ROLE OF INFRASTRUCTURE IN DEVELOPING INDIA

Aashish Dhar, Anup Aggarwal, Anurag Singh, Ashok Singh, Abhishek Biswas, Jyoti Shukla, Krishnanand Belwal

Introduction A nations infrastructure development plays a significant role in its economic growth. A fast growing economy warrants an even faster development of infrastructure. Infrastructure is the capital stock that provides public goods and services. It produces various effects, including those on production activities and quality of life for the households, which thus permeate the entire society. Public services provided by infrastructure may reduce disparities in income. Any discussion about Indias infrastructure has to briefly cover the planning carried out for the countrys economic growth, since Independence. History of Indias economy and infrastructure India's economic history can be categorized into three eras, beginning with the pre -colonial period lasting up to the 17th century. Secondly, the British rule in India starting in the 18th century and ending with Indias independence in 1947. And, at last the post independence period after 1947. The pre-colonial period comprised of the Indus Valley civilization, a predominantly urban settlement that flourished between 2800 BC and 1800 BC. The people practiced agriculture, domesticated animals, made tools and weapons, and traded with other cities. Evidence of well planned streets, drainage systems and water supply reveals their knowledge of urban planning, which included the world's first urban sanitation systems. The British colonial rule brought developed systems like the railways and telegraphs. The lords that were sent to rule India from London brought the idea of bureaucracy. One of the most significant contributions by the British to India was the language of English, which introduced India to todays global business language. Along with all these quantitative contributions, the British also taught the Indians on how not to govern a country. The British governance in India was very unjust and favoured the British rather than the Indian people. Learning from the British, India took an opposite approach after independence and established a more protectionist type of government. The country aimed at distributing the power and hence formed an administration which comprised of a central and a state government. The state government was given the power to intervene in the labo and financial ur matters of the state. Infrastructural developments like the road, power, airways, and railways were part of a large public sector. But with time, these large public sectors became ineffective and created an economic crisis in India. In 1991, the government of India took a decision to liberalize the economy which ended the long held public sector monopoly in many sectors. Since then there has been a lot of private investment in these sectors of the economy of India.

Current state of Indias infrastructure Infrastructure problems in India range from the poor condition of the roads to shortage of electricity. The shipping ports of India need to be upgraded to meet international standards. As Indias population grows and moves to the urban cities, there is a greater demand for electricity. Over the past decade, Students, MBA-14, 2010-12, Army Institute of Management

electricity generation has grown at a compound annual rate of 5.5%, but the demand has grown even faster. Peak demand exceeded supply by 12.1% in 2005.

The condition of the roads is poor; the speed limit on most of the highways is a mere 40 mph as compared to 65 mph in the United States. Low speed limits and traffic congestion on these highways are a major cause for the delays on the roads of India. "If a consignment has to take 7 days to cross 1,400 kilometres, it is a misuse of resources," said the India Head of Chinese appliance maker Haier Electronics Group Ltd., T.K. Banerjee. These poor conditions of the roads drastically affect the business transactions across the country and need an overall repair. The international trade in India is adversely affected by inefficient ports which are congested and expensive. According to Morgan Stanley, freight as a percentage of total import value is about 11 percent in India, compared with a 6 percent global average and 5 percent for developed countries. There is also a higher lead -time for trade: 6 to 12 weeks for India's trade with the United States, compared with China's 2 to 3 weeks. Role of Infrastructure in Development It is now well recognized that a countrys development is strongly linked to its infrastructure strength. Infrastructure helps determine a countrys ability to expand trade, cope with population growth, reduce poverty and a host of other factors that define economic and human development. Good infrastructure raises productivity and lowers production cost, but must also expand fast enough to accommodate growth. For low-income countries basic infrastructure such as water, irrigation and to a lesser extent transportation are more important. As the economies transform into a middle-income category, their share of demand for power and telecommunications in the infrastructure and investment increases. An estimate however shows that a 1% increase in infrastructure stock is positively associated with a corresponding growth in GDP across countries.

