Introduction to Infrastructure Management

1.0

INTRODUCTION
Infrastructure development has a crucial role to play if India is to sustain its
high growth, which must become more inclusive as the country matures. While
there is large variation in the state of rural infrastructure among developing
countries, most lower-income developing countries suffer severe rural
infrastructure

deficiencies.

Deficiencies

in

transportation,

energy,

telecommunication and related infrastructure transform into poorly functioning

domestic markets with little spatial and temporal integration, low price
transmission

and

weak

international

competitiveness.

Despite

the

backbreaking reality that development of rural infrastructure is important to

promote growth and poverty alleviation and high economic rates of return to
investments

in

rural

infrastructure, neither national governments nor

international aid agencies seem to prioritise investments in the construction of

new infrastructure and maintenance of existing infrastructure. Much of the
required investment is of a public goods nature and thus most of the
infrastructure investments must come from public sources, while public- private
partnership should be pursued when appropriate. Failure to accelerate
investments in rural infrastructure will make a mockery of efforts to achieve the
Millennium Development Goals in poor developing countries while at the same
time severely limit opportunities for these countries to benefit from trade
liberalisation, international capital markets and other potential benefits offered
by globalisation.

2.0

ROLE OF INFRASTRUCTURE DEVELOPMENT IN ECONOMY

The relationship between infrastructure and economic growth is quite complex.

Although infrastructure development is important and necessary for industrial
take-off and economic growth, the desire for growth does not necessarily mean
higher or increased need for infrastructure and more infrastructure does not
necessarily guarantee more economic growth.
Infrastructure services exhibits high network effects. As the number of users
increase, the marginal productivity of investments on infrastructure rise with
scale and spread of the network and exceeds the average productivity of
investment until the market is saturated.
For the most part, India has forgone the typical manufacturing exportled path
to development and instead focused on its service sector. Although India has
been very successful in information technology services and businessprocessing exports, its inadequate and dilapidated infrastructure has held back
growth in the manufacturing sector.
India's finance minister estimates that the country's inadequate infrastructure
has restricted economic growth by 1.5 to 2 percent per year. India's central
bank recently reported that "infrastructure bottlenecks are emerging as the
single most important constraint on India's economy."
The country's manufacturing sector is held back by relatively inefficient and
high-cost infrastructureroads, railways, airports, ports, and electricity. The
lack of adequate infrastructure is constraining not only foreign trade but
domestic trade as well. For example, with little refrigeration available, 40
percent of India's fruits and vegetables spoil before reaching markets.

Rural infrastructure and agricultural development:

The importance of good infrastructure for agricultural development in
developing economies is widely recognised. In one of the technical
background documents for the World Food Summit, held some 12 years ago, it
is concluded that Roads, electricity supplies, telecommunications, and other
infrastructure services are limited in all rural areas, although they are of key

importance to stimulate agricultural investment and growth (Food and

Agriculture Organization of the United Nations (FAO) 1996, chapter 10, p.15).
The document further argues that Better communications are a key
requirement. They reduce transportation cost, increase competition, reduce
marketing margins, and in this way can directly improve farm incomes and
private investment opportunities (ibid). Investment in infrastructure is essential
to increase farmers access to input and output markets, to stimulate the rural
non-farm economy and vitalise rural towns, to increase consumer demand in
rural areas and to facilitate the integration of less-favoured rural areas into
national and international economies. In India, Gross Domestic Product during
2000-05 grew annually by 7% whereas the average annual growth rates for the
agriculture and industrial sector during the same period was 2.5% and 7.5%
respectively. The overall average annual growth rate for low income economies
taken together during the same period for GDP, agriculture and industry was
6.1%,3.0% and 6.9% respectively (World Development Indicators-2007). One
of the important reasons for this lopsided growth performance of agriculture
sector is the lack of proper infrastructural facilities in rural areas.
Rural infrastructure and poverty alleviation:
The impact of rural infrastructure on poverty level is significant particularly in
the context of achieving Millennium Development Goals (MDG) in the
developing countries whose first and the most fundamental goal is the halving
of extreme poverty by 2015 (where the comparison is between 1990 and
2015).Any investment on infrastructure leads to an increase in the real income
in both agriculture and non- agriculture sectors leading to a decline in the
poverty level. A direct contribution to poverty alleviation is being made by a
reduction in the consumption level with the provision of essential services like
health & housing facilities, access to safe drinking water and basic
sanitation, particularly in the initial stage of development. Provision of microcredit along with some of the basic infrastructure facilities can be quite
successful in generating incomes in both small-scale agriculture and, in
particular, in small-scale non-agricultural rural enterprises and hence exerting

