Infrastructure: Meaning and Importance | Economic Growth | Economics

In this article we will discuss about:- 1. Introduction to Infrastructure 2. Features of Infrastructure 3. Importance 4. Evaluation of the Performance.

Introduction to Infrastructure:

The infrastructure is important for faster economic growth and alleviation of poverty in the country. The adequate infrastructure in the form of road and railway transport system, ports, power, airports and their efficient working is also needed for integration of the Indian economy with other economies of the world.

The following are the important constituents of infrastructure:

1. Power and the source of its production such as coal and oil;

2. Roads and road transport;

3. Railways;

4. Communication, especially telecommunication;

5. Ports and airports; and

6. For agriculture, irrigation constitutes the important infrastructure.

A distinguishing feature of infrastructure is that while the demand-supply gap in case of other factors can be met by importing some of them, the deficiency of infrastructure cannot be made up through imports. Because location-based the need for relevant infrastructure facility can be met through development of its capacity in the domestic economy. For example, you cannot import power facility, roads, ports or railways as they have to be built up in the domestic economy.

Important Features of Infrastructure:

It is worthwhile to mention some distinctive features of infrastructure – First, the building of infrastructure requires large and lumpy investment and they contribute to output, after a long time that is their gestation period is quite long. Second, due to large overhead capital and lumpy investment, the significant economies of scale are found in most of them. Due to the significant economies of scale found in many infrastructure services, they have the characteristics of natural money. The third important feature of infrastructure facilities is they create externalities.

For example, building of rural roads will benefit agriculture as the farmers are able to sell their products in towns where they can get remunerative prices. Besides, they can get some inputs such as fertilizers, pesticides and other industrial products at relatively cheaper prices as their transport costs decline due to improved transportation. Power plants generate both positive and negative externalities. The construction of power plants produces electricity which is used for industrial helps production and commercial use and thereby helps in acceleration of economic growth. A power plant also produces negative externalities in the form of emission of pollutants, especially CO₂.

The above feature of infrastructure means that competitive market system will not be able to achieve a socially optimal level of infrastructural services in most of the cases. Besides, in many of infrastructural facilities, there are significant economies of scale and therefore they have the features natural monopoly. In other words, we find market failure to achieve their socially optimal level.

Therefore, these infrastructural facilities are either built or run by the government and public sector enterprises or if private sector is permitted to make investment in them and run them, they need to be regulated by the government, so that they should not exploit the consumers. For example, the distribution of electricity which is an infrastructural service is being provided by two power Companies of Tata and Reliance in different regions of Delhi, the electricity rates and other charges are being regulated by an authority appointed by the government. Similarly, in telecommunication, which is another infrastructural service, various companies such as Airtel, Vodaphone, Idea, MTNL are providing this service of wireless telephony (i.e., mobile service) are being regulated by TRAI.

Importance of Infrastructure:

It needs to be emphasized that good quality infrastructure is important not only for faster economic growth but also to ensure inclusive growth. By inclusive growth we mean that benefits of growth are shared by the majority of the people of a country. Thus the inclusive growth will lead to the alleviation of poverty and reduction in income inequality in the country.

For example, micro, small and medium enterprises (MSME) are dispersed throughout the economy and production by them and their growth require access to quality and reliable infrastructure services to compete efficiently with large-scale enterprises which can often build some of their own infrastructure such as installing their own small power plants or generators. Besides, large-scale firms can even locate themselves near ports and near transport hubs where required infrastructure is available.

Small enterprises, on the other hand, are dispersed widely in the economy and have to rely on the availability of the general infrastructure facilities. Thus, by building up general infrastructure facilities helps the small enterprises to compete successfully with large-scale industries and being labour-intensive generate large employment opportunities for the workers. This will help to alleviate the poverty in developing countries.

The expansion in infrastructure facilities such as irrigation, rural electrification, roads and road transport will promote agricultural growth and setting up of agro-processing industries. These general infrastructure facilities will help farmers and owners of processing industries to get their requirements of raw materials, fertilizers and other inputs at cheap rate and also help them to bring their products to the markets which are located in big towns and cities.

Thus, according to Thirlwall, “For poor farmers improved infrastructure will reduce their input cost and increase agricultural production and reduce traders’ monopoly by improving their access to markets. Nearly two-thirds of African farmers are cut off from national and world markets, because of poor infrastructure and market access. Better transport means greater access to public resources including schools, hospitals and other health facilities”.

