Rural Infrastructure and Growth: An Overview

P. Satish* Rural infrastructure is crucial for agriculture, agro-industries and overall economic development of rural areas. It also, incidentally, provides basic amenities that improve the quality of life. However, infrastructure projects, including those in rural sector, involve huge initial investments, long gestation periods, high incremental capital output ratio, high risk and low rate of returns on investment. All these factors are not conducive for private sector entry into infrastructure. As a result of this, infrastructure services, the world over, are largely provided by the public sector. Rural infrastructure development is a complex phenomena, due to the many attributes of infrastructure that make it difficult for individuals to design, construct, operate and maintain these services effectively and efficiently. Some problems stem simply from the fact that infrastructure facilities by nature have potentially long, useful lives during which the circumstances of users may change. Thus, decisions concerning their initial design and subsequent maintenance are extremely difficult to perfect. Even greater problems arise as sustainability of the bulk of the rural infrastructure in the developing world is influenced greatly by public sector decision-making. There are often good reasons for public sector involvement in the provision of rural infrastructure services, however in the production of such services there exists a role for other than public sector entities also (Ostrom, Schroeder and Wynne, 1993) Infrastructure is an umbrella term for many activities referred to as social overhead capital by development economists as Arthur Lewis, Rosenstein-Rodan, Ragner _____________________________________________________________________
* Chief General Manager, National Bank for Agriculture and Rural Development (NABARD), Head Office, Mumbai-400 051 Keynote paper on Subject III Rural Infrastructure and Growth to be presented during the 66 th Annual Conference of the Indian Society of Agricultural Economics, to be held at ICAR Research Complex for the NEH Region, Umiam (Barapani), Meghalaya on November 8-10, 2006 The views expressed are those of the author and not of the institution in which he is employed

Nurkse and Albert Hirschman. Lewis included public utilities, ports, water supply and electricity as infrastructure (Lewis, 1955) whereas Hirschman outlined four conditions that characterise infrastructure or social overhead capital: the services provided to facilitate or are basic to economic activity; the services are usually public goods because of economic externalities; these services cannot be imported; these investments tend to be indivisible or lumpy (Hirschman, 1958). Later, in the sixties, besides the above, emphasis was laid on agricultural research, extension and rural financial institutions as important elements of infrastructure, due to increasing recognition of the role of agriculture in economic development and the vital role that infrastructure plays in generating agricultural growth (de Vries, 1960) (Ishikawa, 1967) The World Development Report of 1994 included the following in its definition of infrastructure Public utilities-power, telecommunications, piped water supply, sanitation and sewerage, solid waste collection and disposal and piped gas. Public works-roads, major dam and canal works for irrigation and drainage. Other transport sectors-urban and inter-urban railways, urban transport, ports and waterways, and airports. (World Bank, 1994) Other authors, like Ahmed and Donovan (Ahmed and Donovan, 1992) disagree with this type of infrastructure definition, indicating that the concept has evolved since the early work of Arthur Lewis and Albert Hirschman towards a more comprehensive definition that includes a wider range of public services that facilitate production and trade. In the case of agricultural infrastructure, Ahmed and Donovan recognize the growing importance of its role in economic development: the related literature includes agricultural research, extension services, financial institutions and irrigation as part of a wider concept of infrastructure. Authors such as Fosu et al. (Fosu et al. 1995), reflecting this broader definition, distinguish up to 11 components of agricultural infrastructure: irrigation and public access to water; means of transportation; storage services; commercial infrastructure; processing infrastructure; public services; agricultural research and extension services; communication and information services;

land conservation services; credit and financial institutions; and, finally, health and education services. This listing makes reference to rural infrastructure before agricultural infrastructure, thus, as Fosu et al. state, the conjunction of infrastructure services includes items that not only facilitate the development of agricultural activities, but also rural activities and sometimes even urban activities. A similar classification of agricultural infrastructure developed earlier by Wharton (Wharton, 1967), identifies three categories: one that is capital intensive (like roads, bridges and dykes); one that is capital extensive (principally extension services or vegetable and animal sanitation services); and the institutional infrastructure (that consists of formal and informal institutions). Wharton was one of the first to emphasize the importance of infrastructure in the generation of positive externalities at the microeconomic level. This author recognized that agricultural development is not exclusively determined by the economic behavior of the producers, but also depends on the environment, which according to Wharton includes physical-climatic, socio-cultural and institutional components that form what he calls the agricultural infrastructure. Provision of adequate and quality infrastructure in rural areas is necessary for increasing the productivity and efficiency of agriculture in the form of improving the credit absorbing capacity, enhancing the productivity of crops and livestock, generating employment and increasing farmers income etc. and in the process, it makes a direct attack on minimizing the incidence of rural poverty. Integration of Indian economy with the global economy has put forth enormous opportunities as well as challenges to agricultural sector to become resilient, cost effective, competitive and quality conscious in the international market. This challenge can be met only with a well-conceived perspective plan on rural infrastructure development. Role of Infrastructure Adequate infrastructure raises productivity and lowers production costs, but it has to expand fast enough to accommodate growth. While the precise linkages between infrastructure and development are yet to be firmly established, it is estimated that infrastructure capacity grows step for step with economic output-a 1 percent increase in

the stock of infrastructure is associated with a 1 percent increase in GDP across all countries (Summers and Heston, 1991) As countries develop, infrastructure must adapt to support changing patterns of demand, as the shares of power, roads, and telecommunications in the total stock of infrastructure increase relative to those of such basic services as water and irrigation (Ingram and Fay, 1993) The role of infrastructure factors in economic development is complex and indirect. The theories of economic development focus sufficient attention on this discussion. Hirschmans point of view was that enlarged availability of electric power and transportation facilities are essential preconditions for economic development practically everywhere and investments in essential overhead capital is advocated not because of its direct effect on final output, but because it permits, and in fact invites, direct productive activities to come in (Hirschman, 1958). In his theory of Stages of Growth, Rostow held similar views and considered social overhead capital, especially in transport and communication as one of the main pre-conditions for take off (Rostow, 1960). The role of social overhead capital in accelerating economic growth and in enhancing public welfare is more pronounced in developing economies as the indivisibility in the social overhead capital has been identified as one of the main obstacles of the development of under-developed countries (Rosenstein-Rodan, 1943) Infrastructure for agriculture and rural development The models of development which focus on agriculture also bring about the role that infrastructure plays in agricultural development in particular. The spread of technology in agriculture depends critically on both physical and institutional infrastructure. It is also indicated that infrastructure plays a strategic role in producing large multiplier effects in the economy with agricultural growth (Mellor, 1976) Rural infrastructure leads to agricultural expansion by increasing yields, farmers access to markets and availability of institutional finance. The kind of infrastructure put in place also determines whether growth does all that it can to reduce poverty. Most of the poor are in rural areas, and the growth of farm productivity and non-farm rural employment is linked closely to infrastructure provision (World Bank, 1994)

