Industrial geography and productivity gains: a spatial econometric analysis of Indian manufacturing sector

Purpose The existing literature has not discussed spatial interconnectedness in the case of agglomeration and productivity for the Indian manufacturing sector. The study aims to bridge the gap in understanding the impact of regional interdependence mediated by skill, infrastructure and labor diffusion on total factor productivity (TFP). Design/methodology/approach This study uses factory-level panel data for the Indian manufacturing sector and uses spatial autoregressive (SAR) and spatial Durbin model (SDM) based on distance and contiguity spatial weight matrix. Findings The findings suggest that there exists positive spatial correlation for TFP, indicating that states share close interdependent productivity patterns. There exists a non-linear relationship between productivity and agglomeration. Further, manufacturing performance is enhanced when skill intensity is integrated with investment in information and communication technology, resulting in synergistic effects. It is evident from spatially lagged explanatory variables, carbon emission and energy intensities that highlight the role of productivity spillover across the regions, highlighting the role of heterogeneous industrial and resource concentration. Research limitations/implications Policymakers in India should focus on spatial interconnectedness between the regions. There should be a push for balancing the industrial concentration, strengthening digital infrastructure and enhancing skills for the synergistic productivity gains. Practical implications Given India’s diverse industrial structure and heterogeneous industrial concentration, the findings highlight the need for a balanced and integrated regional policy for India, as the productivity of one region is affected by the other neighboring region. It advocates for a spatially coordinated regional planning and development of industrial corridors that can harness the spillovers. Further, investment should be made in infrastructure development and skill enhancement, which can further increase the benefits of the agglomeration. Social implications The findings highlight the need for a balanced and integrated regional policy for India, as the productivity of one region is affected by the other neighboring region. It advocates for a spatially coordinated regional planning and development of industrial corridors that can harness the spillovers. Further, investment should be made in infrastructure development and skill enhancement, which can further increase the benefits of the agglomeration. Originality/value This study is novel as it is the first study to integrate spatial econometric methodology to understand the impact of agglomeration on the productivity of the Indian manufacturing sector. It offers a comprehensive understanding of the development of spatially formed policies and highlights spillover effects across states.