Suresh Prabhu may not have heard of Dave Donaldson, but the Indian railways minister would do well to read an insightful paper by the Stanford University economist who has been awarded the prestigious John Bates Clark medal for American economists under 40.

The John Bates Clark medal is a good predictor of future achievement. Twelve of the 39 economists who have won the medal have gone on to win the Nobel Prize in economics. The strike rate increases to almost one in every two if one considers only medal winners before 1993. The more recent winners are obviously too young to be in the running for a Nobel right now, so what happened to the first 25 winners is a better gauge.

One of the works by Davidson that is specifically cited by the American Economics Association in their press release last week is his paper on how the spree of railway building by the British Raj impacted the Indian economy.

Some 60,000km of track was laid in the 75 years after the first train chugged out of Bori Bunder station in Mumbai in 1853. The military intention is well known. A network of railways was seen as a convenient way to move troops across India by a colonial establishment that had been rattled by the first war of independence in 1857.

There were economic benefits as well. Karl Marx wrote presciently in 1853 that the railways would be the forerunner of modern industry. He added that trains would also dissolve traditional social arrangements.

The British funded the expansion of the railways network by floating bonds in the London market—at a guaranteed return of 5% a year. The early nationalist critics of colonial economic policy such as Dadabhai Naoroji argued that the high cost of capital was more than the returns from the railways, and hence amounted to a drain of national resources.

Donaldson is one of the new generation of development economists who use unique data sets to examine what happened in the past. His research on the economic impact of railways uses some innovative district-level data sets that he has constructed on prices, output, rainfall, domestic trade and international trade. These are based on digitized records of the British Raj. Davidson has also developed a digital map of the railways network. Each 20km stretch is coded with its year of opening.

His three key conclusions: railway expansion led to a fall in trading costs, it increased the volume of goods shipped and the economic benefits greatly exceeded the cost of construction.

“When observing the railroad network in India, I estimated that in a typical district, the arrival of railroad access caused real gross domestic product in the agricultural sector (the largest sector of India’s economy at that time) to increase by around 17%,” writes Davidson. This estimate was arrived at after taking into account both the positive and negative impact of the train on economic activity in a district.

There are two important lessons from the sort of innovative work being done by economists such as Donaldson.

First, debates about the past can be enriched if the data is carefully examined. Second, there are contemporary policy lessons as well. Railroads of the Raj: Estimating the Impact of Transportation Infrastructure, which Davidson wrote in September 2012, as well as his later work on the expansion of railways in the US, provides ample proof that ramping up investment in railways and roads is one of the best ways to promote development in the hinterland.

This lesson should be even more resonant at a time when the new goods and services tax will remove obstacles to internal trade by creating a truly integrated Indian market.

Six Major findings-

1. Railroads signicantly reduced the cost of trading in India.
2. Railroad-driven reductions in trade costs increase bilateral trade flows.
3. Railroads reduce the responsiveness of prices to local productivity shocks:
4. Railroads increase real income levels.(That is, when a district is connected to the railroad
   network its real income rises; however, improvements in the railroad network that by-pass
   a district reduce the district’s real income (a negative spillover effect)
5. Railroads decrease real income volatility (When a district is connected to the railroad network,
   its real income is less responsive to stochastic productivity shocks in the district (which reduces
   volatility)
6. There exists a sufficient statistic for the welfare gains from railroads.

Pictorial Representation of historical development of railroads in India:-