ROADS FOR PRODUCTIVITY: How investment in transport infrastructure boosted India”s manufacturing

The Golden Quadrilateral (GQ) Project – a large-scale highway construction and improvement project in India – has provided a substantial boost to manufacturing activity and productivity in districts located within 10km of the network. What''s more, the new road infrastructure has facilitated the movement of growing young firms out of the congested big cities in search of cheaper land and buildings.

These are the key findings of research by Ejaz Ghani, Arti Grover Goswami and William Kerr, published in the March 2016 issue of the Economic Journal. Their study is one of the first explorations of how proximity to a major new road network affects the organisation of manufacturing activity, especially the location of new plants, through industry-level sorting and the efficiency of resource allocation.

The GQ project sought to improve the connection of four major cities in India – Delhi, Mumbai, Chennai and Kolkata. Comprising 3,633 miles of road upgrades and new construction, the GQ network connected many of the major industrial, agricultural and cultural centres of India after its construction began in 2001.

Analysing plant-level data from 1994 to 2009, the researchers find that districts located within 10km of the GQ network experienced substantial increases in entry levels and higher productivity in the organised sector. Their study suggests a 49% overall output increase from initial levels for the average district located on the GQ network, compared with no response in their nearby peers.

These estimates credit about 43% of the observed increase in Indian manufacturing activity to the GQ upgrades, with the rest due to general expansion of Indian manufacturing or other district traits. By contrast, districts near to the North-South and East-West (NS-EW) highway, shown in Figure 1, did not experience any change in activity. Upgrades were scheduled for NS-EW at the same time, but were postponed, making it a great placebo case.

To establish the timing of these reforms, the researchers estimate effects for each calendar year separately relative to 1994, to observe whether the growth patterns follow that of the GQ upgrades.

Figure 2 confirms that the timing of increased activity coincides with GQ upgrades for the output levels of young firms. These entrants were drawn from industries intensive in land and buildings, suggesting that the GQ upgrades facilitated sharper industrial sorting between the major nodal cities and the districts along the highway.

The upgrades are also associated with better allocative efficiency in the organised sector. Allocative efficiency measures the extent to which the employment of an industry is contained in the industry''s most productive plants. India generally fares very poorly on this dimension compared with advanced economies like the United States.

Industries that were initially positioned along GQ show improved allocative efficiency compared with industries initially positioned on the NS-EW system. This is encouraging for the competitive dynamics induced by better infrastructure. Among district traits, the GQ upgrades also helped to activate intermediate cities of medium population density, where some observers believe India''s development has underperformed compared with China.

Adequate transport infrastructure is an essential ingredient for economic development and growth. Rapidly expanding countries like India and China face severe constraints on their transport infrastructure. Business leaders, policy-makers and academics all describe infrastructure as a critical hurdle for sustained growth that must be met with public funding. But until now, there has been only a limited understanding of the economic impact of these projects.

The new study provides an important input into policy choices. It builds a framework for estimating the likely quantitative impact of infrastructure development projects. It also provides estimates of the relative impacts across districts by distance to the network, thereby offering additional insights into the distributional consequences of large-scale infrastructure projects.

This methodology would be applicable to similar settings where, for example, poor transport infrastructure severely hinders economic activity. On the whole, the study speaks to the severe constraints that inadequate infrastructure can have for the development of manufacturing in emerging economies and the potential growth that may follow from alleviating that constraint.

''Highway to Success: The Impact of the Golden Quadrilateral Project for the Location and Performance of Indian Manufacturing'' by Ejaz Ghani, Arti Grover Goswami and William Kerr is published in the March 2016 issue of the Economic Journal.

Ejaz Ghani and Arti Grover Goswami are at the World Bank. William Kerr is at Harvard Business School.


Figure 1: Map of the Golden Quadrilateral (GQ) project and the North-South and East-West (NS-EW) highway



Figure 2: Dynamics of new output growth