Infrastructure maintenance and rural economic activity: Evidence from India

Abstract

We evaluate the impact of a rural infrastructure development and maintenance scheme, directed towards India’s most “backward” districts. Importantly, these infrastructure grants were spent on maintenance, improvements, and complementary investments to existing infrastructure. Using a Regression Discontinuity Design and multiple data sets covering the entire firm size distribution, as well as household employment surveys, we show evidence on the effectiveness of the program on local economic activity. In treated districts, the policy appears to have increased overall village-level employment, and the number of microenterprises, but there were no changes for formal firms. These increases were likely driven by a decline in the share of agricultural wage workers. At the individual-level, wages and the number of days worked also increased. There is suggestive evidence that both rural electrification and connectivity were important mechanisms driving our results. We find stronger impacts in electricity and road-intensive industries, and in villages that had paved roads and electricity prior to the program. Overall, our paper suggests that improving rural infrastructure conditions can boost economic activity, especially by stimulating microenterprises.