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Infrastructure development and

economic growth in India
a b
Pravakar Sahoo & Ranjan Kumar Dash
a
Institute of Economic Growth (IEG), Delhi University , Delhi,
110007, India
b
National Council for Applied Economic Research (NCAER) , Delhi,
110007, India
Published online: 08 Sep 2009.

To cite this article: Pravakar Sahoo & Ranjan Kumar Dash (2009) Infrastructure development
and economic growth in India, Journal of the Asia Pacific Economy, 14:4, 351-365, DOI:
10.1080/13547860903169340

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 Journal of the Asia Pacific Economy
Vol. 14, No. 4, November 2009, 351–365

Infrastructure development and economic growth in India

Pravakar Sahooa∗ and Ranjan Kumar Dashb
a
Institute of Economic Growth (IEG), Delhi University, Delhi 110007, India; b National Council
for Applied Economic Research (NCAER), Delhi 110007, India

In this study, we investigate the role of infrastructure in economic growth in India for the
period 1970–2006 on the basis of the empirical framework developed by D.A. Aschauer
(Is public expenditure productive? Journal of monetary economics, 23 (2), 1989, 177–
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200). In this context, we develop an index of infrastructure stocks and estimate growth-
accounting equations to investigate the impact of infrastructure development on output.
Overall, the results reveal that infrastructure stocks, labour force and total investment
play an important role in economic growth in India. More importantly, we find that
infrastructure development in India has a significant positive contribution toward growth
than both private and public investments. Further, causality analysis shows that there
is unidirectional causality from infrastructure development to output growth. From a
policy perspective, there should be greater emphasis on infrastructure development to
sustain the high economic growth which the Indian economy has been experiencing for
the last few years.
Keywords: India; infrastructure index; investment; output growth
JEL classifications: O1, H4, H54, L9

1. Introduction
India has become one of the fastest growing countries in the world after China which
accounts for nearly a fifth of the world’s population and a quarter of the world’s poor.
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 (Rastogi
2006, India Infrastructure Report 2006). However, India needs to maintain the growth
momentum in a sustainable manner to improve the overall standard of living and reduce
poverty. In this context, the role of infrastructure is very critical as infrastructure is strongly
related to economic growth and poverty reduction. Since there is no study examining the
output elasticity infrastructure development systematically, this paper empirically examines
the role of infrastructure in economic growth in India for the period 1970–2006. Our analysis
is motivated by the seminal work of Aschauer (1989) on the relative productivity of private
and public capital.
The role of infrastructure development in economic growth has been well recognized
in the literature (Aschauer 1989, Munnell 1990, World Bank 1994, Roller and Waver-
man 2001, Calderón and Servén 2003, Canning and Pedroni 2004, Fedderke et al. 2006).

∗
Corresponding author. Email: pravakar@iegindia.org; pravakarfirst@gmail.com

ISSN: 1354-7860 print / 1469-9648 online

C 2009 Taylor & Francis
DOI: 10.1080/13547860903169340
http://www.informaworld.com
 352 P. Sahoo and R.K. Dash

Further, investment in physical and social infrastructure positively affects the poor di-
rectly and indirectly in multiple ways (Estache 2004, 2006, Jones 2004). 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 sustain-
able growth and poverty reduction. Therefore, infrastructure development contributes to
investment and growth through an increase in productivity and efficiency and acts as a link
between resources to factories, people to jobs and products to market.
The importance of infrastructure for overall economic development and enhancement of
trade and business activities in India need hardly be emphasized. Investment climate surveys
repeatedly show that the limited and poor quality of infrastructure facilities acts as a major
impediment to business growth in India. Indian policymakers realize that any credible
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efforts toward sustainable economic growth in India must involve a substantial upgrade
of infrastructure investment and provision of good quality infrastructure facilities. India
has many advantages to offer to potential investors, including high and steady economic
growth, single-digit inflation, vast domestic markets, a growing number of skilled personnel,
an increasing entrepreneurial class and constantly improving financial systems, including
expanding capital markets. However, only provision of good quality infrastructure would
enable India to reap these benefits. In this context, examination of the precise economic
contribution of infrastructure to output growth would be of great use to policymakers and
researchers.
Most of the major previous studies are either cross-section or panel data studies on a
large number of countries where each country in the analysis is not a representative sample.
A study focusing on India is a contribution to the literature as there is hardly any systematic
study on the impact of infrastructure development on output growth in India.1 Further, most
of the previous studies have taken only public expenditure/infrastructure investment as a
proxy for infrastructure, which may not be right given the lack of governance and poor
outcomes of infrastructure investment in developing countries like India. Similarly, previ-
ous literature on the growth effects of infrastructure focuses on one single infrastructure
sector/indicator.2 Unlike other studies, where bivariate analysis between infrastructure indi-
cator/s and output has been used to show the link between output growth and infrastructure,
the present study develops a composite index of stock of leading physical infrastructure
indicators to examine the impact of infrastructure development on output growth along
with public and private investment in infrastructure. The present paper takes care of issues
of reverse causation and a spurious correlation due to non-stationarity of the data and
complements existing studies, which focus mainly on developed economies, by evaluating
the role of infrastructure in the case of a developing economy, i.e. India.
The rest of the paper is structured as follows. In Section 2 we review the macroeconomic
performance and infrastructure facilities in India. Section 3 presents a brief review of the
literature. Section 4 deals with the theoretical framework, construction of infrastructure
index and data sources of the paper. Section 5 analyses the empirical results. Finally,
conclusions and policy implications are presented in Section 6.

