The heterogeneous effects of infrastructure on farm and non-farm sector output: evidence from Indian states

Purpose The study aims to examine the heterogeneous effects of physical infrastructure on farm and non-farm sector output in 16 prominent states of India for the period 2005–2019. Design/methodology/approach We construct a composite physical infrastructure index comprising four indicators namely road density, rail density, tele-density and per capita power availability using the principal component analysis (PCA) method. We estimate the impact of physical infrastructure on aggregate as well as farm and non-farm sector output using the fixed effects regression with Driscoll–Kraay (FE-DK) standard errors to account for cross-sectional dependence in our sample. Furthermore, to mitigate the potential endogeneity concern, we utilise the panel instrumental variable (IV) regression method to estimate the model. Findings Our results imply that physical infrastructure plays a significant role in driving economic growth. We find that infrastructure development affects the non-farm sector output positively while the farm sector output remains unaffected. Research limitations/implications Due to data limitations, our study is based on 16 prominent states only. It is plausible that the selected infrastructure indicators are not highly relevant for the farm sector. Further research can be done to identify appropriate infrastructure that helps stimulate agriculture sector output. Originality/value We examine the varying effects of physical infrastructure on farm and non-farm sector output in the Indian context. To the best of our knowledge, this is the first study that examines the effect of infrastructure development on sectoral output at the sub-national level. Peer review The peer review history for this article is available at: https://publons.com/publon/10.1108/IJSE-06-2024-0468