as a catalyst in the poverty alleviation. The pioneer of Grameen Bank and a

revolutionary in the field of micro-credit, has provided new opportunities for
income generation and poverty reduction in Bangladesh is a well documented
fact now. In India, a large disparity in rural and urban poverty is found. This
disparity is even more in those states where the dualistic character of ruralurban divide is of severe nature; like in Bihar the population below poverty line
in 2004- 05 on the basis of URP (uniform recall period) consumption in rural
area was 42.1% against the urban figure of 34.6%. All these clearly call for
investment in the rural infrastructure development.
Rural infrastructure and international competitiveness:
The potential benefits of trade liberalisation and globalisation in a developing
economy like India where majority of the population lives in rural areas and
agriculture still plays an important role cant be obtained without making
significant investments in rural infrastructure and related institutions such as
roads, transportation, and market institutions. It will be only after that the low
income developing countries and low income communities will be fully
integrated into the process of economic globalisation. Chinas recent
experience is a burning example in this direction. During the reform period the
dualistic character of China has been further strengthened with a large share
of rural population living in remote areas with meager infrastructure facilities
has further fallen into poverty whereas people in urban areas and rural areas
with good infrastructure facilities have been benefited with the opening of the
economy by generating more trade. Such a development is likely to create
social instability in the long run. Hence, it can easily be said that one of the key
determinants of international competitiveness would be the availability of
adequate and efficient domestic infrastructure. Better domestic infrastructure
could contribute to international competitiveness through at least three
channels: (1) improving price competitiveness; (2) improving non-price
competitiveness; and (3) attracting foreign direct investments
3.0

IMBALANCES IN INFRSTRUCUTRAL DEVELOPMENT IN INDIA

Growing regional disparities in India are a cause for concern. But little is known
about the relative importance of possible reasons for the varied growth
experiences across the country. This column explores growth imbalances
among Indian districts. Proximity to cities, infrastructure, degree of urbanisation
and

state

government

policies are

found

to

be

key determinants.

The unbalanced nature of Indias growth is becoming a cause for considerable

concern. The growing regional disparities appear to have dampened political
resolve for further economic reforms, and hence may pose a barrier to Indias
future economic growth.

Dimensions of Indias unbalanced growth

The evidence on the imbalance in Indias growth has several dimensions. First
there is evidence of disparities across state income levels and growth rates,
with richer states growing faster.
This divergence is puzzling given that there are no political barriers to
migration, almost free trade, and a common set of federal institutions. It
suggests an important role for geographical barriers, such as transport and
migration costs, but these issues have not been widely explored.
Complementing these state-level studies is an extensive literature, typically
based on household survey data, on rising returns to education and
differences in human capital, opportunities for employment, and the provision
of public infrastructure.
Together these studies suggest a wide array of possible reasons for differing
growth experiences across India. However, we know little about the relative
importance of each.
Analysing district-level disparities
We use a datasets1 on district-level income and socio-economic indicators to
explore the determinants of Indias growth at the district level. In particular the

district-level data allow both socioeconomic and geographic factors to be

considered. For example, some Indian districts are cities, while others are rural
or semi-urbanised. Moreover some districts are very remote, while others,
though rural, may be close to cities. If we take the economic geography
literature seriously we would expect to observe different long-run income levels
in

these

districts

reflecting

differences

in

transport,

migration

and

communications costs.
We thus consider the determinants of growth across Indias 575 districts. In
addition