2. Macroeconomic performance and infrastructure development in India

Before examining the contribution of infrastructure development to economic growth in
India, it is appropriate to review the macroeconomic performance and infrastructure facili-
ties over the last three decades. India has been consistently implementing economic reforms,
 Journal of the Asia Pacific Economy 353

emphasizing market economy and integrating with the rest of the world. As a result, India
has experienced higher economic growth and better macroeconomic performance during
the 1990s (see Table A13 ). The higher growth rate in India after reforms in 1991 was
accompanied by substantial growth in the service and industrial sectors. Per capita income
growth also improved substantially in India during the post-reform period. Other important
macro indicators such as gross domestic savings, gross domestic capital formation and
indicators in the external sector, such as the current account balance, foreign exchange
reserves, foreign direct investment inflows and balance of payments, have also improved
substantially during the post-reform period. Overall, there has been a positive movement
in most of the macro indicators except the fiscal deficit, both on the domestic and external
sectors front. Indeed, India has been the fastest growing country in the world after China
in recent years.
However, for India to maintain the growth momentum, it is essential to strengthen
infrastructure facilities such as transportation, energy and communication. Table A2 reports
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the transport, telecommunication, information and energy infrastructure indicators for India
vis-à-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. Similarly, infrastructure and business indicators of India vis-à-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.
Singapore has a score of 6.6 out of 7, indicating a high level of infrastructure, followed by
the Republic of Korea with a score of 5.6. The People’s Republic of China has a score of
3.6, which is higher than most of its counterparts in the region, but not as high as Singapore
or the Republic of Korea. India has managed to receive a score of 3.1, though smaller
economies such as Sri Lanka and Pakistan have scored better. Similarly, India lags behind
in providing basic infrastructural facilities compared with many other countries in South
and East Asia (see Table A4).
Infrastructure demands strong planning, coordination, decentralization, private partici-
pation and commercialization of service providers rather than a top-down approach. Since
private participation in infrastructure is limited in developing countries, particularly in
India, cost recovery and measures to improve policy and institutional frameworks are im-
portant for creating a virtuous circle of investment and growth. 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.4
In recent years, the Indian economy is showing signs of overheating because of basic
infrastructure constraints, both physical and human. Clearly, there is a wide gap between
the potential demand for infrastructure for high growth and the available supply (IIR
2006). 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.
In this context, the government is also planning for huge investment in infrastructure
along with private investors. As there exists a huge infrastructure deficit and there is a
pressing need for improving infrastructure investment, a proper study examining the exact
 354 P. Sahoo and R.K. Dash

and dynamic relationship between output growth and infrastructure development in India
would be useful for both academics and policymakers.

