Internal Trade Costs and Regional Convergence: Evidence from India

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Abstract

I develop a quantitative spatial model to measure internal trade costs across Indian states and examine how variation in these costs affects regional income disparities. Using data on inter-state commodity flows alongside a structural gravity framework, I estimate state-pair trade frictions and decompose them into physical infrastructure, regulatory, and border-related components. I find that internal trade costs in India are large relative to international benchmarks and highly heterogeneous across state pairs. Counterfactual analysis indicates that harmonising internal trade barriers to the level of the least-friction corridors would reduce the coefficient of variation in real wages across states by approximately 18 percent, with the largest gains accruing to landlocked and historically lagging states.

Citation

Kandimalla, Vivek. 2024. “Internal Trade Costs and Regional Convergence: Evidence from India.” Working paper.

@unpublished{Kandimalla2024,
author = {Vivek Kandimalla},
year = {2024},
title = {Internal Trade Costs and Regional Convergence: Evidence from India},
note = {Working paper}}