It follows from above that the expansion of infrastructure facilities will ensure sustained growth of employment in agriculture and small-scale rural industries and bring prosperity in the rural areas and in this way ensure inclusive growth. Besides, this will also help to prevent the mass exodus of the rural people to urban areas where they cause problems of urban congestion, growth of slums and acute housing shortage.

Lack of adequate infrastructure not only holds lack economic development, it also causes additional costs in terms of time, effort and money of the people for accessing essential social services such as healthcare and education. Emphasizing the importance of adequate infrastructure, authors of Economic Survey of India for the Year 2013 -14 quite rightly write, “Rural economic growth in recent years has put enormous pressure on existing infrastructure particularly on transport, energy and communication. Unless it is significantly improved infrastructure will continue to be a bottleneck for growth and obstacle to poverty reduction”. In other words, it is the challenge to ensure strong, sustainable and balanced development through integration of the economy with environmentally sustainable development of infrastructure.

It may be noted that with large investment in infrastructure during the last decade (2003-04 to 2013-14) India has become the second fastest growing economy of the world but in the two years (2012- March 2014) economic growth slowed down and this has been mainly due to the stalled infrastructure projects which held back economic development. It is therefore urgently needed that infrastructure projects be given environment clearance quickly and investment in them be speeded up if the Indian economy is to be brought back on the fast growth trajectory.

The availability of good quality infrastructure raises productivity levels in the economy and brings down costs of the enterprises. Besides, the availability of adequate infrastructure helps to expand trade not only within a country by improving transport facilities but also promote foreign trade through improvement of ports and airports. It also helps to diversify production by the firms as they are able to get the required supplies of raw materials and other inputs from the places where these are available in abundance. Furthermore, with improved infrastructure the firms can produce goods in accordance with the demands of the people of different regions and countries.

According to World Bank estimates, in the year 2008 developing countries made investment of around $ 500 billion a year in new infrastructure—transport, power, water, sanitation, telecommunication, irrigation and so on equal to 20 per cent of GDP but the need for infrastructure investment is still large. In developing countries one billion people still lack access to clean water, two billion people lack access to sanitation and electric power and adequate transport facilities are still lacking in developing countries.

Having discussed the importance of infrastructure in general, we now discuss below the importance of sector-specific infrastructure for economic growth of a country.

Power or Energy:

Power or energy is a crucial input into all economic activities and therefore rapid economic growth is possible only if adequate power is made available everywhere. It is essential not only for growth of industry, agriculture and commercial business but also for household-lighting. In India, the percentage of households having electricity connection has increased from 56 in 2001 to 67 in 2011. Thus even now about 33 per cent of households have no electricity connection. Besides, for achieving rapid economic growth on sustainable basis, there is need for rise in productivity.

The rise in labour productivity ultimately requires greater use of electric power which is obtained from primary sources such as coal, oil and gas. Consumption of energy by the various countries of the world varies significantly. The United States and other developed countries use or consume much higher energy per capita as compared to the developing countries such as India.

We give in Table 35.1 the data of per capita consumption or use of energy for some selected developing and developed countries along with their per capita income for the year 2009. It will be seen from the table that per capita energy use in 2009 in USA was 7503 kilograms of oil equivalent while in India it was only 545, that is, energy use per capita in the USA is 15 times higher as compared to India. No wonder that the per capita income of the USA was 45,640 PPP $ as compared to India’s 3,280 PPP $, that is, about 15 times higher than that of India. In fact, the data in the table shows that there is a very high degree of positive correlation between per capita energy use and per capita income of a country.

That is, the greater the energy used per capita of a country, the higher the per capita income and productivity levels of a country. This shows the importance of increasing energy production for economic growth.

In case of India, according to the Twelfth Plan projections, total energy production will reach around 670 million tonnes of oil equivalent (MTOE) by 2016-17 and 844 MTOE by 2021-22. This will meet around 70 per cent of expected energy consumption of the Indian economy and the balance will be met through imports. Thus, even though the domestic production of energy in India is projected to increase significantly, dependence on imports will continue to remain high, particularly for crude oil where nearly 78 per cent of the demand will have to be met through imports by the end of the 12th Plan (i.e. by March 2017).