3. Brief review of the literature

The empirical research on the role of infrastructure in economic growth started after the
seminal work by Aschauer (1989), where he found that the output elasticity of public capital
is very high, ranging from 0.38 to 0.56. Further, he suggests that lack of infrastructure
spending leads to slowdown of productivity growth in the US. Aschauer (1989) uses annual
macroeconomic time series data for the US spanning the 1949–1985 period and estimates
the public sector capital to be at least twice as productive as the private sector capital in the
aggregate. Supporting Aschauer, Munnell (1990) and Garcia-Milà and McGuire (1992) find
high output elasticity, though comparatively lower than Aschauer’s, of public investment
on infrastructure. However, over time, several economists have questioned the estimates of
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this first wave on the grounds that they are implausibly high (see, for instance, Gramlich
1994 and Garcia-Milà et al. 1996).
However, most of the early studies were criticized on two grounds: (1) methodological
background, i.e. reverse causation from productivity to public capital and a spurious corre-
lation due to non-stationarity of the data (Gramlich 1994, Garcia-Milà et al. 1996, Canning
and Pedroni 2004), and (2) results are mostly based on studies of developed countries.
In their survey of the earlier literature, Sturm et al. (1998) show that the literature
contained a relatively wide range of estimates, with a marginal product of public capital
that is much higher than that of private capital (Aschauer 1989), roughly equal to that of
private capital (e.g. Munnell 1990), well below that of private capital (Eberts 1986) and, in
some cases, even negative (Hulten and Schwab 1991). The wide range of estimates makes
the results of these older studies almost useless from a policy perspective.
However, more recent studies – as summarized by Romp and de Haan (2007) – generally
suggest that public capital may, under specific circumstances, raise income per capita.
Although not all studies find a growth-enhancing impact of public capital, it is worth noting
that – compared to the results surveyed by Sturm et al. (1998) – there is more consensus
that public capital furthers economic growth. Another interesting result is that the impact
as reported in recent studies is substantially less than suggested in earlier studies.
Empirical research on the relationship between public capital and growth should not
only answer the question of whether an increase in the public capital stock fosters economic
growth but also ‘what is the effect of extra infrastructure, holding everything else constant?’
In other words, is the existing stock of capital optimal? There are only a few studies that
have estimated the optimal amount of public capital and compared it with the actual stock of
public capital. Aschauer (2000) estimates the growth-maximizing ratio of public to private
capital using data for 48 US states over the period 1970–1990. He finds that for most of
the US the actual levels of public capital were below the growth-maximizing level. Kamps
(2005) applies the methodology of Aschauer (2000) in the European context to assess the
gap between actual and optimal public capital stocks. His results, however, suggest that
there is currently no lack of public capital in most of the ‘old’ EU member states.
Though there is no study examining the relationship between infrastructure develop-
ment and output growth in the Indian context, there have been a few studies examining
different aspects of the role of infrastructure for economic growth. Sahoo and Das (2008)
find a long-run equilibrium relationship between output and infrastructure for four South
Asian countries including India. More importantly, infrastructure development contributes
significantly to output growth in South Asia. Further, the panel causality analysis shows
 Journal of the Asia Pacific Economy 355

that there is mutual feedback between total output and infrastructure development and
there is only one-way causality from infrastructure to per capita income. 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 reduc-
tion. Sahoo and Saxena (1999), using the production function approach, have concluded
that transport, electricity, gas and water supply and communication facilities have a sig-
nificant 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
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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.
However, the exact economic relationship between infrastructure and economic growth
and output elasticity of infrastructure has been debatable (see Table A5). Devarajan et al.
(1996) raised the possibility that public expenditure such as capital investments that was
generally viewed as productive might be unproductive. Distinguishing between productive
and unproductive expenditures, they showed that the effects on growth of the shift in
their respective shares in the expenditures depended not only on the productivity of the
two expenditures but also on their initial shares. Thus, the increase in productive public
expenditure might be unproductive if its initial share is already excessive. This implication
was supported by data from 43 developing countries over 20 years. Namely, the relationship
between capital expenditure and growth per capita was found to be negative, while that
between current expenditure and growth was positive. These results led them to conclude
that governments of developing countries tended to ‘over-invest’ in public capital. Similarly,
Pritchett (1996) suggested that public investment in developing countries is often used for
unproductive projects. As a consequence, the share of public investment in GDP can be a
poor measure of the actual increase in economically productive public capital. Therefore,
the impact of infrastructure on growth can vary from negligible to negative (Eberts 1986,
Devarajan et al. 1996, Pritchett 1996).
Overall, it is clear from previous findings that the effect of public capital or infrastruc-
ture investment is growth-enhancing in general. However, the impact is much lower than
found by Aschauer (1989) and Munnell (1990), which is generally considered to be the
starting point of this line of research. Further, the effect of public investment differs across
countries, regions and sectors depending upon quantity and quality of the capital stock and
infrastructure development. Moreover, there is evidence for reverse causality. Hence, not
only does public investment stimulate growth, higher growth also leads to higher demand
for infrastructure. Most of the previous studies are cross-section or panel studies, and,
therefore, it is necessary to undertake a country-level study to measure the effect of public
investment.