The importance of infrastructure in agriculture and rural development is well documented. It is estimated that 15 percent of crop produce is lost between the farm gate and the consumer because of poor roads and inappropriate storage facilities alone, adversely influencing the income of farmers (World Bank, 1997) Strengthening rural infrastructure can help to lower production costs which can further augment agricultural output and income for rural farming community. Rural infrastructure has its impact on attitudes and values of rural households as well. The most profound effect of infrastructure development could be on the values of rural households. Development of transport and communication infrastructure enhances the mobility of people and information through reduction in cost and time. The resulting increase in interaction contributes to changes in attitudes and human capital development (Ahmad, 1996) Rural infrastructure plays a key role in reaching the large mass of rural poor. When rural infrastructure has deteriorated or is nonexistent, the cost of marketing farm produce can be prohibitive for poor farmers. Poor rural infrastructure also limits the ability of traders to travel to and communicate with remote farming areas, limiting market access from these areas and eliminating competition for their produce. Construction of rural roads almost inevitably leads to increases in agricultural production and productivity by bringing in new land into cultivation or by intensifying existing land use to take advantage of expanded market opportunities. In addition to facilitating agricultural commercialization and diversification, rural infrastructure, particularly roads, consolidates the links between agricultural and nonagricultural activities within rural areas and between rural and urban areas (IFAD, 1995) Binswanger, Deininger and Feder (1993), in a study of 13 states in India, found that investments in rural infrastructure lowered transportation costs, increased farmers access to markets, and led to substantial agricultural expansion. Better roads also lowered the transaction costs of credit services, resulting in increased lending to farmers, higher demands for agricultural inputs, and higher crop yields. Fan, Hazell and Haque (1998) extend these results to show that rural infrastructure is not only an

important driver for total productivity growth (TFP), but also directly contributes to a substantial reduction in rural poverty. Based on an econometric model and state level data for 1970-93, they find that the productivity enhancing investments offer a win-win strategy for reducing poverty while at the same time increasing agricultural productivity. There appear to be no tradeoffs between these two goals. According to the analysis, government expenditure on roads has by far the largest impact on poverty alleviation in rural areas, because it leads to new (non) agricultural employment opportunities, higher wages, and increases in productivity. If the government were to increase its investment in roads by Rs 100 billion (at 1993 constant prices), the incidence of rural poverty would be reduced by 0.87 percent and TFP would increase by 3.03 percent. Similar investment in agricultural research extension would contribute to 6.08 percent growth in TFP and 0.48 percent reduction in rural poverty (Fan, Hazell and Haque, 1998) For specific infrastructure impact cases (like the role of rural roads, telephones or access to electricity on poverty alleviation) the literature has a broad spectrum of work. (Howe, 1984), (Binswanger, Khandker and Rosenzweig, 1993), (Jacoby, 1998), (Lebo and Schelling 2001). A recent study estimated the fixed transaction costs (those not dependent on commercialized volume) that impede access to product markets by subsistence farmers in Kenya. These authors estimate that high transaction costs are equivalent to a value added tax of approximately 15 percent illustrating the opportunities to raise producer welfare with effective infrastructure investments (Renkow, Hallstrom and Karanja, 2003) Based on an infrastructure index that includes road, rail and telecommunications density, a study found that infrastructure is a significant and quantitatively important determinant of bilateral trade flows. Improving destination infrastructure by one standard deviation reduces transport costs by an amount equivalent to a reduction of 6,500 sea km or 1,000km of overland travel. According to their findings, most of Africas poor trade performance can be accounted for by poor infrastructure (Limo and Venables 1999)

Improved infrastructure also leads to expansion of markets, economies of scale and improvement in factor market operations. The development of rural infrastructure helps to enlarge markets with greater access to factors of production. The female labour participation rate increases as traditional taboos against it are overcome (Rahman, 1993). Easier access to market allows an expansion of perishable and transport-cost intensive products. It can also lead to a conversion of latent demand into effective commercial demand. These effects of infrastructure accentuate the process of commercialisation in agriculture and rural sector (Jaffee and Morton, 1995) There is increased scale of trade too and helps in reduction of trading costs per unit owing to the economies of scale. Further, dominance of poor is more in rural areas as compared to urban areas. Therefore, any investment that helps to increase rural production, income and employment is expected to reduce poverty. There has been evidence linking poverty alleviation with infrastructure development. Infrastructure leads to an increase in crop income among small farmers (Ahmad and Hossain, 1990) It has been observed that there was a direct relationship between increase in acreage of export crop cultivation and the standard of roads and distance from main commercial centers. There is enhanced entrepreneurial activity, sharp decline in freight and passenger charges and improved services as a result of investment in rural roads (Bonney, 1964) While analysing the socio-economic impact of new roads on small and isolated village communities in Mexico, it was found that the roads created inflow and outflow generation of transportation, communication and modernisation as well as migration, both into and out of the community. In this sense, rural roads act not only as the bridge between the urban/developed and poor/rural/underdeveloped areas but also as agencies of diffusion, contact and unification (Elmondorf and Merrill, 1977) Impact of Investments in Rural Infrastructure In order to further analyse the effects of public infrastructure on rural development and rural poverty, it is necessary to distinguish between direct and indirect effects. The former occur when an increase in public infrastructure is accompanied by an increase in

production, shifting the production frontier and marginal cost curve, and also increasing the rate of return for private investment in rural activities. The latter takes place as the access to public infrastructure permits a reduction in the transaction costs that small producers face when they integrate into the supply and factor markets. These lower transaction costs change the structure of relative prices significantly for the producer, stimulating changes in the methods of cultivation and breeding, possibly inducing such changes as transition in the allocation of the labour force between agriculture and nonagricultural uses. Adequate access to public infrastructure will also have a positive effect on whether or not technical changes that elevate productivity are achieved, for both agricultural and non-agricultural rural activities. A number of microeconomic-level studies have investigated how a greater investment in infrastructure raises agricultural productivity. But infrastructure investments have many effects. As long as the majority of rural households are dedicated to more than one income activity, whether salaried or non-salaried, agricultural or non-agricultural, it is not abnormal that the access to public infrastructure will also affect household labor assignments (diversifying livelihoods). One study, for example found for Tanzania a significant increase is non-agricultural activities as a consequence of a better infrastructure in roads (Lanjouw, Quizon and Sparrow, 2001) This diversification could be the product of the necessity to hedge against unanticipated risks in a context where credit and insurance markets malfunction or are not existent (Zimmerman and Carter, 2003) (Ellis, Kutengule and Nyasulu, 2003). Alternately the result could be due to the existence of entry barriers that prevent access to more profitable labour markets due to insufficient public or private assets (Reardon, Berdegue and Escobar, 2001). In either of the two cases, the access to public infrastructure could have a direct or indirect role increasing the income generating opportunities for the poorest rural populations. Improved infrastructure also facilitates the most economical location for different types of non-farm activity. While many manufacturing and wholesale trading activities tend to concentrate in rural towns, many smallscale manufacturing activities (e.g. cottage industry and milling) and service activities (e.g. retail shops, coffee and tea shops and

personal services) expand in villages and rural market centers as infrastructure and agricultural development proceeds (Wanmali, 1983). Infrastructure development also opens up the rural economy to greater competition from outside. This may take the form of cheaper products from lower-cost sources of supply or new or improved products that may displace some locally produced items. Improved infrastructure increases the exposure of rural people to urban tastes and products and this leads to changes in consumption behaviour. The availability of electricity in a village for example, creates demand for electrical goods that are imported or produced in urban areas. Better roads and transport also lead rural people to travel to town more often and, once there, to purchase goods and services that they could not easily obtain before or that cost more at home. Some traditional rural and cottage industries lose their markets, but other types of activities expand and prosper (Jayaraman and Lanjouw, 1998) In summary, the majority of studies recognize that infrastructure investment has a strong impact on rural incomes and especially on smallholders. However, this literature has not been completely successful in assessing the benefits and costs of alternative infrastructure investment options or the causality of relations that generate higher rural incomes due to a better endowment of infrastructure services. The work carried out by Fan and associates, (Fan and Hazell, 1999) (Zhang and Fan, 2000) (Fan, Hazell and Haque, 2000), (Fan, Hazell and Thorat, 2000) and (Fan, Zhang and Zhang, 2002) in India and China are some of the few studies that look into the relationships between investment in infrastructure, rural growth, poverty alleviation and the role of complementarities of investments. The problem with the lack of causal relationship knowledge between the investment in infrastructure services and the increase of income generating opportunities and welfare benefits of rural populations is that the possibility of developing specific policy recommendations is very limited. This problem normally results in policy recommendations that are directed towards a general increase in public infrastructure investment but lacks opinions about appropriate intervention strategies for each specific context. In light of this, and with the scarce public fiscal resources available in developing countries, knowing the relative profitability of each type of public infrastructure is critical. Likewise, it is essential to understand the principal

