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Infrastructure and Connectivity in India: Getting the Basics Right

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Infrastructure and Connectivity in India: Getting the Basics Right bs_bs_banner doi: 10.1111/aepr.12144 Asian Economic Policy Review (2016) 11, 266–285 Infrastructure and Connectivity in India: Getting the Basics Right Purva SINGH and Rajat KATHURIA† Indian Council for Research on International Economic Relations 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. 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 importance of infrastructure for growth and development has been recognized by both the theoretical and 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. Infrastructure not 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-sector model of Lewis (1954) that involved moving resources from the agricultural sector to the manufacturing sector. The rise of the services sector (led by Information and Communication Technology (ICT)) was partly design and partly accident. It reflected the weakness of physical infrastructure and the existence of a large and skilled English speaking population. Recognizing however the importance of infrastructure in increasing the share of The authors would like to thank Indro Ray, Parnil Urdhwareshe, and Suhail Shersad for excellent ideas and support. The usual disclaimer 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, India. Email: [email protected] 266 © 2016 Japan Center for Economic Research Purva Singh and Rajat Kathuria Infrastructure and Connectivity in India manufacturing gross domestic product (GDP) for robust, sustained, and inclusive growth, the 11th five year plan (FYP) augmented investments in infrastructure to $US 500 billion which were doubled to $US 1 trillion in the 12th FYP. Public spending on infrastructure was increased by (Indian Rupee) 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). Empirical research shows that an increase in public spending on infrastructure, if efficiently implemented, boosts aggregate demand and crowds in private investment in the short run because of the complementary nature of infrastructure services and in the long run, augments the productive capacity of the economy (Ministry of Finance (India), 2015b). India’s12th 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) physical or hard infrastructure and (ii) soft infrastructure. Physical or hard infrastructure consists of transport, energy, and ICT infrastructures, while soft infrastructure relates to all the institutions and regulations governing the physical infrastructure. This paper builds on 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 (11th and 12th FYPs) and various committee reports of the erstwhile Planning Commission. The rest of the paper is organized as follows. The next section reviews 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 transport infrastructure is seen to influence trade performance through reduction 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 75th percentile. Similarly, Francois and Manchin (2006) reveal that transport and communication infrastructure and institutional © 2016 Japan Center for Economic Research 267 Infrastructure and Connectivity in India Purva Singh and Rajat Kathuria quality are significant determinants not only of a country’sexportlevelsbutalsoofthe likelihood of exports. Research also shows that exporters in developing countries gain more from a 10% drop in their trading costs than from a similar reduction in the tariffs applied to their products in global markets (World Bank, 2012). A comparison of connectivity shows that India significantly lags behind China. The “Transport Infrastructure” sub-indicator of the Global Competitiveness Index (Table 1) ranks India lower than China in each sub-indicator – roads, port, railways, and air connectivity infrastructure. The widely held view is that infrastructure development in China has benefitted from massive public investment and successful implementation (Qin, 2016). On the other hand, transport infrastructure in India suffers from a lack of capacity addition, poor hinterland connectivity, variations in state levied taxes that ultimately impact on the logistics services, and inter-state connectivity. A unified institutional structure is also absent. Besides, World Bank data shows that overall investment as a proportion of GDP is also significantly higher for China – in 2014 it was 46.4% for China compared with 31.6% for India. Transport infrastructure forms a critical component of an efficient logistics network. Inadequacies of physical infrastructure and equipment coupled with cumbersome administrative procedures have burdened India’s logistics network. These deficiencies manifest themselves in higher transport times and costs, reduced reliability, lower availability of quality services, and a higher risk of damage or pilferage. Logistics costs as a percent of GDP for India have been estimated to range between 12% and 15%, higher than for the USA (9%) and Japan (11%) (Planning Commission (NTDPC), 2014). Even though logistics costs in China are estimated to be higher than in India (about 18%), it is because the share of the service sector in the Chinese economy is lower relative to India’s. The contribution of services to GDP between 2005 and 2014 averaged 44.3% in China as opposed to 52.2% for India (a gap of nearly 10% points over the last decade). In addition, a large expanse of terrain in China is covered by deserts and mountains which Table 1 Ranking of India vis-a-vis China on various infrastructure parameters of Global Competitiveness Index China India Quality of roads 42 61 Quality of railroads infrastructure 16 29 Quality of port infrastructure 50 60 Quality of air transport infrastructure 51 71 Available airline seat km/week 2 11 Quality of electricity supply 53 98 Mobile telephone subscriptions/100 pop 107 121 Fixed-telephone lines/100 population 63 116 Source: Global Competitiveness Report (2015–2016), World Economic Forum. 268 © 2016 Japan Center for Economic Research Purva Singh and Rajat Kathuria Infrastructure and Connectivity in India requires expensive trucking technology. For India, by contrast it is the sub-optimal modal mix and high level of coordination necessitated because of the fragmented industry and institutional structure that is responsible for the relatively high proportion of logistics costs (Planning Commission (NTDPC), 2014). According to McKinsey& Company (2010), inadequate transport
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