4. Theoretical framework, infrastructure index and data sources

Existing empirical studies on the contributions of public and private investments to eco-
nomic growth are essentially based on the production function framework. Assuming a
 356 P. Sahoo and R.K. Dash

generalized Cobb–Douglas production and extending the neoclassical growth model to

include infrastructure stock/public capital as an additional input of the production function
along with private capital and labour, the production function is written as:

Yt = f (Kpvt /Kpub , LFt , It ) . . . , (1)

where Yt is gross output produced in an economy using inputs such as capital (Kpvt /Kpub ),
labour force (LFt ) and supporting infrastructure (It ). Equation (1) specifies that the output
growth depends on both private investment and public investment rates. This generalized
form (Equation 1) is open to the possibility of constant returns to scale as suggested by
Solow-type models (Solow 1956). On the other hand, the model also admits the possibility
of constant or increasing returns to capital – in our case disaggregated into private and
public capital – as suggested by some endogenous growth theorists (Romer 1987). The
possibility of a long-run impact of infrastructure on income depends on whether the data
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are generated by a neoclassical growth model or an endogenous growth model. In the

exogenous growth model wherein technical progress drives long-run growth, shocks to
the infrastructure stock can only have transitory effects. However, shocks to infrastructure
can raise the steady-state income per capita in an endogenous growth model. Finally, we
estimate the following equations to empirically examine the impact of infrastructure stock
on output in India:

ln Rgdpit = αi + δi t + β1i ln Rgdcf (Pvt/Pub)it + β2i lnLfit

+ β3i ln Iindexit + εit . . . , (2)

where Rgdp is real gross domestic product, Rgdcf (Pvt/Pub) is gross domestic capital
formation (private/public) and Iindex is infrastructure index. The expected sign of (β 1i , β 2i
and β 3i ) is more than 0.
Infrastructure index: The empirical literature examining the impact of infrastructure on
growth uses a variety of definitions of infrastructure development such as infrastructure
investment or some indicators of physical infrastructures. However, a composite index of
major infrastructure indicators has been developed to examine the impact of infrastruc-
ture stock on growth. We use principal component analysis (see Appendix) to create the
infrastructure index by taking major infrastructure indicators as follows:

(1) Per capita electricity power consumption.

(2) Per capita energy use (kg of oil equivalent).
(3) Telephone line (both fixed and mobile) per 1000 population.
(4) Rail density per 1000 population.
(5) Air transport, freight million tons per kilometer.
(6) Paved road as percentage of total road.

The eigenvalues and respective variance of these factors are as given in Table A6. The
first factor or principal component has an eigenvalue larger than 1 and explains over two-
thirds of the total variance. There is a large difference between the eigenvalues and variance
explained by the first and the next principal component. Hence, we choose the first principal
component for making a composite index representing the combined variance of different
aspects of infrastructure captured by the six variables. The factor loadings for each of the
five original variables are given in Table A7.
 Journal of the Asia Pacific Economy 357

Data source: Annual data on real GDP, per capita GDP and gross domestic capital
formation (public and private) are taken from various issues of the Economic Survey, of
the Ministry of Finance, Government of India. Data on total labour force are taken from
World Development Indicators (CD-ROM) of World Bank (2007). Labour force is taken
from the International Labour Organization (ILO) definition of the economically active
population that includes both the employed and the unemployed.5 Infrastructure indicators
such as air freight transport (million tons per km), electric power consumption (kwh per
capita), energy usage (kg of oil equivalent per capita) and total telephone lines (main line
plus cellular phones) per 1000 population are taken from World Development Indicators
of World Bank. Data on rail density (per 1000 population) and paved road as percentage
of total road are taken from Centre for Monitoring Indian Economy (CMIE) publications
(Report on Infrastructure, various issues).

5. Analysis of results
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The empirical research evaluating the impact of infrastructure on output growth always
comes across the problem of endogeneity and reverse causality. Dealing with this problem
has been at the heart of the controversy over the infrastructure–growth relationship. Various
approaches have been followed in the literature to deal with the problem of causality. One
is to derive an appropriate test to examine how the causality runs. Other approaches that
have been followed to address the problem of reverse causation are using panel models,
simultaneous equation models and instrumental variables. In order to overcome this problem
we carried out the causality test at first difference, as variables are difference-stationary
(see Table A8), between infrastructure and real GDP and found that the causality mostly
runs from infrastructure to growth (see Table 1). Since all the variables are I (1), we carried
out the Granger causality test at first difference (see results presented in Table 1). It is clear
that there exists one-way causality running from investment to growth. However, we did
not find reverse causality running from GDP to infrastructure (see Table 1).
Since we found only one-way feedback from infrastructure to output, we estimated the
long-run production function in log form by using Ordinary Least Square (OLS) method.
Various specifications of Equation (2) in Table 2 are estimated using annual data for India
for the period 1970–2006. Results presented in Table 2 show that various equations have a
relatively high degree of explanatory power as measured by their adjusted coefficients of

Table 1. Granger causality between infrastructure and growth.