mechanisms that stimulate changes in the livelihoods of rural inhabitants as a result of a determined increment in rural infrastructure services. The ex-poste study of the effects of rural roads improvement in the Philippines revealed improved economic social and human services indicators, as a result of improvement in rural roads. The gross household income increased by 28 percent primarily due to cheaper and more reliable transport, cheaper farm inputs, higher farm gate prices and large share of major crops sold directly in markets. There was increased non-farm employment, better access to education, health and farm management services, improved recreation facilities and information flows (USAID, 1978) Improvement in rural roads effect agricultural development followed by the development of social services. It is observed that roads tend to have a greater initial impact on the production where cash crops are grown, because food crops, grown by small farmers have a lower price elasticity of supply than cash crops (USAID, 1972) Therefore, more developed the existing agricultural system, more significant and more faster is the response to road provision or road improvements within an area. Access to better health and education usually improves more rapidly along roads than elsewhere. A study in Thailand revealed that impact of roads was more on isolated areas that were brought into the mainstream. The area under cultivation and the intensity of land use increased significantly wherever access to market is improved (Moore, 1980) A study of the socio economic improvement, with roads, on the village development, based on a survey of 1662 villages in India, found that effect of accessibility was greater for unimproved than for improved roads suggesting that in bringing about socio economic change, existence of some kind of trafficable route is of major importance. Its quality is a second-order consideration (Bansal and Patil, 1979) In another study macro data was used from eighty five random selected districts of India to examine the role of rural roads, among other factors in agriculture investment and output. The study found that the road investment contributed directly to the growth of agriculture output, increased use of fertiliser, expansion of commercial bank operations etc (Binswanger,

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Khandker and Rosenzweig, 1993) The study by IFPRI on a survey of 129 villages in various parts of Bangladesh categorised the villages into two groups based on an aggregate index developed to reflect the ease and access of a village to various services such as markets, schools, banks and local administrative offices. Villages with better access were found to be significantly better off in a number of areas including agricultural production, household income, wage income of landless labour, health and participation of women in the economy (Ahmad and Hossain, 1990) There was also an observation regarding the positive impact of social development and irrigation intensity factors on the composite index of economic development at the district level (Gulati, 1997) Within the social development factors, the surfaced road length and electricity turned out to be the crucial infrastructure. In a state level analysis for two periods of time, viz., 1970-71 and 1980-81, the inadequacy of infrastructure facilities has been seen as a major obstacle in the path of progress of developing states. It was observed that infrastructure had a positive impact on development, atleast in six states while in another five, low development levels were associated with poor infrastructure development (Tewari, 1984) Another study for a recent period found positive and significant relationship between the level of infrastructure and per capital net straight domestic product between 1971-72 and 1994-95 (Ghosh and De, 1998) A positive correlation was also observed between infrastructure and agricultural development. Among the various infrastructure facilities, agricultural development was strongly correlated with agricultural infrastructure index followed by index of transport and communication (Singh, 1983) On the basis of a regression analysis and state level cross-section data for each of the years from 1971-1995 a study indicated that among various physical infrastructures, it was transport infrastructure that significantly affected the agricultural output level and the agricultural development index. However, besides physical infrastructure, social infrastructure also had significant positive impact on the dependent variables. At the district level, from the regression analysis, at three points of time, viz., 1971, 1981 and 1991, the study observed that agricultural and transport infrastructure are import

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determinants of agricultural output and agricultural development index (Majumdar, 2002) A recent study attempted to analyse the impact of infrastructure on agriculture development using larger data, both in terms of time period and coverage of infrastructure variables to include ten explanatory variables viz., transport, power, irrigation, tractorisation, research, extension, access to primary agricultural credit societies, regulated and wholesale marketing infrastructure, access to fertiliser sale points and commercial banks covering physical financial and research infrastructure. The results indicate that transport, power, irrigation and research infrastructure are four critical components that affect the agricultural productivity in a significant manner. However, between transport and power, the former emerged as a more dominant variable. There were complementarities between transport and power in the sense that accessibility to roads is normally followed by accessibility to power. With improvement in access to power, irrigation infrastructure also improved particularly through energisation of pumpsets. In turn, improved irrigation facilities, coupled with research input enhanced agricultural productivity. The other infrastructure facilities like access to fertiliser sale points, markets, credit infrastructure, extension services etc was also developed with development of transport infrastructure (Thorat and Sirohi, 2002) Growth of Rural Infrastructure in India since Independence The investment pressure from infrastructure being the major source of investment demand in the Indian context, at the stage of development the country is in, a productive or input type infrastructure, i.e. power, irrigation, transport, telecommunication, banking etc will have to expand at the rate of atleast corresponding growth rate of the economy. Government has traditionally been well aware of the fact that the availability of adequate infrastructure facilities is vital for the acceleration of economic development of a country. At the time of independence, the government has accepted the crucial role played by infrastructure in the development process of the country and also

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realised that given the long gestation of infrastructure projects and their generally low profitability, private capital is unlikely to flow into the infrastructure sectors and hence the responsibility was shouldered by the public sector and infrastructure development became the domain of the state. Consequently, in the Five Year Plans, priority was accorded to investments in sectors such as power, transport, communication etc. The First Five Year Plan recognised that large areas of the country have remained underdeveloped due to the lack of basic services like transport, communication, irrigation and power and this plan attached priority to agriculture including irrigation and power. The Plan sought that agricultural development receives the highest precedence that necessitates an extensive programme of investment covering minor as well as major irrigation projects. Generation of electricity and power that is linked in most places to the major investment projects was also a high priority in its own right. In regard to transport also, public authority has a special responsibility. The State has to take further initiative in linking up the whole country through the system of roads reaching down to the village and in promoting the development of modern means of transport like shipping and aviation (Thorat and Sirohi, 2002) But in the sixties, India entered into deep structural retrogression and some of the major sectors of infrastructure, like railways and irrigation were among worst hit. While the Plans continued to emphasise on the infrastructure development, there were no matching financial outlays for these sectors. The long period of stagnation in the Indian economy and the worldwide disenchantment with the trickle-down strategy essentially changed the focus of the policy of the State from growth to re-distribution. However, infrastructure development continued to be an important element from the Indian policy perspective and the Sixth Five Year Plan, reiterated the need for massive public investment in rural infrastructure and ensuring that the fruits of economic progress are more equitably distributed in rural areas. The Plan clearly recognised that altering the new projects in favour of quick maturing and directly productive projects, may improve the short term prospects, but would adversely affect the long term growth rate, as such a choice leads to less investment in long gestation infrastructure projects (GoI, 1981)

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The Eighth Five Year Plan re-emphasised rural infrastructure development and considered it to be one of the basic elements of an employment-oriented growth strategy. Also, the creation of communication, transport, health and educational infrastructure in large numbers of small towns and in rural areas was considered to make the process of urbanisation more compatible with the overall economic development pattern and environmentally less damaging. Thus, strengthening the infrastructure (energy, transport, communication, irrigation) in order to support the growth process on a sustainable basis was one of the explicit objectives that was to be accorded priority in the Plan. Besides, the development of physical infrastructure, the Plan also recognised that social infrastructure is to be attended to with a degree of urgency in the next phase of development (GoI, 1992) With the large-scale plan expenditure of the government, the availability of infrastructure has significantly expanded in the country over the years. The growth in the stock of major infrastructure items in India has been shown in Table 1. Table 1 shows that the stock of infrastructure has expanded manifold in the country in the 46 years of planned development. The electric power generation has increased almost 75 times from 5.1 billion kWh in 1950-51 to about 380 billion kWh in 1995-96. Fertiliser production in the country has increased from 0.50 lakh tonnes to over 117 lakh tonnes, whereas irrigational facilities have increased from 22.50 million hectare to 70.25 million hectare during the same period of 1950-51 to 1995-96. These are three important physical items of infrastructure significantly influencing production and growth in agriculture. Equally important is the marketing infrastructure including roads and transport, storage and market facilities which provide impetus to agricultural production growth through orderly disposal. While road lengths have increased to seven times, the commercial vehicles in the country have increased to over 19 times from 1.16 lakhs to 22.21 lakhs during 1950-51 to 1995-96. Similarly the number of regulated markets in the country has increased from 206 to 6,836 during the same period (Bhatia, 1999)

