards places that already enjoy strong political voice

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