Infrastructure and Connectivity in India: Getting the Basics Right

• Published date: 01 July 2016
• Author: Rajat Kathuria,Purva Singh
• Date: 01 July 2016
• DOI: http://doi.org/10.1111/aepr.12144

Infrastructure and Connectivity in India:

Getting the Basics Right

Purva SINGH and Rajat KATHURIA†

Indian Councilfor Research on InternationalEconomic Relations

Infrastructure helps in building productive capacity by bridging connectivity gaps, reducing

distributionand trade costs, and facilitatingthe sharing of the benefits of growth with poorer groups

and communities, among others. The evidence in this paper suggests the need for India to develop

both hard as well as soft infrastructure for enhancing trade flows and growth. The existence of both

aspects simultaneously will produce gains of a significantly higher order but one without the other

is likely to be ineffective.

Key words: connectivity, India, infrastructure, infrastructure, public–private partnership

JEL codes: H54, G2, O18, R42,R48

1. Introduction

The importanceof infrastructure for growth anddevelopment has been recognizedby both

the theoreticaland policy literature. Infrastructure helps in building productive capacity by

bridging connectivity gaps, reducing distribution and trade costs, and facilitating the

sharing of the benefits of growth with poorer groups and communities, among others.

Infrastructurenot only affects production and consumption directly,but also creates many

indirect positive externalities. Public investments in infrastructure are shown to have a

positive effect on output.

Infrastructure has often been classified into three functional types in the academic

literature, Keynesian, Ricardian, and Neo-Classical to reflect the stimulus to aggregate

demand, the enhanced efficiency because of reduction in cost of transportation and

distribution, and the productivity impacts, respectively (Roland-Holst, 2009).

India’s fast growth is not typical of the two-sect or model of Lewis (1954) that

involved moving resources from the agricu ltural sector to the manufacturing sector.

The rise of the services sector (led by Information an d Communication Technology

(ICT)) was partly design and partly accid ent. It reflected the weakness of physical

infrastructure and the existence of a large and sk illed English speaking population.

Recognizing however the importance of infrast ructure in increasing the share of

The authorswould like to thank Indro Ray,Parnil Urdhwareshe, andSuhail Shersad for excellent

ideas and support. The usualdisclaimer applies.

†Correspondence: Rajat Kathuria,Indian Council for Research on International Economic Relations

(ICRIER), 4th Floor, Core 6A, India Habitat Centre, Lodhi Road, New Delhi 110003, I ndia. Email:

rkathuria@icrier.res.in

doi: 10.1111/aepr.12144 Asian EconomicPolicy Review (2016) 11, 266–285

266 ©2016Japan Center for EconomicResearch

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manufacturing gross domestic produ ct (GDP) for robust, sustained, and inc lusive

growth, the 11

th

five year plan (FYP) augmented investments i n infrastructure to $US

500 billion which were doubled to $US 1 trillion in the 12

th

FYP. Public spending on

infrastructure was increased by (Indian Ru pee) INR 70,000 crore (about $US 10 billion)

in 2015–2016 with the objective to crowd-in private investments, among other benefits

(Ministry of Finance (India), 2015a). Emp irical research shows that an increase in public

spending on infrastructure, if efficie ntly implemented, boosts aggregate d emand and

crowds in private investment in the short run because of the complementary nature of

infrastructure services and in the lo ng run, augments the productive capaci ty of the

economy (Ministry of Finance (India) , 2015b).

India’s12

th

FYP is about to enter its last year (2017). Assessing the progress and

challenges that surround infrastructure thus becomes critical at this point. The aim of the

paper is fourfold: to review the progress of physical infrastructure in India; to assess the

barriers posed by infrastructure (or lack thereof) on logistics networks and inter-state

connectivity; to review the financing mechanisms of infrastructure projects in India; and

to draw policy implications and recommendations. Following the literature, we classify

the infrastructure sector into (i) physicalor hard infrastructure and (ii) soft infrastructure.

Physical or hard infrastructure consistsof transport, energy, and ICT infrastructures, while

soft infrastructure relates to all the institutions and regulations governing the physical

infrastructure.

This paper buildson existing academic research,especially previous work by one author

(Kathuria, 2014; Kathuria et al., 2014; Kathuria et al., 2015), the National Transport

Development Policy Committee (NTDPC) report of 2014, Annual Five Year Plan

documents (11

th

and 12

th

FYPs) and various committee reports of the erstwhile Planning

Commission. Therest of the paper is organized as follows. The next sectionreviews India’s

transport infrastructure and logistics processes. Section 3 explores financing constraints,

and section 11 examines India’s experience with public–private partnerships (PPPs) in

infrastructure. Section 12 offers concluding comments and policy options.

2. Transport Infrastructure and Logistics Processes in India

There is a close relationship between economic growth and infrastructure, of which

transport infrastructure is a significant component (Planning Commission (NTDPC),

2014). Better transportation infrastructure improves cost effectiveness of user industries

by reducing transactions costs, increases connectivity, improves economic opportunities

for the poor, reduces inequality, and contributes to competitiveness in general.

Better transportinfrastructure is seen toinfluence trade performance throughreduction

in monetary transactions costs, loss, damage, and spoilage to goods in transit, and ensuring

timeliness of delivery, among other factors (Brooks, 2016). The dependence of trade costs

on transport infrastructure has been emphasized in various studies. Limao and Venables

(2001) show that transport costs rise by 12% for a deterioration in infrastructure (mainly

transport infrastructure) from the median to the 75

th

percentile. Similarly, Francois and

Manchin (2006) reveal that transport and communication infrastructure and institutional

Purva Singh andRajat Kathuria Infrastructureand Connectivity in India

©2016 JapanCenter for EconomicResearch 267