Further, it is estimated by the Planning Commission that the import dependence for coal, liquefied natural gas (LNG) and crude oil taken together in the terminal year (2016-17) of the 12th Plan is likely to remain at the 11th Plan level of 36 percent. It is worthwhile to note that the potential for energy generation depends upon a country’s natural resource endowments and the technology used to harness them. India has both non-renewable energy resources (such as coal, lignite, petroleum and natural gas) and renewable energy sources (such as hydro, wind, solar, biomass).

Twelfth Plan Target:

The Eleventh Five Year Plan (2007-12) added 55,000 MW of additional power generating capacity and the Twelfth Plan (2012-17) aims to add another 88,000 MW generating capacity. This large increase in the additional capacity is not impossible but actual delivery of power depends critically on solving serious fuel availability problems that arise relating to coal and natural gas. Uncertainties about fuel availability would seriously dampen investment activity in this sector, especially since about half of the generating capacity is expected to come from the private sector and they will not be able to obtain the required finance if fuel supply issues are not resolved.

Road Transport:

Road transport is another important infrastructure which is essential for movement of goods, raw materials and fuel. The availability of transport expands the market for agricultural and industrial products and thereby enables the producers to produce on a large scale and reap the benefits of the economies of scale.

Besides, transport development helps to open up more regions and resources for production. Some parts of a country may have abundant forests and reserves of mineral resources but they remain unexploited for production because they are remote and inaccessible through means of transport. There is thus a need for linking these backward regions with building of roads and railways so that their untapped mineral and forest resources be utilised for production. India has one of the largest road networks in the world spread over around 49 lakh kilometers. It comprises national highways, expressways, state highways, district roads with length details given in Table 35.2. In the last few years there has been some progress in the development of national highways and in rural roads but much more needs to the done.

The National Highways (NHs) with a total length of 92,851 km serve as the arterial network of the country. The development of National Highways is the responsibility of the Central Government which has been mandated to upgrade and strengthen a total of 54,478 km of NHs, through various phases of the National Highways Development Project (NHDP). A total length of around 22,000 km has been completed till March 2014. There are some difficulties in the way of developing national highways due to acquisition of land from the owners from which national highways have to pass through.

In India a special effort is needed to speed up road connectivity in Jammu and Kashmir, North East and other special category States. A good start had been made in the development of roads in North East in the Eleventh Five Year Plan and is proposed to be pursued with greater vigour in the 12th Plan in which enhanced connectivity of North East has been given a high priority. Furthermore, the construction of roads and upgradation of national highways (NHs) in the districts affected by Left-Wing extremism in Andhra Pradesh, Bihar, Chhattisgarh, Jharkhand, Madhya Pradesh, Odisha and Uttar Pradesh have been taken up for inclusive growth of these areas.

Railways:

Railways are an important infrastructure as a means of transport whose expansion and efficient working is required for rapid growth of the economy. The demands of a growing economy such as ours require railways to expand its freight network, increase its ability to carry larger weight per wagon and the efficiency of the rail system for faster delivery. Besides, the railway requires improving the reach and quality of its passenger services. To meet the growing demand for carrying goods and passengers the current focus of Indian Railway should be the creation of additional capacity, modernisation of its existing network, improvement in asset utilisation and productivity. Besides, it should pay attention to modernisation of its rolling stock and maintenance practices to bring about overall improvement in the quality of its services.

It may be further noted that the Indian Railways is expected to generate its internal resources for its expansion and modernisation. The broad objective of Indian Railways should be to develop a strategy to be a part of an effective multi-modal transport system and to ensure an environment- friendly and economically-efficient transport system.

Airports:

Airport development is a basic infrastructure requirement for international connectivity, especially because the demand for air travel is projected to grow rapidly in India. There had been a significant progress of airport development in the Eleventh Plan period with the development of four new airports at Bangalore, Hyderabad, Delhi and Mumbai under public-private participation (PPP) mode. To expand airport infrastructure in India, modernisation of airport infrastructure in metro and non-metro cities and construction of Greenfield airports are under consideration of the government.

Development of 35 non-metro airports which have been identified based on regional connectivity, development of regional hubs etc. has been undertaken by Airports Authority of India (AAI). Out of 35 metro airports work has been completed in 33 metros and in the remaining two airports of Vadodra and Khajuraho work is in progress.