Null hypothesis No. of Obs. F-stat Probability

Gross Investment
Rgdcf (Pvt + Pub) does not Granger Cause Rgdp 34 3.78∗ 0.02
Rgdp does not Granger Cause Rgdcf (Pvt + Pub) 0.71 0.40
Private Investment
Rgdcf (Pvt) does not Granger Cause Rgdp 32 3.86∗ 0.04
Rgdp does not Granger Cause Rgdcf (Pvt) 0.61 0.71
Public Investment
Rgdcf (Pub) does not Granger Cause Rgdp 33 5.28∗∗ 0.005
Rgdp does not Granger Cause Rgdcf (Pub) 2.89 0.09
Infrastructure stock
Iindex does not Granger Cause Rgdp 33 3.17∗ 0.01
Rgdp does not Granger Cause Iindex 2.41 0.12

Note: ∗ Denotes significance at 5% level.

 358 P. Sahoo and R.K. Dash

Table 2. Results of growth-accounting production functions.

Variables Equation (1) Equation (2) Equation (3) Equation (4) Equation (5)

Constant 8.75∗∗ (82.25) −0.26 (−0.14) 8.92∗∗ (28.25) 9.50∗∗ (57.56) 3.67∗ (2.38)
Ln Rgdcf (Pvt 0.35∗∗ (5.62) — 0.24∗∗ (11.02) — —
+ Pub)
LnLF 0.63∗∗ (3.59) 0.61∗ (2.06) 0.51∗ (2.33) 0.65∗ (2.56) 0.57∗ (1.97)
Ln Index — — 0.35∗∗ (5.16) 0.32∗∗ (4.95) 0.24∗∗ (2.90)
Ln Rgdcf (Pvt) — 0.37∗∗ (6.23) — 0.28∗∗ (10.61) 0.15∗∗ (3.28)
Ln Rgdcf — 0.16∗∗ (2.90) — — —
(Pub)
Index91 — — — — 0.03∗∗ (3.89)
Adj. R2 0.91 0.89 0.93 0.92 0.94
Se Reg. 0.0266 0.025 0.0268 0.028 0.017
DW 1.47 1.74 2.33 1.67 1.88
ADF test of −4.56∗∗ −3.78∗ −4.32∗∗ −4.78∗∗ −3.88∗∗
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residuals

Note: ∗ Significance at 5% level; ∗∗ significance at 1% level; all the variables are in real and log (Ln) values.

determination, and, more importantly, the Durbin-h statistics suggest that serial correlation
is not a major problem in the sample data.
We first estimate the growth-accounting equation (column 2) where output is a function
of two basic inputs such as total capital (Rgdcf) and labour force (LF). As expected, results
reveal that the coefficients of both labour and capital are positive and statistically significant.
Further, the long-run elasticity of both capital and labour are 0.35 and 0.63, respectively.
Now we have divided total investment into private and public investments and estimate the
output function (see column 3). The results reveal that private and public investments along
with infrastructure index and labour force have positive impact on output. Interestingly, the
elasticity of private investments is higher than that of public investment. This may be due
to the fact that public capital includes all the investment and some of them may be devoted
to non-growth-promoting activities, such as defence procurement. Further, there is a huge
gap between actual investment and outcomes in developing countries like India due to lack
of proper institutional and governance factors.
Next, we estimate the production function with infrastructure stock (Iindex) as an
additional input along with total capital and labour. The coefficient of infrastructure is
positive and significant with long-run elasticity of 0.33. Similarly, we present the result of
output function with private capital, infrastructure and labour in column 4 where we find
similar results. Results of both Equations (3) and (4) explain an interesting fact, i.e. the
long-run elasticity of infrastructure is higher than total real investment and also private
capital. These findings are in line with other studies (Eberts 1986, Holtz-Eakin 1994, Khan
and Kumar 1997, Al-Faris 2002) but opposite to the findings of Aschauer (1989) and
Munnell (1990). In the case of total investment, which includes public investment may
not be highly productive given the fact that some public investment projects are more
politically motivated than economically crucial, which is found in developing countries.
Further, output elasticity of physical infrastructure stock is higher than investment.
Similarly, we present the result of output function with private capital, infrastructure and
labour in column 4. It is seen that long-run elasticity of infrastructure (0.32) is higher than
private capital (0.28). Private investment without public investment has a lower positive
contribution explaining indirectly the complementarity between the productivity of public
 Journal of the Asia Pacific Economy 359

Table 3. Coefficients of various infrastructure stocks.