to considering

the

usual

factors based on

socio-economic

characteristics of each district, we also construct a measure of district

remoteness - defined as the minimum distance by road from a district
headquarter to one of the 10 major urban agglomerations in India.
The first feature of the district-level data is the wide disparity in income levels
across states. For example, there is a 9.8 fold difference between the richest
state Goa, and the poorest state Bihar. But at the district level, the range of per
capita incomes is from 3,858 million rupees to 139,868 million rupees in
Jamnagar district, Gujarat. This is a ratio of, roughly 36, which implies that the
real income gap between districts in India can be as large as the gap in real
incomes between the worlds richest and poorest countries.
A preliminary analysis of the data shows that, despite this enormous gap in
income levels, there is no evidence of convergence. Rather the trend, if
anything is one of absolute divergence with richer districts getting richer faster
than poorer districts. This shows the enormous difficulty that the government
faces in promoting reforms which may amplify these differences further in the
short term.
In more detailed analysis, we then explore the possible causes of these growth
rates. We find that infrastructure indicators, such as urbanisation and
electrification are significant factors. In addition we find that, even after
accounting for many socio-economic characteristics, significant differences in
growth rates remain across states. This suggests that state governments play
an important role in determining growth rates through providing appropriate

institutional or regulatory environments, but also that within states the

allocation of public infrastructure is important.

The significance of remoteness

In our analysis, we also find that remoteness is an important factor in
explaining differences in growth rates across districts. As an example, the most
remote district from any large urban agglomeration in India is in Manipur, near
the Burmese border. It is 2,531 km from Kolkata, the closest city. Conversely,
some districts areas are as little as 8 km from a major city. We predict that, in
this case, the closer district would have a per capita Gross Domestic Product
(GDP) level approximately four times higher than those in the remote parts of
Manipur. Likewise, the more remote district would have a growth rate that is in
the range of 1.5 to 3 percentage points lower, other factors being equal.
Thus remoteness has an important economic effect on growth rates for very
remote districts, though for many districts the effect is small. Subject to this,
and other infrastructure factors, we find that there is strong evidence of
conditional convergence across districts.
Nevertheless we also find that conditional convergence across Indian districts
is a very weak force. It is only about half of the usual rate, known as Barros
iron law of convergence5 of 2% (Barro 2012). Our estimated convergence rate
implies that after a decade of growth, the income gap between two districts
would still be 90% of its level at the start of the decade.
Following is the hierarchy of pattern of regional inequalities in India:
1. Extensive areas of high level of development;
2. Isolated areas of development within low development region;
3. Linear pattern of development;
4. Extensive areas of low development with scattered market centres;
5. Extensive areas of low level of development;

6. Low development in hill areas.

Lessons for policy

Our research helps clarify the roles of several alternative theories about Indias
unbalanced growth. The differences that exist across Indian districts in terms of
proximity to cities, infrastructure provision, and degrees of urbanisation are all
important factors. In addition, there are also significant differences across
states - suggesting that state-level policy differences are also contributing to
Indias growth imbalance. The results are thus suggestive of an important role
for the government in addressing Indias growth imbalances, through
appropriate state-level reforms and by adopting best practice in the supply of
public

infrastructure.

Nevertheless

there

remains

much

to

explain.

Remoteness, though important, has large effects only for very remote districts.
Likewise the slow rate of convergence suggests that there are other significant,
but currently unidentified, barriers to growth across India.
Spatial Pattern of Regional Imbalances in India:
4.0

HOW TO REDUCE GAPS IN INFRASTRUCUTRE DEVELOPMENT

There are competing hypotheses to explain the phenomena of divergence.

Using a newly developed framework, we are able to quantify the contributions
of various factors to the observed patterns of regional inequality and test the
alternative hypotheses.
In a closed economy with agriculture as the predominant mode of production,
the comparative advantage is mainly determined by the difference in land
quality and climate 10 across regions within a country. But when the economy
opens its door to the rest of the world, a regions comparative advantage is
evaluated in a broader global context. Therefore, regions adjacent to more
developed economies, or with better infrastructure such as ports and airports,