Ports:

Ports are another important infrastructure for international trade connectivity. It is mainly through these that the goods are exported to other countries and the goods and raw materials are imported. Without efficient ports it is not possible to expand foreign trade. In the Eleventh Plan period (2007- 12) some problems were faced for expansion of the Indian ports because several issues had to be resolved for the proposed public-private participation (PPP) in this connection. These have now been resolved and it is expected that in the next five years there will be significant progress in this area. As regards minor ports which come under State governments, there has been good progress in the Eleventh Plan period.

During 2013-14 major and non-major ports in India handled a total cargo of 980 million tonnes reflecting increase of 5.0 per cent over 2012-13. This can mainly be attributed to an increase of 1.8 per cent in the cargo handled at major ports. In contrast, traffic at non-major ports increased at around 9.6 per cent during 2013-14 as compared to 9.8 per cent in 2012-13.

Telecommunications:

Telecommunications occupy an important place in the modern economy. E-commerce and E-governance require the efficiency of telecommunication services. The companies like Amazon, Flipkart, Snapdeal are engaged in E-commerce for sale of goods. They work through mobiles and internet network. Besides, many BPO companies are providing outsourcing services through telecommunication. Without the efficient telecommunication system, the business through E-commerce and BPO is not possible. Telecommunications and the associated increase in Internet connectivity is a productivity enhancing development and India is well based to benefit from this.

Telecommunications in India have seen impressive expansion and large investment in the past several years with a tele-intensity increasing from 26.2 per cent in 2008 to 78.7 per cent in 2012. The expansion of telecommunications in India has been led by private sector whose market share (in terms of number of connections) increased from 73.5 per cent in 2008 to 86.3 per cent in 2012. However, due to arbitrariness and irregularities in the allocation of 2G Spectrum in 2008, 2G licenses and associated spectrum were cancelled by the Supreme Court in 2011 and ordered for reallocation of the spectrum through auction. The new auction of 2G spectrum was completed by January 2013.

There is a very large scope for further expansion in the telecommunications, especially with the introduction of 3G and 4G services. Besides, recently in July 2015, Prime minister has launched Digital India scheme to promote the role of telecom. In India a large number of companies providing telecom services have come into being. Business firms and even farmers can sign up for a telecom service which provides information through SMS or E-mail about market prices and other prevailing market conditions. This will help them to take optimal decisions regarding their business. Banks are also providing their customers, through SMS or E-mail, the status of their deposits and withdrawal. Besides, the banks are providing through E-mail the information regarding investment avenues open to them.

Keeping in view the role of an efficient telecom network in E-commerce and E-governance and delivery of public services provisions for state-of-art IT facilities in the country need to be put in place. Issues requiring attention include the policy for better spectrum management, strengthening a national fibre-optic network, network mobile number possibility and rural telephony.

Evaluation of the Performance of Infrastructural Services:

Whether in the public sector or regulated private sector the performance of infrastructural services has been quite poor. In many developing countries, the majority of the population, does not have access to the electricity and until recently in telephone services. After over 50 years of independence, in India the adequate pucca rural roads had not been built and natural highways were in very bad shape and not properly built and maintained lack of good ports and ports in India affected foreign trade of the country. It is only since 2001 that the work of building rural roads, highways, good ports and airports has been started in the 10th, 11th and 12th Five Year Plan.

In the case of electricity, the quality of service has been quite poor. There have been quite often fluctuations in voltages and often supply-cuts even in capital city of Delhi. In UP, Haryana and other states there are interruptions of supply for many hours compelling big companies to install their own big generators. Besides, State Electricity Boards which are usually responsible for distribution of electricity are running heavy losses. Prices charged by them even do not cover variable costs of supply, let alone contributing to overhead costs.

Similarly, until recently before the extensive use of mobile-phone wireless technology, telephone connections were very few and were a luxury consumer service rather than an essential productive service required to link markets, producers and consumers. Besides, one has to wait for many years to get telephone connection. However in the last 12 years, regarding telephone service things have improved a lot in India, especially with the widespread use of mobile telephone service. Likewise, in India, the performance of railways port and airport services has been quite inefficient and poor and need drastic reforms to be undertaken to improve their services.

To conclude, Prof. T.N. Srinivasan is right in saying that, the said performance of enterprises providing infrastructural services has been a factor in the poor performance of many developing countries including India. Thus the case for reforming the infrastructural sectors is very strong, both for improving their own performance and for removing the drag of an unreformed and poorly performing infrastructure sector on the realisation of potential benefits of reforms in other sectors.