Infrastructure is a necessary but not a sufficient condition for growth. Adequate complements of other resources must be present as well. In developing countries like India, infrastructure development and financing has largely been the prerogative of the government. Since infrastructure is typically a natural monopoly, the government considered it necessary to keep control of the same, in public interest. The success and failure of infrastructure to meet the needs of the people is largely a story of the governments performance. The simple truth is that public money is no longer sufficient to meet the burgeoning needs of the nation in line with its economic aspirations. Reluctantly, therefore the government has to throw open the doors to private participation in infrastructure. Impact of Infrastructure on External Trade and Production Reliable and adequate quantity of infrastructure is a key factor in the ability of countries to compete globally. In particular, the competition for new export markets is specially dependant on high quality infrastructure. There is an increasing trend not only in terms of greater globalisation of trade but also in terms of globalization of production. It is possible for companies located in different parts of the globe to produce components. In the recent years India has been used as a base for sourcing by a host of companies such as Sony, Toyota, ABB and the like for their raw materials as well as for components. To be able to fulfil the requirements of sourcing MNCs world-class infrastructure facilities including appropriate logistical support and multi-modal transport facilities are essential. Importance of Infrastructure for a developing country like India Indias BPO industry has grown at a phenomenal rate in the past few years. BPO exports have been projected to grow from a mere $912 million in 2002 to $7.4 billion in 2006. Despite the emerging problems it is expected that the industry will grow rapidly. The major reason is the unavailability of cheap skilled labour in developed countries. Indias comparative advantage lies in its vast source of educated English speaking labour force.

BPO revenue is projected to rise to $13.8 billion by 2007. India is a developing country and as a reason it is very important for it to continue providing good quality BPO services to keep its market share. The revenue from the BPO industry is a major contributor to the annual exports of India which grew by 19.04 per cent to $7.11 billion in June 2005. The BPO revenue during the 2005 year was about $4 billion which is 56% of the $7.11 billion worth of exports made by India during 2005. This shows that the BPO is an integral part of the Indian economy as it contributes to over half the exports of India. Rural Infrastructure and Growth: An Overview 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.

Infrastructure for agriculture and rural development The models of development which focus on agriculture also bring about the rol that infrastructure e 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. 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. 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). 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 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. 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 tra nsition in the allocation of the labour force between agriculture and non-agricultural 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 nonsalaried, agricultural or non-agricultural, it is not abnormal that the access to public infrastructure will also affect household labour assignments (diversifying livelihoods).

Factors impeding the development of Indias infrastructure The chief reason affecting the development of Infrastructure in India is the poor judicial system. All other reasons stem from this main reason. The decision made by a court in India can be challenged in a higher court of law. Even the decision of the President of India can be questioned in the court. This process of re-appeal prolongs the time frame of the case. India has the second largest population in the world and has a huge number of court cases filed every year. The judicia system in India has a l huge backlog of court cases which add to the amount of time taken to reach a verdict. Ashok Kheny an engineer-builder, who ran a successful business in Philadelphia, returned to India in 1994 to build a 106-mile, $525 million expressway between Bangalore and Mysore. In the decade since, Kheny's Nandi Infrastructure Corridor Enterprises Ltd. has been harried by no fewer than 336 lawsuits from farmers, other landowners, and government allies trying to prevent the builders from gobbling up their land. The expressway, now seven years behind schedule, is expected to be completed by December, 2007. The bulk of the projects in India are getting delayed because it is not easy to acquire land in India. The owners of the land have the right to go to court and contest the governments decision of enforcing the law of eminent domain. This leads to court hearings which delay the process of acquiring land for building of public utilities. In the case of the expressway mentioned above, the project was delayed by seven years which is a very long span of time considering the growth and needs of India.

References y y y y en.wikipedia.org/wiki/Economic_history_of_India Rajiv Lal and Anupam Rastogi, 2007, IDFC Occasional Paper Series 2007/1. D. Canning and P. Pedroni, 2004, The Effect of Infrastructure on Long Run Economic Growth. http://www.chillibreeze.com/articles/Infrastructure-Development-and-Economic-Growth.asp