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Table 1 All India Expanded Stock of Infrastructure Year Power Generation (bln kwh) Irrigated Fertiliser Area Production (mln ha) (lakh tonnes) 0.5 1.5 10.50 30.08 90.45 117.03 Road Length (000 kms) 400 524 918 1491 2037 2884 No of Commercial Vehicles (lakh) 1.16 2.25 4.37 7.01 17.44 22.21 No of Regulated Wholesale Markets 206 715 1777 4158 6250 6836 No of Registered Medical Practition ers (000) 61.39 83.46 153.5 266.49 397.76 491.4

1950- 5.1 22.56 51 1960- 16.9 27.98 61 1970- 55.8 38.19 71 1980- 110.8 49.73 81 1990- 264.3 62.47 91 1995- 380 70.25 96 Source: Bhatia (1999)

The development of infrastructure state-wise can be gauged from the Composite Rural Infrastructure Development Index presented in Table 2 that has been worked out by the Centre for Monitoring Indian Economy (CMIE). Table 2 State-wise Infrastructure Development Index Sl No 1 2 3 4 5 6 7 8 9 10 11 State Andhra Pradesh Arunachal Pradesh Assam Bihar Goa Gujarat Haryana Himachal Pradesh Jammu and Kashmir Karnataka Kerala CDI Value 104.01 71.89 104.39 91.31 171.57 105.33 133.12 113.12 92.03 106.12 162.42 Rank 12 25 11 17 2 10 5 6 16 9 3

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12 13 14 15 16 17 18 19 20 21 22 23 24 25

Madhya Pradesh 86.66 Maharashtra 106.77 Manipur 83.50 Meghalaya 77.60 Mizoram 84.49 Nagaland 89.89 Orissa 101.45 Punjab 171.92 Rajasthan 87.27 Sikkim 83.01 Tamil Nadu 145.62 Tripura 92.85 Uttar Pradesh 112.04 West Bengal 102.09 All India 100 Source: Centre for Monitoring Indian Economy (CMIE), 2000.

20 8 22 24 21 18 14 1 19 23 4 15 7 13

The Table shows that nine states have an index that is less than the national average while index value was highest for Punjab, followed by Goa, Kerala and Tamil Nadu. It was lowest for Arunachal Pradesh followed by Meghalaya and Sikkim. Although the status of infrastructure development in certain states was on par with the national average, economic backwardness is considerably more than that of most of the states. It is also pertinent to mention here that the composite index based on quantitative information does not reflect the qualitative aspects of social and economic infrastructure. The inverse relationship between poverty and backwardness on one hand and Infrastructure Development Index (IDI) on the other is well established as seen from Tables 3 and 4 Table 3 Relationship Between Poverty Indices and Levels of IDI Poverty Level High Medium Low No. of Regions 19 (100.0) 19 (100.0) 19 High 5 (25.3) 9 16 IDI level Medium 4 (21.1) 6 (31.6) 7 Low 15 (78.9) 8 (42.1) 3

(100.0) (47.4) (36.8) Total 57 14 17 (100.0) (24.6) (29.8) Figures in brackets are percentages Source: India Rural Development Report 1999, NIRD. Table 4

(15.8) 26 (45.6)

States where more than 40 percent regions fall in bottom 30 percent for infrastructure ranking State Uttar Pradesh Rajasthan Madhya No. of Electricity Post & Roads Gross Backwardness Regions Telegraph Irrigated Index (%) Area 5 4 4 5 65.0 4 7 3 1 3 3 4 7 4 1 1 2 62.5 53.6 50.0 50.0 50.0 50.0

Pradesh Meghalaya 1 1 1 Bihar 3 3 2 Assam 3 3 1 1 Orissa 3 3 1 Source: India Rural Development Report 1999, NIRD.

The status of IDI varies within the states between various regions as is observed in Table 5. States with predominant deficiency in infrastructure in four prominent sectors are indicated in Table 6 Table 5 Region-wise IDI Status within States State Andhra Pradesh Assam Bihar Gujarat Haryana Himachal Pradesh Karnataka No. of Regions 4 3 3 3 2 1 4 17 High 2 2 2 1 IDI Medium 2 1 4 Low 3 3 -

Kerala Madhya Pradesh Maharashtra Orissa Punjab Rajasthan Tamilnadu Uttar Pradesh West Bengal Total

2 7 6 3 2 4 4 5 4 57

1 2 4 14

1 3 1 2 3 17

7 3 3 3 3 1 26 (45.6)

(100.0) (24.6) (24.8) Figures in brackets are percentages Source: India Rural Development Report 1999, NIRD Table 6 States with predominant deficiency in infrastructure Sl. No. 1 2 3 4 Sector Electricity States

Assam, Bihar, Orissa, Rajasthan, UP, West Bengal,

Meghalaya Posts & Telegraph Arunachal Pradesh, Bihar, Rajasthan, UP, Meghalaya Road Density MP, Rajasthan, UP Gross Irrigated Maharashtra, MP, Kerala, Orissa, Assam

Area Source: India Rural Development Report 1999, NIRD The effect of diminished public investments in infrastructure like irrigation since mid1990s has had an effect on the capital formation in agriculture. The decline in the share of the agricultural sectors capital formation in GDP from 2.2 percent in the late 1990s to 1.7 percent in 2004-05 is a matter of concern. However, there is an indication of reversal of this trend with public investment in agriculture reaching its highest level of Rs 12,591 crore in 2004-05 since the early nineties. The share of public investment in gross investment increased by over 11 percentage points to reach 29.2 percent in 200405 relative to 1999-2000 (Economic Survey, 2006) The study by Bhatia also examines the relationship between infrastructure and agricultural output. The state wise index of infrastructure, per hectare yield of

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foodgrains and value of agricultural production for 1994-95 are indicated in Table 7. It can be observed from the Table that Punjab which has the highest index of infrastructure also has the highest yield of foodgrains and value of agricultural production per hectare. Tamil Nadu and Haryana which have second and third highest index of infrastructure, have third and second highest yield per hectare of foodgrains. Rajasthan and Madhya Pradesh which have a very low index of infrastructure also have a low yield of foodgrains and total value of agricultural production per hectare (Bhatia, 1999) Table 7 Statewise Index of Rural Infrastructure, Yield of Foodgrains and Value of Productivity per Hectare Sl. No. State Index of Yield of Infrastructure Foodgrains per Hectare (Kg) 53.6 (X) 1713 (VII) 50.8 (XI) 1308 (XI) 42.0 (XV) 1446 (X) 55.6 (VII) 1249 (XII) 65.9 (IV) 2730 (II) 56.6 (VI) 1643 (VIII) 53.9 (IX) 1632 (IX) 56.8 (V) 1152 (XIV) 70.0 (II) 1873 (VI) 42.0 (XV) 1088 (XV) 54.4 (VIII) 852 (XVII) 47.9 (XIV) 1231 (XIII) 85.3 (I) 3684 (I) 38.3 (XVI) 906 (XVI) 68.4 (III) 2358 (III) 50.1 (XIII) 1932 (V) 50.4 (XII) 2077 (IV) Value of Output per Hectare (Rs) 4089 (XI) 5402 (VIII) 4091 (X) 2062 (XVII) 7288 (IV) 6797 (V) 6696 (VI) 3368 (XII) 8088 (II) 2180 (XV) 2275 (XIV) 2765 (XIII) 9133 (I) 2109 (XVI) 5204 (IX) 5744 (VII) 7798 (III)

1 Andhra Pradesh 2 Assam 3 Bihar 4 Gujarat 5 Haryana 6 Himachal Pradesh 7 Jammu and Kashmir 8 Karnataka 9 Kerala 10 Madhya Pradesh 11 Maharashtra 12 Orissa 13 Punjab 14 Rajasthan 15 Tamil Nadu 16 Uttar Pradesh 17 West Bengal Source: Bhatia (1999) Figures in brackets are rankings

Despite the creeping commercialisation of infrastructure provision services, there has been a realization that the State has to continue playing a major role in strengthening

