Infrastructure investments, urbanization, and regional growth in India

Abstract

There are significant differences in the level of economic development across states in India. Economic theories differ on the issue of convergence or divergence in regional incomes along with national economic growth. Neoclassical theory predicts convergence in regional incomes, caused by diminishing factor returns and no barriers to internal mobility of factors. On the other hand, cumulative causation hypothesis predicts divergence in regional incomes. An empirical inquiry into regional growth differences in India forms the basis of the present study. In regional economic growth lite rature, regional growth is analyzed as a function of structure, size, and location, in addition to factors of production, and technology (Boventer, 1975). Structure refers to the growth effects of industry structure, employment share of particular sectors, and employment shifts from low productivity to higher productivity sectors. Size and location reflect the factors defining attractiveness of a region. One such factor is agglomeration economies, which result from clustering of economic activities, as level of urbanization increases {Graham, 2009). These economies emanate from availability of locally traded inputs, wider buyer - supplier linkages, access to supporting services, specialized labour pool, and inter-industry information transfers. Another factor having productivity enhancing impact in a particular location is availability of infrastructure services. These services are directly used as inputs in production. Further, availability of infrastructure reduces the cost of other inputs, and generates external economies by attracting investments (Kawakami, 2004). The present study examines the issue of differences in regional economic growth in India during the period 1980-81 to 2006-07. Specific objectives of the study are: (i) to ascertain convergence or divergence in regional incomes in India during the above- mentioned period; (ii) to establish association of structural change with regional growth differentials; (iii) to analyze the pattern of urbanization in India & measure the magnitude of agglomeration economies; (iv) to analyze the impact of infrastructure availability on productivity and growth. We employ panel data estimation method to test the hypothesis of convergence, based on neo-classical framework. The analysis reveals convergence in regional incomes during the above - mentioned period. Speed of convergence has increased after 1992 - 1993, when India implemented structural reforms. Association of structural change with regional growth differentials is measured using decomposition analysis based on Shift-share technique. Results display the positive association of industrial sector productivity with regional growth differentials. Mobilization of factors from low productivity sectors to high productivity industrial sector are also related to high regional growth differentials. We analyze presence and magnitude of agglomeration economies in India in a growth accounting framework. The analysis establishes the existence of positive agglomeration economies, contributing to total factor productivity growth for manufacturing, transport, storage, and communication, and other services sectors in India. Diseconomies of agglomeration are found for service sector at around 30% urbanization level. We analyze state level indicators of education, health, transport, and power infrastructure avail ability, using principal component analysis to construct infrastructure indices. A panel data analysis in growth accounting framework also shows the positive and significant relationship between availability of economic infrastructure and total factor productivity growth. In the last part of the study, we measure the interrelationship between regional growth, urbanization, and infrastructure availability by using a simultaneous equation mode- I, and empirically estimating it for Indian data. Estimation results re-establish the previous findings. The study tries to reconcile macroeconomic growth theory with spatial location theory. It is the first such attempt in the Indian context so far. Further, there is a dearth of studies focusing on and comprehensively analyzing the regional aspect of growth in India. The study reveals that regional incomes are showing a convergent trend in India, and therefore the best policy at pre sent seems to be strengthening the emerging convergent forces in the system. One such converging factor is changing structure of the working force. Improving upon agricultural productivity in lagging regions, and simultaneously facilitating mobilization of resources from the lagging sector to more productive sectors will lead to further convergence. Results also suggest that by promoting growth of urban centers in lagging regions and providing economic infrastructure may lead to productivity enhancement, which is the key for growth.