Road to Productivity: Effects of Roads on Total Factor Productivity in Indian Manufacturing

Kailthya S, Kambhampati U

Abstract

A denser road network lowers transport costs and stimulates manufacturing total factor productivity (TFP). The placement of roads, however, is likely to be non-random. For identification, we exploit cross-state variation in the strength of centre-state partisan alignment that asymmetrically affects road building in aligned states. Using panel data on manufacturing establishments in India from 1998 to 2012, we find that, a 1% increase in road density raises value-added TFP by about 0.25%, on average. A closer examination reveals that the effect varies by plant characteristics and road type. Younger establishments are more likely to gain from a denser road network with highways playing a prominent role. The results are robust to imperfections in the instrument and to other sensitivity checks.