India's cities are expanding in size and economic importance, but poor city governance is imposing a hidden productivity tax on workers, firms and the economy at large, according to the the Economic Survey 2025-26. In a pointed critique of urban governance, the Survey argues that the core of this problem is a regulatory system that relies on uniform, one-size-fits-all compliance, instead of contextual, risk-based regulation suited to the realities of modern cities.
Cities account for a disproportionate share of India's economic output, yet the Survey notes that Indian cities struggle to convert scale into efficiency. The reason, it argues, lies in fragmented governance and limited economic agency. Urban local bodies lack meaningful control over land use, taxation, infrastructure planning and service delivery, constraining their ability to respond to economic demand and manage growth efficiently.
This governance gap directly affects productivity. Poor land-use planning raises housing costs and pushes development outward, increasing commute times and congestion. Inadequate coordination between transport, housing and employment centres reduces effective working hours and weakens the productivity advantages typically associated with dense urban clusters.
The Productivity Cost of Non-Contextual Compliance
A recurring theme in the Survey is the cost of uniform, inspection-led regulation. Rules governing construction, environmental compliance, business licensing and urban services are applied uniformly across cities with vastly different densities, risks and capacities. The Survey explicitly calls for a move towards 'contextual compliance based on risk, scale and capacity', warning that one-size-fits-all regulation raises transaction costs without improving outcomes.
For firms and workers, this translates into delayed projects, underutilised land and higher operating costs. Low-risk activities face excessive scrutiny, while regulatory capacity is spread thinly instead of being focused on high-impact risks. The Survey suggests that this misallocation of regulatory effort acts as a drag on urban productivity, particularly in services and small enterprises that rely on speed, proximity and flexibility.
Informality and Low-Productivity Equilibria
The Survey also warns that urban informality is becoming structural. Cities continue to absorb labour, but governance systems fail to integrate workers into formal housing, transport and service networks. Excessive compliance burdens discourage formalisation, weakening municipal revenues and limiting investment in productivity-enhancing infrastructure.
This creates a low-productivity equilibrium: weak services reduce compliance incentives, while informality further strains governance capacity and fiscal resources.
In the section titled 'Civic Order without a Social Contract', the Survey argues that Indian cities lack the trust-based relationship between citizens and urban governments that underpins efficient service delivery. Limited accountability and poor service outcomes weaken compliance and civic participation, undermining the institutional foundations needed for productive urban systems.
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