Industry Agglomeration in a Developing Economy: Evidence from India

This paper examines the role of agglomeration economies in shaping patterns of industrial coagglomeration in post-liberalisation India. Using granular, establishment-level data from a 2005 census of all non-farm establishments, we estimate the relative importance of two Marshallian channels of agglomeration economies -- input-output linkages and labour market pooling -- in determining which industries locate together. To address concerns regarding endogeneity and measurement error we employ instrumental variables based on U.S. industrial data. We find large effects for both Marshallian channels -- substantially larger than those the previous literature has found for advanced economies. By contrast, natural advantages appear less influential, though this may reflect measurement challenges. We also find that the two channels operate at distinct geographic scales: inputoutput linkages are similarly influential at both the district level and at the level of individual towns and villages, while labour market pooling effects appear more localized, as they are strongest at the town/village level. This pattern holds both in the full sample and within manufacturing alone. Our study is among the first detailed empirical assessments of coagglomeration patterns in a developing country, thus offering insights into the economic forces that shape spatial inequalities in such contexts.