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the physical infrastructure. There is also an increasing understanding on the part of the State about the social dimension of infrastructure and the State continues to bear the responsibility of providing the poor with adequate access to basic services such as health, education, water supply, sanitation and sewerage. With these objectives in view the Government of India continued to implement specific infrastructure strengthening programmes in sectors like irrigation, rural electrification, rural connectivity and rural drinking water supply. The Accelerated Irrigation Benefit Programme (AIBP) was launched by the Central Government in 1996-97 for accelerating implementation of ongoing irrigation/multipurpose projects on which substantial progress has been made and which are beyond the resource capability of the State Governments or at advanced stages of construction and could yield irrigation benefits in the next four agricultural seasons. The reforming states, characterized as the ones, which agree to revise their water rates to cover operation and maintenance costs get a higher proportion of central loan assistance (CLA). So far Rs 18,103 crores has been released under this programme for 189 major/medium irrigation projects and 4,472 minor irrigation schemes. Of these, 45 major/medium irrigation projects have been completed creating an additional irrigation potential of 3.25 million hectares. 3,179 minor irrigation schemes have been completed creating an irrigation potential of 1.21 lakh hectares. Under the scheme for repair, renovation and restoration of water bodies directly linked to agriculture pilot projects have been launched in 23 districts of 13 States with an estimated cost of Rs 262.91 crores. Irrigation is one of the six components for development of rural infrastructure under Bharat Nirman. The irrigation component of Bharat Nirman aims at creation of irrigation potential of 10 million hectares in the four period of 2005-06 to 2008-09 (Economic Survey, 2006) The Rajiv Gandhi Grameen Vidyutikaran Yojna (RGGVY), a scheme for rural electricity infrastructure and household electrification was launched in 2005-06 to achieve the objective of providing access to electricity to all rural households over a period of four years. At present only 44 percent of rural households have access to

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electricity. Rural Electrification Corporation (REC) is the nodal agency for the programme. The scheme envisages 90 percent capital subsidy for setting up of rural electrification infrastructure which will cater to the requirements of agriculture and other activities, including irrigation pumpsets, small and medium industries, khadi and village industries, cold storage chains, healthcare, education and rural IT. Unelectrified BPL households will get electricity connection free of charge in all rural habitations. So far 187 projects for 191 districts have been sanctioned covering 22 states at the cost of Rs 6,241.86 crores covering 51,284 un electrified villages and 69.29 lakh rural households, of which 45.15 lakh are BPL households. Till December 2005, 1,941 villages have been electrified. As far as rural telephony is concerned, by December 2005, 5,39,572 villages were connected using a Village Public Telephone (VPT). Under Bharat Nirman a total of 66,822 villages are to be provided by VPTs by end 2007. In rural areas more than 2 lakh public call offices (PCOs) and 14.18 million phones have been provided (Economic Survey, 2006) The Pradhan Mantri Gram Sadak Yojana (PMGSY) was launched in 2000 as a 100 percent central subsidy scheme to provide all-weather connectivity to all eligible unconnected rural habitations. Bharat Nirman envisages connectivity by 2009 to all habitations with a population of 1000 or more in the plains and of 500 or more in the hilly, desert and tribal areas. The systematic upgradation of the existing rural road network also is an integral part component of the scheme, funded mainly from the accruals of diesel cess in the Central Road Fund, with the support of multilateral funding agencies and the domestic financial institutions. Upto December 2005, with an expenditure of Rs 12,049 crore a total road length of 82,718 km of road works have been completed. The Accelerated Rural Water Supply Programme (ARWSP), in operation since 1972-73, is now being implemented as a part of Rajiv Gandhi National Drinking Water Mission. It aims at coverage of all rural habitations with population of 100 and above, specially the unreached areas, ensure sustainability of systems and sources and tackle the problem of water quality. As of end 2004-05, 96.1 percent of rural habitations were fully covered and 3.6 percent were partially covered, leaving 03 percent not covered with drinking water facilities. More than 3.7 million hand pumps

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and 1.73 lakh piped water schemes have been installed under this programme. Drinking Water Supply is one of the six components of Bharat Nirman under which it has been envisaged to cover 55,067 uncovered habitations and also to address the problems of slippages and water quality (Economic Survey, 2006) Creation of Rural Infrastructure Development Fund (RIDF) In the context of the need for stepping up agricultural growth rate to 4.5 percent in the Ninth Five Year Plan, emphasis was considered necessary for developing rural infrastructure in sectors like irrigation, roads, bridges etc as an essential requirement for better productivity of capital and labour. Such an emphasis would also help check migration of rural population to urban areas. However one of the basic limitations to create adequate infrastructure was lack of resources. Difficult financial position of the state governments, who are mainly responsible for development and maintenance of rural infrastructure, was a cause for concern. Many well-intentioned infrastructure projects were found languishing for want of resources. This apart it was found that the commercial banks who were expected to channelise 18 percent of their total lending to agriculture were not able to fulfill their commitment. It was therefore considered desirable to create a fund out of the shortfall in commercial banks lending for agriculture in the name of Rural Infrastructure Development Fund (RIDF) to be operationalised by NABARD. Government of India announced this fund in the Budget of 1995-96 aimed at financing on-going rural projects in the area of basic infrastructure like agriculture, production, transport, marketing and other allied activities. The then Finance Minister, in his budget speech, declared "Inadequacy of public investments in agriculture is today a matter of general concern. This is an area which is the responsibility of the states and many states have neglected investments in infrastructure for agriculture. There are may rural projects which have been started but are lying incomplete for want of resources. They represent a major loss of potential income and employment to rural population(GoI, 1995) RIDF was set up within NABARD as a lending facility for State Governments. Set up with an initial amount of Rs. 2000 cr primarily to provide financial assistance to State

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Governments in ensuring speedy completion of projects which could not be completed due to paucity of funds with concerned agencies, the coverage of the scheme is being extended in successive budgets. A significant number of projects covered in the rural areas are, major, medium and minor irrigation, rural roads, bridges, watershed management, rural market yards, Command Area Development, drainage, cold storages, primary health centres, primary schools, rural drinking water supply projects etc. With an allocation of Rs. 2000 cr under RIDF I, in 1995-96, the Fund has reached the level of Rs 10,000 cr under RIDF XII taking the cumulative corpus to Rs. 60,000 cr during 2006-07. In addition, Rs 4,000 crores has been separately allocated for rural roads under Bharat Nirman. Bulk of the investments made in case of rural infrastructure has been shared between irrigation (38.78%) and rural roads (40.1%)followed by rural bridges (13.2%) leaving only 8 percent for other infrastructure activities such as watershed development, flood protection, market yard development, cold storages, fisheries, forest development soil conservation, rural drinking water supply etc. The Fund has been lending every year in tranches and each tranche targeted a specific corpus. Project proposals are invited from State Governments and sanctions are made within a specified corpus for incoming or outgoing projects in minor, medium and major irrigation along with flood protection, watershed management and soil conservation etc. In addition to these activities, the following were added subsequently: Rural roads and bridges; Harvesting of rain water; Construction of terminal market yards; Fishing jetties and cold storages; Primary school buildings; Primary health centres; Village haats; Forest management; Mini-hydel and system improvement projects; Rural drinking water supply projects and Citizen information centres under IT. In the first four tranches of RIDF loans were sanctioned exclusively to the State Governments, while from the Vth tranche onwards, the coverage has been extended to include and execution of projects of Panchayati Raj institutions, SHGs and NGOs.

