Chinese Roads in India: The Effect of Transport Infrastructure on Economic Development

Abstract

This paper uses a general equilibrium trade framework to estimate the contribution of transport infrastructure to regional development. I apply the analysis to India, a country with a notoriously weak and congested transportation infrastructure. I first analyze the development effects of a recent Indian highway project that improved connections between the four largest economic centers. I estimate the effect of this new infrastructure on income across districts using satellite data on night lights. The results show large aggregate gains from the Indian highway project, but unequal effects across regions. China has followed a different highway construction strategy and has experienced more significant convergence across regions than India. I therefore use the model to gauge the effects of a counterfactual highway network for India that replicates the Chinese strategy of connecting intermediate-sized cities. I use an iterative procedure to design a network among the targeted Indian cities that equalizes marginal costs and benefits of building roads within the general equilibrium framework. The results suggest that a network that connects intermediate-sized cities in an approximately optimal way is substantially larger than the existing network, would have large aggregate net gains, and it would benefit the lagging regions of India.