Infrastructure Coefficients Coefficients Coefficients

indicators Equation (3) Equation (4) Equation (5)

Electricity power consumption (per capita) 0.15 0.14 0.10

Energy usage (kg of oil equivalent per capita) 0.14 0.13 0.10
Telephone 0.12 0.106 0.08
Rail density (population) 0.15 0.14 0.10
Air transport, freight 0.13 0.12 0.09
Paved road as percentage of total road 0.17 0.15 0.115

and private investments. In other words, public investment in physical capital, for instance,
is far more important for macroeconomic performance by improving the productivity of
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private investment. Apart from the direct multiplier effect, resulting from all types of
government expenditures, public infrastructure is an important input in the private sector
production process, affecting both output and productivity. It not only enlarges the capital
stock of a nation but also enables a more efficient use of the existing stock (Munnell 1990).
Further, there is a significant deficit in infrastructure in India and, therefore, any increase
in infrastructure stock should contribute significantly to output. Given the fact that the
elasticity of output with respect to infrastructure stock is substantially larger than the share
of those sectors in GDP, the marginal products of infrastructure services are much higher
than the cost of providing them.
Having seen that infrastructure significantly affects economic growth, we next analyse
the change in the elasticity, i.e. whether it has changed significantly after the 1991 post-
reform period. In order to do this, we include an interaction dummy of infrastructure
(infrastructure index × liberalization dummy).6 The results (see column 5), which are
consistent with other equations, reveal that the coefficients of both private and infrastructure
stock are still positive and significant. Note that the interaction dummy (Index91) coefficient
is positive and significant at the 1% level, indicating a significant change in the elasticity
of infrastructure in the post-1991 period. The purpose of the interaction dummy is to
find out whether the change in the slope of the coefficient of index is significant. Since
the government has been pro-active in improving infrastructure investments, both through
direct public investment and through encouraging private investment, a significant reforms
dummy is justified.
Further, to find out the importance of different types of physical infrastructures, the
long-run coefficients of individual infrastructure indicators are calculated by multiplying
the infrastructure index coefficient in Equations (3), (4) and (5) in Table 2 with the fac-
tor loading of the individual infrastructure indicator. Among the infrastructure facilities,
energy usage, electricity usage and paved roads are the most important infrastructures
having the maximum contribution to growth (see Table 3). Clearly, elasticity of individual
infrastructure indicators is much less than reported in previous studies.

6. Concluding remarks and policy implications

In this study, we have investigated the role of infrastructure in economic growth in India for
the period 1970–2006 on the basis of a theoretical framework developed by Solow (1956)
and Romer (1987) and empirics inspired by Aschauer (1989) and Munnell (1990). Unlike
other studies, the present analysis develops a composite index for infrastructure stocks
 360 P. Sahoo and R.K. Dash

to examine the impact of physical infrastructure on growth. Overall, the results reveal
that infrastructure stocks, labour force and total investment play an important role in the
economic growth of India. More importantly, we find that the infrastructure development
in India has a more significant positive contribution to economic growth than both private
and public investments. Further, the causality analysis shows that there is a unidirectional
causality from infrastructure development to output growth. From the policy perspective,
greater emphasis is needed on infrastructure development to sustain the high economic
growth which Indian economy has been experiencing for the last few years.

Acknowledgements
We thank an anonymous referee for very useful and constructive comments. We also thank Drs Arup
Mitra and Dipendra Sinha for their help and encouragement in writing this paper. However, the usual
disclaimer applies.
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Notes
1. Though there is no study examining the relationship between infrastructure development and
output growth in the Indian context, there have been a few studies examining different aspects of
the role of infrastructure in economic growth (see Section 3).
2. Some papers do this by design, e.g. Roller and Waverman (2001) evaluate the impact of telecom-
munication infrastructure on economic development, and Fernald (1999) analyses the productivity
effects of changes in road infrastructure.
3. All the tables mentioned in the text are given in the Appendix at the end.
4. Though these issues are very important for infrastructure development in India, these are not the
subject matter of this study. For details on these issues, see Nataraj (2007).
5. Though it is appropriate to use labour hours, its data are not available for India. Further, it is
really difficult to estimate labour hours taking many approximations like average working days,
average hours of work per day, particularly in the unorganized sector which absorbs around 90%
of total labour force. There are also issues like strikes, lockouts, etc., which need to be accounted
for while estimating labour hours.
6. The liberalization dummy takes the value 1 for post-1991 periods and 0 otherwise.

