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Public investment in infrastructure is seen as a boost for the whole economy. But not all companies gain equally. A study using the example of road projects finds that formal sector companies, especially those located closer to the highways being built, benefit much more than informal ones.

The study, by Santanu Chatterjee of the University of Georgia and others, uses data on around 29,000 formal and 83,000 informal firms in the manufacturing sector. The study uses the context of two large highway projects: the Golden Quadrilateral, which connects Delhi, Mumbai, Chennai, and Kolkata, and the North-South East-West Corridor, which connects Srinagar to Kanyakumari and Silchar to Porbandar.

Among formal sector companies, those located in districts along the routes of these highway corridors were on average 9-10% more productive than those away from the route. But among informal companies, those along these routes were not any more productive than off-route ones.

This benefit can be seen over time as well. Formal firms in districts up to around 30 km from an upgraded or a completed section of the corridor improve their productivity by an annual 2-4% once the section is completed. But for informal firms, the improvement is only 1% per year.

The study also finds that larger firms along completed sections of highway projects benefit more from these investments than smaller firms. This also explains why formal firms benefit more by infrastructure investments than informal ones. Formal firms tend to be larger in size, so they can crowd out smaller informal firms and take up their market share.

Given that informal firms contribute over half of India’s gross domestic product and employ over 80% of the non-agricultural labour force, helping them benefit more from infrastructure investments will be important for the economy.

Also read: “How productive is public investment? Evidence from formal and informal production in India"

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