(Photo: Mint)
(Photo: Mint)

Do highways help develop financial markets?

The Golden Quadrilateral highway network spurred greater financial activity but only in areas with existing financial development, shows study

The critical role of finance in economic growth is widely acknowledged and developing well-functioning financial markets has become a central focus of economic policies across the world. The bigger question, then, is how to develop financial markets and the extent of financial markets depth needed for growth. A new World Bank study authored by Abhiman Das of IIM Ahmedabad and others provide some answers. They suggest that investing in infrastructure in regions with basic financial development can help these regions overcome barriers to economic growth.

Using the construction of India’s Golden Quadrilateral central highway network, together with comprehensive loan data from the Reserve Bank of India, the study finds a disproportionate increase in the number of loans disbursed and average loan size in newly connected districts along India’s Golden Quadrilateral network. The improved transportation infrastructure results in increased economic activity which in turn increases bank lending. Importantly, the authors find that these effects were stronger in districts where the banking sector and financial institutions were already sufficiently developed (measured as loan credit disbursed in the district in 2000). In these areas, infrastructure investment can help financial markets converge towards more developed regions.

The authors conclude that financial markets respond to large infrastructure investments and helps spur real economic outcomes contingent on initial financial sector development. Consequently, areas with high initial financial sector development will play an important role in determining where economic activity will grow. The authors caution against simply investing in large-scale infrastructure and hoping that this will automatically develop financial markets.

Also Read: Infrastructure and Finance: Evidence from India's GQ Highway Network

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