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The loans from the fund are project based. The project proposals received from the State Governments are appraised for technical feasibility, financial viability and economic and social benefits. While ongoing incomplete projects were accorded priority under RIDF I, new projects have also been made eligible for loans under the subsequent tranches of the fund. Projects with shorter gestation period are given priority for availing loans out of RIDF. State Governments are required to complete the execution of the projects within a maximum period of three years. In RIDF V and subsequent tranches the period of repayment and period of loan has also been increased from five to seven years. Loans under RIDF are sanctioned upto 90 percent of the project cost. Depending upon the requirement of State Government, upto 20 percent of the sanctioned loan, on acceptance of the terms and conditions of sanction by the State Government, is given as advance. Further 10 percent can be given if the State Government commences the execution of the projects. Subsequently releases are made on reimbursement basis. The Project Sanctioning Committee which is the subcommittee of the Board of Directors of NABARD sanctions the projects. The rate of interest on lendings to state government is at 0.5 percent above the prevailing bank rate and is at present at 6.5 percent. Under each tranche normative allocation is made to the states on the basis of rural population, geographical area, infrastructural development index and implementation of past projects. The sector-wise projects and amounts sanctioned are indicated in Table 8 and the cumulative sanctions and disbursements are indicated in Table 9 Table 8 Sector-wise Projects and Amounts Sanctioned (As on 31 March 2006) Sector Irrigation No. Amount Rural Bridges No. RIDF I to X (Total) 78,442 14,684.15 9,285 Share (%) 36.7 34.3 4.3 RIDF XI (2005-06) 14,017 2,786.79 706 (Rs crores) Share (%) 46.0 32.7 2.3

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Amount 4,760.84 11.1 827.19 9.7 Rural Roads No. 43,857 20.5 5,454 17.9 Amount 14,493.57 33.9 3,083.66 36.2 Social Sector* No. 67,995 31.7 6,527 21.5 Amount 3,871.84 9.1 1,147.98 13.5 Power Sector# No. 717 0.3 11 0.1 Amount 1,294.37 3.0 125.24 1.5 Others@ No. 13,915 6.5 3,725 12.2 Amount 3,663.91 8.6 540.47 6.4 Total No. 2,14,211 100.0 30,440 100.0 Amount 42,768.68 100.0 8,514.33 100.0 *Includes projects relating to Rural Drinking Water, Primary/Secondary Schools and Public Health Institutions #Includes projects relating to System Improvement in Power Sector and Mini/Small Hydel projects @Include Soil Conservation, Watershed Development, Rain Water Harvesting, Flood Protection, CADA, Drainage, Cold Storage, Fisheries, Riverine Fisheries, Animal Husbandry, Forest Development, Inland Waterways, Rubber Plantations, Seed/ Agri/Horti Farms, Citizen Information Centres, Food Parks, Rural Libraries, Market Yards/ Godowns, Meat Processing, Rural Knowledge Centres etc. Source: NABARD Table 9 Cumulative Sanctions and Disbursements under various tranches (As on 31 March 2006) (Rs crore) RIDF Corpus No of Amount % of Tranche Projects Disbursement** Sanctioned Phased Disbursed I 2,000 4,168 1.906.21 1,906.21 1,760.87 92.4 II 2,500 8,334 2,666.87 2,666.87 2,397.95 89.9 III 2,500 14,346 2,733.82 2,733.82 2,453.50 88.9 IV 3,000 6,172 2,903.32 2,903.32 2,482.00 85.5 V 3,500 12,254* 3,477.16 3,477.16 3,032.66 87.2 VI 4,500 43,354 4,525.36 4,525.36 3,850.83 85.1 VII 5,000 24,987 4,657.65 4,657.65 3,756.82 80.7 VIII 5,500 21,012 6,009.36 6,009.36 4,440.34 73.9 IX 5,500 19,605 5,599.18 5,599.18 3,387.48 60.5 X 8,000 59,979 8,289.75 6,878.48 2,967.81 43.1 XI 8,000 30,440 8,514.33 3,033.30 807.08 26.6 25

Total 50,000 2,44,651 51,283.01 44,390.71 31,337.34 70.6 *One lakh STWs sanctioned to Government of Assam treated as single project **With phased amount Source: NABARD The implementation of the sanctioned projects is subject to close monitoring. For this process, a high power committee at the state level chaired by the Chief Secretary or Agricultural Production Commissioner is constituted. The Committee ensures proper coordination between the implementing agencies and departments of the State Government so that projects are expeditiously implemented. The progress of implementation is also assessed by NABARD through regular field visits and desk monitoring through a specifically designed MIS. Periodic discussions are held with officials at various levels to sort out the operational issues. On the conclusion of the project a Project Completion Report (PCR) is obtained. The objective of this report is to make overall assessment of the potential created for generation of income and employment in rural areas, and to chalk out a strategy for funding identical projects in future. Impact Evaluation of RIDF Projects NABARD conducts evaluation studies on a continuous basis to assess the socio economic impact of investments under RIDF. These findings though limited by methodological variations, locational differences, price differentials etc, throw-up valuable insights into the levels of benefits derived by the farmers. It has been estimated that projects funded under RIDF would facilitate the expansion of the production base in rural areas and create additional employment opportunities as indicated in Table 10. Table 10 Accretion to Rural Infrastructure and Employment (lakh) Rural Infrastructure Additional irrigation potential Rural road network Rural bridges 107.92 ha 2.02 km 3.69 mt.

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Generation of Employment Due to increased irrigation -Recurring (jobs) -Non-recurring (person days) From non-irrigation projectsNon-recurring (person days) Source: NABARD

50.62 15,417 28,348

Five studies sponsored by NABARD conducted on irrigation projects under RIDF in various states have shown various positive impacts of RIDF such as on small farmers coverage, contribution to capital costs, expansion of irrigable and irrigated commercial area, enhanced cropping intensity, incremental income, higher financial rate of return and employment generation. It has been estimated that irrigation projects financed under RIDF I to VIII have created irrigation potential of 75.06 lakhs ha and generated recurring employment of 39.84 lakh jobs per annum (NABARD, 2004) As far as road projects are concerned, the studies conducted by NABARD observed that RIDF investments have led to improvement in access to modern agri economic practices, improved accessibility in case of participation, increased frequency of extension staff etc. Net benefit from investments under rural roads per month was in the range of Rs. 2.08 lakh un Gujarat to Rs. 2.87 lakh in Tamilnadu. Employment availability in terms of mandays per year increased by 35 percent in case of Punjab and 8 percent in case of Rajasthan. Economic rate of return of the investments calculated in DCF technique ranged between 20.2 percent in case of Tamilnadu to 36.2 percent in case of Gujarat. The study also observed positive changes in intangible benefits due to development of rural roads. There were changes in asset holding patters, increase in job availability, increased credit absorption, improvement in access to education and health, improved quality of life etc. Credit absorption in the project area increased by 163 percent in Tamilnadu and by 30 percent in Punjab. Significant change in enrolment to primary schools was observed in states covered in the study. Improved connectivity on account of construction of bridges has resulted in reduction of transportation costs of farm inputs and outputs, vehicle operating costs, travel time etc. It was also observed that commercialisation and diversification of crops, non farm activities, access to urban

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centres, education/ health centres, asset holdings etc showed improvement in the postproject situation (NABARD, 2004) A monitoring study on Kharkhara Mohdipat Irrigation Project in Chhattisgarh revealed that efforts were made to link the available water resources including the existing old tanks under the project command area by remodeling the canal system and extending their tails so as to cover maximum area thereby reducing cost of land acquisition. The study on Primary School Building projects in Karnataka observed that the average time taken for completion of the work was more than two years against one year envisaged, owing primarily to the delay in handing over of the project site to Karnataka Land Army Corporation, award of works and release of funds by Zilla Panchayat. The additional rooms built eased the pressure on the existing infrastructure and provided congenial and conducive atmosphere for learning by the school children. The study on Bisalpur Multi-purpose project in Rajasthan revealed that there were time and cost overruns in both phases(I and II) of the project. The irrigation facilities extended have brought about positive changes in the cropping intensity and productivity. There has also been an improvement in farm mechanization, especially in the use of tractors and threshers. The project paved way for establishment of ITCs e-choupal network for the sale of farm inputs and purchase of outputs and also allied activities such as dairy and bee-keeping units.(NABARD, 2006) NABARD assigns the monitoring/evaluation of projects to select independent consulting firms of repute. Twenty-six projects were thus assigned to outside consultants. These studies revealed that financing under RIDF has unlocked the sunken investments already made by various State Governments. Apart from benefits like increased agriculture activity, improved access to markets, schools, health centers, enhanced social interaction, provision of safe drinking water to the local populace, there has been considerable employment generation and spurt in economic growth in rural areas (NABARD, 2006) Financing Rural Infrastructure: Beyond RIDF

