Macroeconomic Performance and Infrastructure Development in India

Introduction

India accounts for nearly a fifth of world population and a quarter of the world’s poor. It is a fastest growing country after china. However, the Indian economy has been showing signs of overheating in recent years because of basic infrastructure constraints. Clearly, there is a wide gap between the potential demand for the output elasticity of infrastructure for high growth and the available supply.  Infrastructure development is one of the major factors contributing to overall economic development in many ways, such as: (1) direct investment in infrastructure creates production facilities and stimulates economic activities; (2) it reduces transaction costs and trade costs, improving competitiveness; and (3) it provides employment opportunities and physical and social infrastructure to the poor. In contrast, lack of infrastructure creates bottlenecks for sustainable growth and poverty reduction.

Macroeconomic performance and infrastructure development in India

However, for India to maintain the growth momentum, it is essential to strengthen
infrastructure facilities such as transportation, energy and communication. Table A2 reports
the transport, telecommunication, information and energy infrastructure indicators for India
vis-a-vis other developing countries. India lags behind other developing countries, except `
other South Asian countries such as Pakistan, Sri Lanka and Bangladesh, in almost all
indicators.

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Similarly, infrastructure and business indicators of India vis-a-vis other East and `
South East Asian countries are presented in Table A3. With the exception of Singapore, no country in the region is performing well in the overall infrastructure quality index.

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Another important factor for accountable and cost-effective provision of infrastructure is increasing competition through private participation and technological innovation. If the policy and institutional framework are clearly spelt out, international investors would like to invest in India where there is a huge market for infrastructure projects. Though private participation, both domestic and international, is important, improving the capacity of the local financial markets is also very important. Some of the major issues for infrastructure development in India include public–private partnerships, budgetary allocation, infrastructure financing, fiscal incentives and tariff policy.

According to the India Infrastructure Report (IIR), currently around 5% of the gross
domestic product (GDP) is invested in the infrastructure sector which needs to be increased
to 7% with immediate effect and further to 10% by 2010 to meet the infrastructure demand.

Binswanger et al. (1989) show a major effect of road infrastructure in rural India leading to a reduction in transportation costs and increase in productivity. Elhance and Lakshamanan (1988), using both physical and social infrastructures, have shown that reductions in production costs in manufacturing mainly result from infrastructure investment in India. Dutt and Ravallion
(1998) prove that Indian states starting with better infrastructure and human resources,
among other facilities, have witnessed significantly higher growth rates and poverty reduction. Sahoo and Saxena (1999), using the production function approach, have concluded
that transport, electricity, gas and water supply and communication facilities have a significant positive effect on economic growth with increasing returns to scale. Ghosh and
De (2000), using physical infrastructure facilities across the South Asian countries over
the last two decades, have shown that differential endowments in physical infrastructure
were responsible for the rising regional disparity in South Asia. Mitra et al. (2002) find
further confirmation of a substantial public capital effect at the state-level disparities for
India. Sahoo (2006) shows that infrastructure development attracts foreign direct investment
(FDI) into South Asian countries