Transport infrastructure, economic development and urbanization in India (1990-2011): Is there any causal relationship?

Development of transport infrastructure has long been taken as a major tool in promoting economic development and urbanization of a region. However, it is quite debatable whether transport infrastructure promotes economic development and urbanization, or economic development and urbanization create demand first which leads to investment in transport infrastructure. Each of the views has theoretical support. Therefore, apart from theory, empirical evidence is required to establish direction of causality, which bears serious policy implications. This study looks into different sub-sectors of transport infrastructure to find its long-run relationship and direction of causality with economic development and urbanization. It first finds the order of integration of the variables and then tries to find their causal relationship using cointegration and Granger causality test approach for India between 1990 and 2011. It uses Vector Auto-Regression and Vector Error Correction model to find short-run and long-run causality. Results showed existence of long-run relationship between transport infrastructure and economic development, and the direction of causality is from economic development to transport infrastructure in most of the cases, thus drawing support in favor of Wagner's law.