Infrastructure and economy:

INTRODUCTION

Infrastructure development which is critical for the economic development of any

country provides the easier and quicker access of the poor people to the market mechanism.
Studies show that infrastructure investments complemented by policy and institutional
reforms enable markets to develop and function efficiently, thereby mainstreaming the poor.
Infrastructure development contributes both directly and indirectly, to poverty reduction
having access to more income generating activities (1). Since the infrastructure investment
has been done mainly by the government and in some cases under government-private sector
collaboration, this sort of investment can be broadly termed as public capital investment. This
public capital investment encompasses the investment in highways, water, sewerage system,
bridge construction and other forms of public capital. Private sectors are gradually coming
forward to invest for infrastructure investment and since 1990; more than 120 developing
countries have invited the private sector to participate in the provision of private
infrastructure services (2). Designing infrastructure to deliver services to poor people is a key
measure to eradicate poverty (3). Therefore, public capital investment is used to play a
significant role in the market mechanism in various ways which ultimately encourage the poor
people to participate actively in the income generating activities.

INFRASTRUCTURE AND DEVELOPMENT

Infrastructure is so pervasive and multidimensional concept that can hardly be well-

defined in few words. The publication of 'America in Ruins' by Choate and Walter in 1983,
which focused on the nation’s infrastructure crisis, caused by decades of inadequate
investment and poor maintenance of public works, made the word 'Infrastructure' prominent.
Infrastructure is generally defined as structural elements that provide the framework
supporting an entire structure (4). The term carries multiple meanings in different fields, but is
perhaps most widely understood to refer to roads, airports and utilities. Infrastructure can be
categorized as physical and social infrastructure. Education, health and other services are
regarded as social infrastructure while roads, airports, bridges, railways as physical
infrastructure. It is really hard to envisage all dimensions of infrastructure in one research.
Therefore, for the convenience of the research, the definition of infrastructure has been
dwindled to only physical infrastructure.

A good number of empirical works on physical infrastructure have been done using
broadly two types: Time series estimates of an aggregate production function and cross
sectional estimates using state and regional data. Exploration of productivity enhancement
due to public infrastructure investment using the time series estimation of an aggregate
production function can be done using the concept of the prevalent Solow type growth models
focusing that production function incorporates capital and labour inputs with technology.
Production process also involves supporting infrastructure services which can be categorized
as a component of capital stock. The estimation using the annual data of Canada from 1946-
1991 indicates that the marginal product of infrastructure was estimated to be slightly larger
than that of direct capital in goods sector, at 0.248 and 0.213 respectively (4). Estimation
results from using the 1949-1985 annual U.S. data show that 1% increase in public
infrastructure capital has led to increase the private business sector by 0.36%, ceteris paribus
(5). Another estimation from 1949-1987 annual data for the US private non-farm business
sector has got the results that the estimated parameter on [lnK.sub.i] is 0.31, very close to
the result reported by Aschauer (6). The study about infrastructure-GDP interactions using the
cross country data noted, the contribution of infrastructure services to GDP is substantial and
in general exceeds the cost of provision of those services (7). The case of Nepal suggests that
establishment of extensive road access to market would confer substantial benefit on
average, much of these going to poor households (8). The study on the effects of public
infrastructure capital on output supply and input demands in 12 OECD countries, find that in
all 12 countries, public capital has positive long-run effects on both output supply and input
demands and its mean short run rates of return are fairly low, while corresponding long run
rates are much higher but declining over time (9). The estimation results using the US data
from 1953-1989 found, when growth in roads changes, productivity growth changes
disproportionately in US industries with more vehicles (10).

Public sector infrastructure capital is expected to have a significant impact on the

performance and productivity of the private sector. The coincidence of the decrease in public
infrastructure capital formation with the decline in productivity growth in the private business
sector of the US and Sweden cases indicate some sort of casualty between them. A study
shows that the 4.1% average annual growth rate of capital stock for public infrastructure in
Sweden was associated with 4.7% annual growth in private business sector.

The contribution of the Infrastructure Sector in the India GDP

Infrastructure Sector Growth Rate in India GDP came to 3.5% in 1996- 1997 and the
next year, this figure was 4.6%. The Growth Rate of the Infrastructure Sector in India GDP
increased after the Indian government opened the sector to 100% foreign direct investment
(FDI). This was done in order to boost the Infrastructure Sector in the country. The result of
opening the sector to the private sector has been that Infrastructure Sector Growth Rate in
India GDP has increased at the rate of 9%. It is estimated that the Growth Rate of the
Infrastructure Sector in India GDP will grow at the rate of 8.5% between 2006 and 2010. The
biggest ongoing project in the Infrastructure Sector in India is the Golden Quadrilateral, which
is improving the main roads that connect the four cities of Chennai, Mumbai, Delhi, and
Kolkata. We need to increase this not only to get to a reasonable level but also to make up for
an accumulated infrastructure deficit.

Return to Investment, India State-level Analysis

Field of investment Return in Rupees No. Of poor Reduced

per Rupee per Million Rupee
spending spending

R&D 13.45 84.5

Irrigation 1.36 9.7

Roads 5.31 123.8

Education 1.39 41

Power 0.26 3.8

Soil and Water 0.96 22.6

conservation

Health 0.84 25.5

Anti-poverty programs 1.09 17.8

 India’s finance minister agrees.

