Core Infrastructure and Manufacturing Activity in the Indian States: Does the Income Group Matter?

Abstract

Taking the data for 17 Indian states for the period running 1991–2017, the study investigates relationship between infrastructure and manufacturing value added at the overall as well as segregated levels to study the spatial differences. Preliminary tests of cross-section dependence point to the existence of dependence among the cross sections after which second-generation testing procedures are applied. Spatial differential impact of infrastructure on the performance of manufacturing activity is estimated using fixed/random effect modelling. The empirical results show that infrastructure index exerts positive and significant impact on the manufacturing performance with estimate of 0.20 for all states in India and 0.49 for high-income states. Similarly, individual components of infrastructure influence manufacturing activity differently. Road infrastructure is influencing manufacturing performance negatively in high-income states while it is positive for other states; teledensity exerts positive influence in case of middle-income states while the impact is negative in case of low-income states. Dumitrescu and Hurlin’s causality test shows bidirectional causality from infrastructure to manufacturing output. JEL Codes: D02, E62, H54, L94, L96