I try a partial answer.
I write from Italy, where a similar problem, not of so large scale as in India, of course, is important. The economic system of Italy is spatially non homogeneous, because regions present very large differences in economic development, economic institutions, industrial structure, infrastructures, labour market, unemployment, and so on. In particular, there is the old and unresolved problem of the so-called ‘duality’ of Italian economic system, that is a marked difference of economic development between the north and the south of the country, where the southern regions are less developed.
With regard to these problems, there is a whole branch of economics devoted to this subject, that is regional economics.
I guess, as in India the question is certainly bigger than in Italy, that there must be Indian economists who have studied this matter.
What can I do, to give you an idea, is to report here, translated from Italian, a short quotation from the introduction to a course of regional economics at an Italian university:
The dimension of space and territory in economic analysis
In neoclassic economic theory the dimensions of space and time are
nearly ignored. Implicitly, the neoclassical model hypothesizes a
world which consists of a plane space, homogeneous, where
transportations costs are zero and there aren’t economies of scale.
Economics activity, in such a world, in equilibrium should be
uniformly distributed over the territory. It should be, at the limit,
a world of small self-sufficient villages (Krugman, 1997, p. 35-36.).
On the contrary, in the real world, productive resources are
distributed unevenly over the space and we observe a very uneven
distribution of productive activities, of population and economic
There are essentially three disciplines which try to explain the
interaction between space/territory and the economic system:
geographical economics, development economics and regional
economics.[…] Maybe, on the whole, is regional economics that gives a
synthesis and a systematization of spatial problems of economic
organization and development useful for the study of economic planning
of the territory. […]
Regional economics requires to abandon many hypotheses of the
- Non linearity of economic processes.
- Presence of transaction costs.
- Embeddedness of economic activity in the ‘institutional ‘milieu’.
- Imperfect markets. Non constant returns.
To regional economics belong two groups of theories:
- The theory of localization, born at the beginning of the XIX° century, which deals with the economic mechanism underlying economic
activity in the space.
- Regional growth and development theory, which focuses on spatial aspects of economic growth and the distribution of income over the
The former has mainly microeconomic and static foundations, the
latter macroeconomic and dynamic foundations.
Below a list of possible references given for this course: