Relevance: GS-3: Economy, Growth Infrastructure

Key Phrases: Indian Economy, Economic Growth, Infrastructure Development, Capital Expenditure, Revenue Expenditure, Public Sector, Private Sector, World Bank’s Logistics Performance Index.

Background

• Realising the dream of becoming a US$5-trillion economy by 2025 can be a landmark achievement in India’s journey.
• However, with post-COVID-19 pandemic conditions and the global headwinds of an economic downturn, India needs to set clear priorities and chart out actionable strategies to enable its transition to a global powerhouse.
• At the same time, while gaining relevance in global markets, India also needs to become self-reliant—ensuring higher resilience for its people and domestic markets.
• Being a developing country with constrained financing, India has to identify key sectors that can most effectively advance its growth agenda over the next few years.
• India’s assets spanning various sectors of the economy are embodied in three forms of capital:
  1. Physical capital such as its factories, plants or machinery- used to produce consumer goods and services -
  2. Human and social capital such as health and education.
  3. Natural capital reserves that feed into the production processes.
• The productivity of all these assets is critically dependent on the developments in India’s infrastructure sector.
• Giving primary importance to India’s infrastructure sector, the Union Budget 2022–23 presented a massive outlay for capital expenditure on key connectivity projects that are envisaged to lead India to a sustainable and resilient future.
• However, to milk these opportunities efficiently, India must learn from its past to build forward better.

Significance of Infrastructure development

• Infrastructure development serves as the sine qua non of economic growth.
• It has impact on productivity and reduction in production costs across economic sectors.
• Adequacy of infrastructure and its efficiency of operation play a vital role in a country’s development course, in ways such as production diversification, trade expansion through increased competitiveness.
• It enables improvements in environmental conditions and reductions in multidimensional poverty through augmentation of non-income factors.

What is the contribution of infrastructure in growth?

• Investments in infrastructure development are typically undertaken by the public sector, including its operations and maintenance.
• These form a part of the capital expenditure from the public exchequer, contributing directly to the creation of productive assets in the economy.
• While government spending (both revenue and capital expenditure) generates higher levels of economic growth through demand creation, the impact in each case is strikingly different.
• Revenue expenditure directly leads to higher aggregate demand in the economy, feeding into subsequent rounds of market demand expansion and, in turn, higher growth, without actually altering the productive capacities of the economy.
• On the other hand, capital expenditure on infrastructure development directly generates higher levels of aggregate demand. It also leads to improvements in productivity and reductions in production costs with a commensurate increase in rates of profit and crowding-in private investments.
• This has been true in the Indian context as well.
• Re 1 spent by the Indian government on revenue expenditure (or direct transfer payments) yields, on average, an additional Re 1 worth of income, while for capital expenditure the increase in income is about Re 2.45.
• Besides, in times of economic downturns, fiscal expansion can stimulate counter-cyclical income growth.

What are the limitations of India’s infrastructure boost through capital expenditure?

• Like most developing countries, India’s fiscal consolidation requirements often constrain its capital expenditure - to reign in deficits which may ultimately prompt a larger impact, especially in the long run through overall output contraction.
• Therefore, to enable macroeconomic stabilisation through expansion of revenue expenditure, ring-fencing of capital expenditure levels as a share of the Gross Domestic Product (GDP) becomes critical.
• Capital expenditure requirements for infrastructure investments are huge, with relatively longer gestation periods. Their immediate and cumulative impacts are both higher.

What are the recommendations of World Bank with regard to infrastructure and improvement of its quality?

• Targeted and timely investments in infrastructure development are also extremely important.
• Emphasising a paradigm shift in focus on “quantity” of infrastructure to improving the “quality” of its performance, the World Bank makes three major recommendations.
• They are wider applications of commercial principles.
  1. Managerial autonomy;
  2. Making the sector more competitive through greater private sector engagements in the form of public-private partnerships; and,
  3. Increased responsibility and accountability towards key stakeholders including end consumers.
• Without adequate accountability, this sector can be characterised by significant inefficiencies and capacity underutilisation.

How has India performed in infrastructure development so far?

• Infrastructure development in India has historically suffered from plan implementation or operational failures as well as hefty regulatory frameworks that negatively impact the overall business environment.
• Especially, its logistics sector, which shall serve as the crucial link across all business sectors, has been deficient in terms of performance.
• As per World Bank’s Logistics Performance Index (LPI) 2018, neighbouring China has outperformed India in domains such as customs, existing infrastructure (quantity), the volume of international shipments, the competence of the logistics system, tracking and tracing mechanisms, timeliness, and also in terms of overall performance.
• The 2018 LPI ranked China at 26th position with a score of 3.61, while India is placed at 44th rank, scoring 3.18 in overall logistics performance.
• Among all domains, the largest divergence between India and China emerges in terms of infrastructure, which then automatically feeds into other regulatory and operational lags due to unduly high pressure on the existing capacities.

What are the steps that India can take for advancing infrastructure development?

• In India, a large number of private players have emerged across economic sectors, that is why, quality infrastructure development to support business operations has become an area of utmost importance, which demands urgent attention from all levels of government.
• The infrastructure sector primarily includes physical and digital connectivity, along with power and energy.
• While capital expenditure in India (as a share of total expenditure) remains well below global standards, there has been a consistent rise in investments in infrastructure projects in the last five years.
• The infrastructure sector has become one of the biggest focus areas of the government with an estimated expenditure outlay of US$ 1.4 trillion during 2019-2023 to ensure sustainable economic growth and development in the country.
• Moreover, India has also joined hands with regional partners, most prominently Japan, to advance its “Act East” agenda through a major investment push in infrastructure development.
• This will also likely advance its regional economic integration through functional coordination between the trading partners, reductions in transaction costs and seamless movement of goods and services within India as well as across countries.
• However, in addition to the big push for infrastructure investments in transport and digital connectivity, there is an urgent need to enable efficient coordination among different departments of the central and state governments.
• Logistics costs in India are significantly higher compared to global standards owing to several persisting issues that need to be identified and addressed.
• Only then, a coordinated approach to infrastructure development envisioned under the ‘PM Gati Shakti National Master Plan’ initiative, can enable seamless end-to-end connectivity through multi-modal transportation networks and promote the development of industrial clusters that contribute to economic growth and development.
• Ths most critical task for India will be to balance its efforts towards a big push in infrastructure investments and create an enabling environment for successful implementation and timely completion of these projects.
• Redemption of these complementarities in infrastructure development can be instrumental to India’s realisation of its growth potential over the decade.

Source: ORF-Online

Mains Question:

Q. Evaluate the contribution of the Infrastructure sector in economic growth. What are the challenges that India faces in its push for infrastructure development?