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The Effects of Transport Infrastructure on India’s Urban and Rural Development

This paper uses a two-sector domestic trade model to study urban and rural development in India over the past decade. Based on a version of the market access approach proposed by Donaldson and Hornbeck (2016), we derive general equilibrium relationships between a sector’s income and it’s access to markets in both the urban and rural sectors. While the one-sector model that is often used in the literature predicts a constant elasticity of income with respect to market access, the two-sector version allows for heterogeneous effects. We use satellite data to measure urban and rural growth in 5,900 sub-districts where we assign areas to either urban or rural sectors based on a threshold for urban light intensity. In order to estimate the relationship between income and market access, we exploit changes in transportation infrastructure that have led to reductions in travel times on the computed shortest path. The implied reduction in trade costs generates variation in the market access measures. This time variation allows us to estimate the elasticity of income in each sector with respect to market access in the own and the other sector. The results suggest that both urban and rural market access are each individually strongly correlated with income, but they are empirically difficult to disentangle when estimating jointly. We then study the role of various complementary factors that potentially play different roles for urban and rural production and could imply heterogeneous effects of transport infrastructure. We consider natural resources like ground water, rainfall, temperature, and the availability of crop land, as well as measures for human capital. The evidence on interaction effects is mixed and mostly suggests that the effect of market access is relatively stable