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Appendix. Infrastructure index

Infrastructure index has been made by using the Principal Component Analysis (PCA). The PCA is
a multivariate choice method. This approach develops a composite index by defining objectively a
real-valued function over relevant variables. The principle of this method lies in the fact that when

Table A1. Major macroeconomic indicators of India.

Major macro indicators 1980–1990 1991–2000 2001 2002 2003 2004 2005 2006

GDP 5.7 6.2 5.20 3.73 8.4 8.33 9.23 9.6

GDP per capita 3.49 4.39 3.52 2.12 6.78 6.78 7.75 8.1
Agriculture 3.12 3.05 6.26 −7.22 10.00 −0.04 6.01 3.8
Industry 6.89 6.65 2.72 7.06 7.57 9.6 9.35 11.6
Manufacturing 7.44 7.48 2.55 6.81 6.63 8.65 9.09 12
Services 6.87 8.31 7.15 7.37 8.41 9.62 9.94
Exports of goods and 4.92 11.05 5.60 21.89 9.78 18.18 21.85 25.3
services
Imports of goods and 6.07 12.62 3.38 10.30 11.69 44.99 22.07 29.3
services
Gross domestic capital 6.21 6.79 –1.84 16.60 19.08 19.01 16.46 18.9
formation
Ratio to GDP
1980 1990 2000 2001 2002 2003 2004 2005 2006
Gross capital formation 18.68 24.06 24.77 24.45 25.57 27.45 30.98 33.35 35.9
Gross domestic savings 15.51 22.64 24.02 23.82 25.19 26.85 27.75 29.71 34.8
Current account balance −0.98 −2.21 −0.99 0.29 1.39 1.13 0.76 1.21 1.1
FDI 0.04 0.07 0.77 1.14 1.10 0.76 0.78 0.81 1.9

Source: World Bank (2008), World development indicators 2008.

 Journal of the Asia Pacific Economy 363

Table A2. Infrastructure facilities in India vis-a-vis other developing countries.

Electric Energy Air freight

power usage Paved Total trans. Air pass. Total
consumption (kg of oil roads rail (million transport telphones
(kwh per equi. per (% of total route  000 tons ( 000 (Per  000
capita) capita) roads) sq. km) per km) population) persons)

Countries 2005 2005 2005 2005 2006 2006 2006

India 480.5 490.9 62.6 21.5 842.6 40.3 186
Bangladesh 135.5 157.8 9.5 20.22 190.8 17.2 129
Sri Lanka 377.7 476.6 81 14.5 325.4 31.9 366
Pakistan 456.22 490.91 64.7 10.1 426.7 57.14 249
Nepal 69.53 338.45 56.8 0.41 7.21 23.23 592
China 1780.52 1316.3 81.6 6.84 7692 112.41 631.37
Korea 7778.6 4426.5 76.82 33.69 7751 784.4 1385
Indonesia 509.31 813.8 59.00 — 469.2 143.10 352.5
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Malaysia 3262.4 2388.72 78.9 5.07 2597.22 713.98 911

Thailand 1988.1 1587.9 99.17 7.89 2106.5 363.82 754

Source: World Development Indicators (various years) and Centre for Monitoring Indian Economy (CMIE).

different characteristics are observed about a set of events, the characteristic with more variation
explains more of the variation in the dependent variable compared with a variable with lesser variation
in it. Therefore, the issue is one of finding weights to be given to each of the concerned variables.
The weight to be given to each variable is determined on the principle that the variation in the linear
composites of these variables should be the maximum. Therefore, the composite index is defined as

Ci = W1 X11 + W2 X12 + W3 X13 + · · · + Wn X1n

or C1 = Wi Xij ,

where Ci is the composite index for the ith observation, Wj is the weight assigned to jth indicator
and Xij is the observation value after elimination of the scale bias.

Table A3. Infrastructure and business indictors for India, South, East and Southeast Asia (2007).