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Financing of the creation of rural infrastructure through the medium of RIDF has entered its twelfth year in 2006-07. However it has to be realized that RIDF is basically dependent on a negative incentive system- the non achievement of priority sector and agriculture lending norms by commercial banks. This implies that if the performance of the commercial banking sector measures up to the demands placed upon them and they are able to fulfill the priority sector and agriculture lending norms no resources would be available for RIDF. But irrespective of the source of funds, the RIDF mechanism would have to continue in view of the comfort levels it has afforded to the State Governments in creating rural infrastructure. In such a scenario Government of India, RBI and NABARD have to explore alternative sources of finances for RIDF. If this trend towards raising non-budgetary resources for infrastructure is to continue, financial markets will have to respond by providing the necessary long-term resources. Both foreign and domestic sources of capital will need to be tapped. Reliance on foreign savings remains a necessity due to the lack of depth in local debt markets. Worldwide, capital markets contribute to the major share of funding for infrastructure development. But with lack of markets for long-term funds India is starved of longterm capital, which is a necessary condition for infrastructure development. Deepening of capital markets will go a long way in addressing this issue. Insurance companies, provident funds and pension funds should be enabled to commit more of their funds which are basically of a long term nature to financing infrastructure, especially rural infrastructure. It stands to reason that NABARD should have greater access to these resources and its debt instruments should be given the requisite infrastructure tag. The zero coupon bonds announced in this years budget, having an income tax concessionality built in could be another source of long-term funds. However this is a virgin market whose extent is not yet known. Public-Private Partnership in Infrastructure Provision The recent years have also shown a perceptible shift in government approach to infrastructure development. Concerns were raised about escalating costs and inefficiencies in infrastructure projects. It was recognised that due to lack of cost

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consciousness and subsidising of infrastructure facilities to the consumers, projects and services were unable to generate the resources required for their own maintenance and expansion, let alone producing a surplus for the others. Hence, private initiative was sought to be encouraged in creating infrastructure and the area that was hitherto considered to be solely in public domain. Consequently, during the nineties, infrastructure services which had been previously provided by the public sector so far, were swept by the new wave of privatisation and deregulation. Several factors led the State to consider enhancement in commercialisation of infrastructure provisions. The precarious economic situation in the nineties made it imperative for the government to tighten the budget of public enterprises. As a result of fiscal conditions, the total public investment slipped quite sharply from the VIII Five Year Plan targets of 10.4 percent of GDP to 8.3 percent of the GDP. This slippage of 2 percentage points fell disproportionately on infrastructure, both economic and social. Thus, additional sources of financing infrastructure in the form of private investments were resorted to. Apart from the tight fiscal situation, the increasing need to provide an efficient infrastructure in a globally competitive set up, rethinking on the ability of the government owned entities to supply quality infrastructure have also been instrumental in privatisation of infrastructure services. Thus, in the current context, while the government continues to remain the service provider in the infrastructure sector, it needs to facilitate private investment in infrastructure as much as possible. Taking cognizance of the advantages that Public Private Partnership (PPP) offers in terms of cost saving, access to specialized expertise and proprietary technology, sharing of risks with private sector and the ability to take up a larger shelf of infrastructure investments, Government of India is actively encouraging them. The shift towards PPPs is primarily driven by the inadequacy of budgetary resources. However, an enlarged role of PPPs also provides an opportunity to introduce competitive suppliers of infrastructure services leading to improvement in the quality and services and reduction in costs. PPPs also ensure the sparing of sparse public resources for other sectors where private sector would be reluctant to go. To accelerate and increase PPPs

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in infrastructure two major initiatives have been taken by the Government: provision of viability gap funding and the setting up of a SPV-India Infrastructure Finance Company Limited (IIFCL) to meet the long term financing needs requirements of potential investors. With private sector making inroads into infrastructure investment, the State holds the responsibility of providing an appropriate regulatory framework that will assist investors of infrastructure entities on the one hand and protect the consumers from monopolistic exploitation on the other. To create an enabling milieu to improve predictability and mitigate risks for PPPs and prune transaction costs and time, the Government has to foster an institutional mechanism, besides modernizing the policy and regulatory framework. Small-scale Community based Infrastructure In the context of overall infrastructure-poverty reduction-governance nexus, small-scale community based infrastructure assumes a special place as it may present more insights into the issues involved. Because of the nature, location, design and implementation process, small-scale infrastructure may bring more direct impacts on the lives of poor people. Small irrigation projects contribute immediately to agricultural productivity bringing tangible benefits to small farmers. A rural feeder road improves mobility of local communities and reduces transportation costs which have impacts on economic activities. Further local communities can take part directly in decisions regarding the nature of the infrastructure, location of facilities and designs. They can also take part in the implementation process and be involved in operation and maintenance of facilities. Small-scale infrastructure helps to reinforce social capital and consolidate community organizations. The small-scale community based infrastructure efforts are complementary to largescale infrastructure initiatives in many ways. First, small-scale infrastructure fills in the gaps left by large scale projects mostly designed from the top down. Second there are complementarities between large scale and small-scale infrastructure. For instance,

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improvement of access to a high quality main road and a transportation system enables improvement of agricultural technology, a stable supply of input goods and improvement in productivity. Third, some of the governance lessons from small scale community based projects may be replicated and scaled up in large scale infrastructure (Jahan and McCleery, 2005) Issues for policy debate There is an increasing consensus that providing adequate infrastructure is an important step in the process of poverty alleviation and in providing a more equitable set of opportunities for rural citizens by linking smallholders to the markets, and by reducing the market risk and transaction costs they face. However in this endeavour there are several policy issues that require further attention and debate. These issues could be discussed under the following broad heads: Governance related Issues: In view of the huge extent of resources involved in infrastructure projects, governments the world over have to prioritise. An overarching policy issue is to apply benefit-cost analysis to rank alternative infrastructure investment strategies and projects. With limited public resources, several countries in the developing regions are undertaking important reform processes in order to promote private investment in the provision of infrastructure. But along with these reforms governments have to develop robust mechanisms for ranking alternatives in infrastructure investments. Intended benefits from investments in infrastructure cannot be reaped unless infrastructure is managed properly-from the design and location decision to implementation to operation and maintenance All these issues interact with each other in a mutually reinforcing way and in this linkage governance plays a major part. There is strong link between infrastructure and governance: good governance is necessary for the successful implementation of infrastructure programmes, and infrastructure programmes can be important vehicles in the improvement of governance. When good infrastructure such as roads and transportation, electricity is put in place, the efficiency

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and effectiveness of local government and administration are greatly enhanced. The converse is also true: without broad participation in decision making in terms location, design and nature of infrastructure, without the local communitys involvement in the implementation and operations and maintenance, infrastructure can neither provide maximum benefits nor even be sustainable. Governance of infrastructure requires institutional reforms and capacity development. In sum, governance plays a major role in providing better and improved infrastructure services. First, with improved governance, there is an increased efficiency in resource use, with less waste in form of leakages and corruption. Second, with better governance, efficiency in service delivery also improves. This maximizes the effects of infrastructure. Third, better governance also ensures transparency and accountability. Furthermore, governance plays a major role in the scaling up process of the infrastructure. In order for public goods to be provided, the amount and type of infrastructure to be supplied must be decided, investments must be made and infrastructure provided, and the infrastructure facilities must be maintained. The market would clearly fail in these functions, but centralized public infrastructure bureaucracies have not proved adept at performing them either. In most situations, infrastructure provides public goods of a localized nature. Decentralised responsibility offers an opportunity to improve the provision of such goods. Provision of local, and to some extent even national, public goods can be more effective when participation provides a voice for infrastructure users and stakeholders. Decentralisation is not inherently good or bad. As with all arrangements, its success depends on the incentives it creates, the capabilities it can draw on, and the costs it imposes. To improve incentives, public accountability is essential and can be enhanced by local choice of leaders, local control of finances and other forms of local responsibility. However unlocking local effort through decentralization requires creating new technical and institutional capacity wherever it does not exist. The poor use fewer infrastructure services than the non-poor, not only because of low incomes but also because of low access. Failure to reach the poor has often been