may enjoy a far better location advantage for trade and development than
landlocked regions, and therefore may have a faster growth.
In contrast, those states neighboring to poor or hostile countries are lagging
behind in the process of opening up. Efforts thorough the planning process in
the first several decades of independence might have positive effect in
reducing regional inequality. But the traditional ways of allocating development
expenditure means of planning may become obsolete in the era of economic
liberalization. Therefore, new way of thinking is called to promote balanced
regional development. More investment in physical infrastructure such as
roads will bring the interior regions closer to the world markets. As education is
the only equalizing factor to regional development, promoting wide access to
basic education will enable more people to share the gains of market reforms
and lead to a broad-based regional
Steps Taken to reduce infrastructural Gaps in India
a) Credibility has been restored on the fiscal front. By meeting the fiscal
target through incessant government-expenditure reduction, India is
once again on the path of fiscal consolidation. It is not just the level of
the deficit but also the shift in the quality of government expenditure
which should be listed as one of the governments achievements.
b) Due to this expenditure control, as well as an overhaul of the NREGA
scheme and active positive intervention in the food market, consumer
prices are now on a predictable disinflation path. This is just what is
needed for Indias growth to recover to trend.
c) Stalled projects were at Rs 2,58,600 crore at the end of the December
2013 quarter. By March 2015, the value of stalled projects was down by
70 percent to Rs 82,400 crore.
d) Government capex has taken off. Again, along with inflation, this change
in government expenditure mix is essential to set the stage for a new
growth cycle. Thus, new investment projects for the past four quarters

have totalled Rs 10,01,000 crore, almost double of what the number

was at the end of March 2014 (Rs 5,46,200 crore).
e) Law making is back on track, evidenced by the remarkable rise in the
productivity of Parliament as well as the numerous new reform-oriented
laws passed. In the three sessions since the Modi government took
over, Parliament has registered 91 percent productivity with the Upper
House doing 89 percent. This is a reflection of the governments intent
rather than just its numbers in the Houses.
f) Finally, optimism is up. Sentiment is crucial to investment decisions and
hence, boosting the outlook for the future is a critical ingredient to
growth. It is visible in FDI flows as well as in stock market multiples.
Gross FDI inflows rose to $45.4 billion in the 12 months ended January
2015 (up 33 percent year-on-year), which is very close to the all-time
high of $46.5 billion for the 12 months ended March 2012. The stock
market capitalisation had dropped to 60 percent of GDP in 2013, but is
now at 80 percent, reflecting greater confidence in Indias medium-term
earnings growth recovery.
5.0

BENEFITS OF INFRASTRUCTURE STIMULUS

5.1.1

PUBLIC SPENDING EFFECTS

Public investment also has the potential to lay the foundations of medium-term
growth if the investment is in infrastructure, since this has the effect of raising
the growth potential and also crowds in private investment, unlike other kinds
of government expenditure which may actually crowd out private investment.
The investment is likely to be in rebuilding and upgrading existing
infrastructure, much of which was put in place long before the more modern
infrastructure in emerging market economies (EMEs), who have, in a sense,
reaped the advantage of late development. There is also a latent demand for
smart grids and green infrastructure in advanced countries

5.1.2

RESKILLING REQUIREMENT

Infrastructure centred on natural gas, particularly shale, also presents a huge

public investment opportunity. There is also need for putting in place a new
infrastructure that creates high-end skills, as it is likely that future job creation
in advanced countries would be in high-end manufacturing and services, rather
than in labour-intensive or medium skill areas in which emerging markets are
more competitive.
It also needs to be recognised that greater funding and investment in
infrastructure may not be an optimal solution in all countries that may need to
focus more on rebalancing demand towards domestic consumption. It also
goes without saying that the focus on investment should not detract from the
imperative for structural reforms necessary to encourage private sector job
creation. The dangers of creating white elephants and pork barrel politics
would also need to be mitigated.
5.1.3

FINANCIAL EXCESSES
Regardless of these caveats, taking emerging market and developing
economies (EMDEs) as a whole (and perhaps some advanced economies as
well), there is an argument that long-term funding and investment in
infrastructure may assist the objectives of furthering development, rebalancing,
reviving growth and creating jobs.
Infrastructure investment can be one such growth lever. Increase in final
consumer demand in surplus countries can be another. For deficit countries to
exploit these opportunities, they need to become more competitive by
implementing ambitious product and labour market reforms.