Time Hiring
Overall Rail–road Port Air transport required and
infrastructure infrastructure infrastructure infrastructure to start a firing
quality development development development business∗ practices

India 3.1 4.5 3.5 4.8 35 3.1

Bangladesh 2.2 2.3 2.4 3 37 4.5
Sri Lanka 3.3 2.8 4.1 4.5 50 3.3
Pakistan 3.4 3.2 3.7 4.2 24 4.7
Nepal 1.9 1.3 3 3.4 31 3.1
China 3.6 3.9 4 4.1 35 4.3
Korea 5.6 5.2 5.5 5.7 22 4.7
Singapore 6.6 5.6 6.8 6.9 6 5.8
Malaysia 5.7 5.1 5.7 6 30 4.3
Thailand 5.1 3.5 4.7 5.7 33 4.2
The Philippines 2.6 1.7 2.8 4.1 48 3.5

Note: Overall infrastructure quality, 1 = poorly developed and inefficient and 7 = among the best in the world.
The same applies to rail, port and air transport infrastructure; hiring and firing practices, 1 = impeded by
regulations, 7 = flexibility determined by employers; ∗ No. of days required to register a business. Source: Global
Competitiveness Report, 2007–2008.
 364 P. Sahoo and R.K. Dash

Table A4. Summary of infrastructure access indicators in India vis-à-vis other developing countries,
2005.

Tele Road density Road density

Electricity Water Sanitation density (by population) (by area)

Afghanistan 5 13 8 12 32
Bangladesh 25 75 48 16 1.6 1594
Cambodia 10 34 16 38 1 70
China 97 77 44 424 1.4 189
India 40 86 30 71 3.2 1115
Indonesia 80 78 52 127 1.7 203
Myanmar 5 80 73 8
Nepal 15 84 27 18 0.6 107
Pakistan 55 90 54 44 1.8 334
Sri Lanka 75 78 91 122
Vietnam 60 73 41 88 1.2 287
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Note: Electricity (percentage of population access to network), water (percentage of population access to improved
sources), sanitation (percentage of population access to improved sanitation), tele density (fixed line and mobile
subscribers per 1000 people), roads (percentage of rural population living within 2 km of an all-season road).
Source: Jones 2006.
Since variables chosen for analysis are measured in different scale, it is required to convert them
into some standard comparable unit by using the following method:
xij = ((Xij − Xm )/Ã),
where Xij is the scale-free observation, Xij is the original observation, Xm is the mean of the series
and σ is the standard deviation.

Table A5. Estimates of output elasticity of infrastructure indicators.

Output elasticity Infrastructure

Country/region Author of infrastructure measure

US Aschauer 1989 0.39 Public capital

US Munnell 1990 0.34 Public capital
Mexico Shah 1992 0.05 Transport, power and
communication
Taiwan Uchimura and Gao 1993 0.24 Transport, water and
communication
Korea Uchimura and Gao 1993 0.19 Transport, water and
communication
DCs Easterly and Rebelo 1993 0.16 Transport and
communication
US Garcia-Milà et al. 1996 0 Public capital
LDCs Devarajan et al. 1996 Negative Transport and
communication
Canada Wylie 1996 0.31 Public capital
Cross country Canning and Pedroni 2004 −0.23 to 0.22 Road, telephone and
electricity
US Duggal et al. 1999 0.27 Public capital
Cross country Calderón and Servén 2003 0.16 Transportation,
communication and
general purpose
Cross country Esfahani and Ramirez 2003 0.12 Power and telephones
OECD countries Kamps 2006 0.22 Public capital
South Africa Fedderke et al. 2006 −0.06 to 0.20 Physical capital stock

Source: Authors’ compilation.

 Journal of the Asia Pacific Economy 365

Table A6. Eigenvalues and variance explained by principal components.

Principal Percentage of Cumulative

components Eigenvalues variance variance

1 5.2165 0.869 0.869

2 0.5363 0.089 0.958
3 0.2204 0.036 0.995
4 0.0178 0.003 0.998
5 0.0076 0.001 0.999
6 0.0015 0.0003 1.00
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Table A7. Factor loadings of original values.

Infrastructure variables Factor loadings

Electricity power consumption (per capita) 0.429

Energy usage (kg of oil equivalent per capita) 0.421
Telephone 0.334
Rail density (population) 0.428
Air transport, freight 0.383
Paved road as percentage of total roads 0.482

Table A8. ADF unit root test.

Variables Optimal lag At level Optimal lag At first diff. Order of integration

LnRGDP 0 1.34 1 −6.31∗ I(1)

LnRGDCF 2 1.47 1 −4.33 I(1)
LnRGDCFtprv 2 −0.75 2 −4.76∗ I(1)
LnRGDCFpub 3 0.43 1 −5.23∗ I(1)
LnLF 3 −1.62 0 −9.09∗ I(1)
LnIindex 1 −1.19 0 −6.71∗ I(1)

Note: ∗ Denotes the null hypothesis that the variable concerned is non-stationary can be rejected at 5%
significance level. Asymptotic cutoff values for 5% significance level are −3.41 when the trend term is
included and −2.86 when the trend term is not included (see Davidson and Mackinnon 1993).