33

associated with flawed infrastructure pricing policies, little emphasis on the services of most value to them, for which they are willing to pay. Many countries have been subsidising infrastructure services for the poor by low tariffs. But these subsidies are usually captured by middle and high-income groups. Appropriate services for the poor are often lacking when decision on investment and service are driven by a needs gap rather than by assessment of effective demand. The importance of participation in effective delivery of local public goods is well recognized, and it is central to community provision of services. Without local participation, projects often either flounder at implementation stage or are not maintained and fail to produce sustained benefits. Participation in project formulation is particularly important for maintenance of facilities. There are three keys: to using participation to improve project performance: involve the beneficiaries directly; seek their early consensus on the project and moblise cash or in-kind contributions from them. It is particularly important to ensure that participatory processes involve all groups of beneficiaries, including women and others who may be disenfranchised, such as the very poor and landless. Reaching consensus on user needs often leads to infrastructure that is lower in cost, less technologically complex, and more labour intensive. Another policy issue is whether the reform processes in infrastructure provision will have the benefits expected. If reform is to be successful, one has to address the widening disparities between those benefiting from reforms and those rural areas where the costs, the lack of information, or the risk prevents public participation. Structural and Operational Issues: The indicator of inefficient performance by an infrastructure system is the extent of output lost in delivery. Distribution losses in water and power supply systems are the prominent examples. Inefficient use of labour is especially common and costly in infrastructure. Many public utilities in infrastructure are overstaffed. At the same time, in construction and maintenance of rural infrastructure, often equipment-based methods are used rather than employment intensive methods that can produce high quality results, while being more consistent with relative capital and labour costs.

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Closely related to operational inefficiencies is lack of maintenance: roads deteriorate, irrigation canals leak, water pumps break down, sanitation systems overflow, installed phone lines fail. Capacity is then lost, output declines and substantial additional investment is needed simply to sustain existing levels of service. In road sector, inadequate maintenance imposes large recurrent and capital costs. Neglect of routine maintenance can compound problems to such an extent that the entire surface of a road has to be replaced. Maintenance expenditures are often not allocated by economic priorities. In irrigation, too, poor maintenance is costly and results in distribution channels being filling up with silt and weeds, canal linings cracking at an increasing rate, and outlets breaking or being bypassed. Drainage also fails, causing salt build up in the soil. Worldwide, works covering 60 percent of the irrigated area require upgrading to remain in good working condition. Inadequate maintenance is a problem in rural water supply and power sector also. Sometimes problems of operation and maintenance are rooted in the initial design or construction of infrastructure. Operations and maintenance can be made more difficult by inappropriate design standards that increase the requirements for skills in short supply or involve heavy dependence on imported inputs where foreign exchange is scarce. There are also many examples of investments that were economically nonviable to begin with and that should never have been made-such as over-designed or gilt edged roads and buildings. Finance related Issues: Infrastructure must be conceived of as a service industry providing goods that meet customers demands. Successful providers of infrastructure services in public or private sector are generally run on business lines and have three basic characteristics: 1. They have clear and coherent goals focused on delivering services 2. Their management is autonomous, and both managers and employees are accountable for results 3. They enjoy financial independence Government and public sector remain the dominant players in the provision of infrastructure services. Therefore improving the effectiveness of public sector

35

infrastructure providers is critical. It can be done by applying three core instruments to reinforce commercial operations in the public sector: Corporatisation, which establishes the quasi-independence of public entities and insulates infrastructure enterprises from non-commercial pressures and constraints. Explicit contracts between governments and managers or entities involved in infrastructure services, which increase autonomy and accountability by specifying performance objectives that embody government defined goals A pricing strategy designed to ensure cost recovery, which creates a desirable form of financial independence for public utilities and even at times for public works. An element in the successful provision of infrastructure on a commercial basis is the establishment of reliable revenue sources that give providers more financial autonomy. Reliance on revenues directly related to services delivered will increase the productivity of infrastructure suppliers and also often benefit users. With fewer budgetary transfers, the government has less occasion to interfere, a fact key to managerial autonomy. For public utilities smaller subsidies give managers a greater incentive to focus on cost reductions and to satisfy users because payments from users have to cover the cost of service. But an issue in cost recovery is that most governments fear that fully recovering costs will hurt the poor. Yet increasing prices to enable cost recovery in the delivery of services may actually help the poor. They often pay much higher prices per unit for privately provided water and lighting because they are not connected to public service networks that have lower unit costs, and because they do not benefit from subsidies to users of the public system-usually the better off. Expansion of access benefits the poor by allowing them to rely on less costly sources of water and power. Further Research Agenda Even though researchers recognize that the externalities resulting from infrastructure investment play a central role in rural development and poverty alleviation there is a need for greater empirical research in the area. Existing empirical evidence that

36

substantiates these arguments at the microeconomic level is too limited. As such future empirical work to analyze rural households with different levels of access to public goods and services should allow for the study of the presence and importance of these externalities. Research has to identify investment opportunities that generate the largest multiplier effects and that enhance the attraction of public and private investments for the rural sector and also identify methodologies to raise the private and social profitability of the executed investments. There is a need to enhance knowledge levels about the impact that complementary investments in rural infrastructure (water, sewerage, roads, electricity and telecommunications) may have in market development and in reducing poverty. Social Cost benefit analysis is often advocated as a devise for clarifying, rationalizing and simplifying societal choices and avoiding social conflict, while taking investment decisions in infrastructure. But there have been arguments that this technique does not clarify but rather obscures rational deliberative processes involving plural values, faces intractable difficulties regarding predictability, discount rates and opportunity costs and is based on a controversial political theory. There is thus a need to evaluate social cost benefit analysis as a tool for infrastructure investment decision making. The absence of reliable databases at the regional level reduces the scope for empirical testing. Data collection and dissemination at regional level needs to be high on the research agenda. The availability of public investment and private investment data at the district level would be useful for examining intra-state as well as inter-state growth effects. Researchers could include the concepts of theoretical spatial economics and spatial econometrics in their empirical studies. Presently most of empirical work is in simple uni-directional causal model that does not appear to capture the multiple impact path-potentials between infrastructure and growth. There also appears to be an issue of appropriate aggregation levels. In addition to being sensitive towards scale and spatial

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issues, model specification and development of conceptual linkages are central to further work on infrastructure productivity (Lall, 1999) Future research has also to estimate the existing complementarities between the different types of public infrastructure and the endowments of private assets (human capital, financial-physical capital or social capital), which are already possessed by rural populations, in order to maximize the impact of public infrastructure investment. Research should also facilitate the design of strategies to provide institutional arrangements for the adequate access to public infrastructure needed to enhance the environment in which private sector activities take place. Specifically, there is a need to address issues concerning how to foster institutional innovations to enhance infrastructure investments. Concurrently the identification of bottlenecks (physical or institutional) which impede the attainment of maximum potential for investment in rural infrastructure services should also form a major part of research agenda. Notes 1. In the Tables 2 to 7 the data relating to the new States of Uttaranchal, Jharkhand and Chhattisgarh is included in the data of the composite States of Uttar Pradesh, Bihar and Madhya Pradesh respectively. References Ahmad Raisuddin and Cynthia Donovan, (1992): Issues of Infrastructural Development: A Synthesis of the Literature, International Food Policy Research Institute, Washington DC. Ahmad, Raisuddin (1996): A Critique of the World Development Report, 1994:Infrastructure for Development in UNCTAD: International Monetary and Financial Issues for the 1990s Volume 7, New York and Geneva. Ahmad, Raisuddin and Mahabub Hossain (1990): Developmental Impact of Rural Infrastructure in Bangladesh, Research Report 83, International Food Policy Research Institute, Washington DC.

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