“Our infrastructure deficiencies have become more visible because of high growth,” Palaniappan Chidambaram told a
parliamentary panel in September.
“The most visible indicators of overstretched infrastructure are India’s congested highways, airports and ports.”
India has set a goal of average annual growth of 9% for this year and the next four years with the expectation it will
touch 10% by 2012, but Ahluwalia said this would not be achieved unless it made a big effort to boost infrastructure.
“This target of investment that we’ve outlined probably adds up to $500 billion over a five-year period. Of this $500
billion about 30%, which is about $150 billion, would be the share that should be coming from the private sector.”
He said while $150 billion seemed a lot from India’s point of view, it was not that large an amount to attract from
global capital markets, assuming stability returned to the markets over the next 12 months.

Global/future things linked with a infrastructure project.

• Poor infrastructure conditions increase costs and export times and can compromise
product quality, rendering both merchandise and services exports less competitive than
global competitors. Poor infrastructure conditions also increase costs and add delays.
• A poorly maintained and often unpaved, and truck fleets generally consist of aging fuel-
inefficient vehicles that are often overloaded and contribute to further road
degradation. Truck breakdowns often slow the movement of goods, damage goods in
transit (particularly perishable goods), and increase transport costs.
• In particular Some SSA producers have been able to achieve higher returns in recent
years despite infrastructure, by focusing on quality improvements that increase the
appeal of its exports to international buyers, India has been able to improve the
competitiveness of its exports.
• Local the rapid development of infrastructure will improves the quality of human
resources as well as the investment environment.
• A well developed infrastructure, developing human resources and improved state
management of foreign investment activities can attract more FDI in the coming time.
• The infrastructure deficit lowers the productivity and competitiveness and slowing
economic growth. Logistics costs (transportation and storage) are high in LAC, due
largely to inadequate transport infrastructure. These costs are about 10 percent of
product value in industrialized countries, but in LAC they range from 15 percent in Chile
to 34 percent in Peru.
• China is betting on infrastructure spending to pull the country through the current
economic downturn: 45% of its $586 billion stimulus package announced in November
of last year is devoted to the development of highways, railways, airports and power
grids, while another 25% will go to post-earthquake construction in Sichuan.

Jamuna multipurpose bridge project

The Jamuna multipurpose bridge project, which is the ever largest physical
infrastructure project in Bangladesh, is supposed to work as an aide to foster the economic
development of the North eastern region, the main catchments of the project since its
opening up in 1998. The objective of the research is to examine the development of the
catchments of the project through income generation using the household level income data
in the pre and post time period of this facility.

INFRASTRUCTURE AND RURAL ECONOMY

INDIA A PLACE OF RURAL POPULATION

Numerous studies have shown that public spending in rural infrastructure is one of the
most powerful instruments that governments can use to promote economic growth and
poverty reduction. Investments in roads, electricity, telecommunications and other
infrastructure services are crucial for stimulating growth in agriculture and rural areas, and for
food security and poverty reduction. Improved infrastructure helps create jobs and raise
worker productivity. It saves time and human effort in transporting water, crops, wood, and
other commodities. It also improves health (by reducing indoor air pollution and emissions in
urban areas and making clean water available) and education (by expanding access to
schools, computers, and lighting).

• Poor road access leads to higher transaction costs for many farmers when selling their
produce. For example, high transaction costs are equivalent to a value added tax of
15%.
• In Africa, increases in agricultural output in some areas were accomplished by
increasing the supply of intermediate means of transportation, which increased access
and reduced costs of key inputs (Airey, 1992).
• road density has a significant positive effect on the consumption expenditure of rural
farm households in poor regions of China. For every 1% increase in kilometres of roads
per capita, household consumption increases by 0.08 percent.
• Research on Vietnam reveals that poor households living in rural communes with paved
roads have a 67 percent higher probability of escaping poverty than those in
communes without paved roads.
• In terms of poverty reduction, every additional kilometre of roads would lift 1.57 poor
people out of poverty in irrigated areas, but would lift 3.5 and 9.51 people out of
poverty in high and low potential rain fed areas, respectively.

China, a country India wishes in many ways to emulate.

China has plowed its huge reservoir of domestic saving — about 40% of GDP — into some of
the best infrastructure you will see anywhere in the world. And it has been brilliant in attracting
massive inflows of foreign direct investment as the means to acquire technology, managerial
expertise, and factories on a scale and with scope that is hard to believe. China has, in fact,
leapt to the fore as the largest recipient of FDI in the world — some US$53 billion per year in
2002-03. India suffers in comparison basically from having none of the above. That’s an
exaggeration but not all that wide of the mark. India has a 24% national saving rate, only a
little more than half that of China. As a result, it has far less in the way of internally-generated
funds available to plow back into infrastructure. And it doesn’t take much travelling around in
India to experience first-hand the seriousness of its infrastructure constraint.
Return in GDP to road investment, China

Return in total High quality Low

GDP quality

Average 1.55 5.99

Northeast 1.35 3.61

 North 1.48 6.11

Northwest 1.13 1.44

Central 1.71 6.57

Southeast 1.61 18.63

Southwest 1.91 7.47

South 1.29 7.57

CONCLUSION

At present times the term India refers to booming not just in economy but in population and
urbanisation too. This uproar should be taken forward in a prosperous ideology but not for the
sake of current situation or demands. All the national aid programmes should be design the
needs of future India in a prosperous way. The one best and very needy thing at present in
front of us is the infrastructure sector. Unless a well planed infrastructure all this uproar will
flattens with in no time and ends us up in a mess.