What Causes Agglomeration— Policy or Infrastructure?

How significant are industrial dispersal policy incentives for agglomeration of organised manufacturing in India? Using plant-level data for 1997-98, the locational choices of 66 manufacturing industries in 21 Indian states are investigated. First, the degree of agglomeration (Ellison-Glaeser index) is calculated in each of these industries to ascertain in which states they are clustered, followed by an econometric investigation of industrial dispersal policy after controlling for different factors that affect agglomeration. The analysis yields that the dispersal policy has not been successful in most specifications. Factors like presence of infrastructure, coastlines, and labour market pooling determine agglomeration. The results also indicate that the nature of the product, high electricity tariff, and per capita energy gap have induced several industries to disperse.

I am thankful to the reviewer for the useful comments and suggestions. The paper has benefited a lot from discussions with Keith Maskus, James Markusen, and Wolfgang Keller. Earlier versions of the paper were presented at the UNU–WIDER Project Workshop at LSE, a seminar at CMDR Dharwad and a conference organised by ISID Delhi and Sixth Annual Knowledge Forum conference held in Goa. My gratitude to K L Krishna, N S Siddharthan and the workshop and conference participants for their useful suggestions. Special thanks to Avanti George for constructing the index. The usual disclaimers apply.