ByBy
Shashanka BhideShashanka Bhide
NCAERNCAER
November 21, 2008November 21, 2008
Macroeconomic Considerations in Macroeconomic Considerations in Infrastructure DevelopmentInfrastructure Development
Outline
• Infrastructure development and India’s economic growth
• Financing Infrastructure: The 11 th FYP challenges
• Lessons for PPPs?
Seeking economic growth and development
• Focus on raising rate of investment through the Five Year Plans
• Demand led infrastructure development or supply driven development?
• Infrastructure development primarily through public sector investments
Frustration ends in the 1980s
Raising investment and saving (%GDP):
Change in the public sector’s role
Infrastructure
• Electricity
• Roads, bridges and railways
• Ports
• Airports
• Telecom
• Irrigation
• Water supply and sanitation
• Storage
• Gas distribution
Nirvana of Infrastructure
Type Desire
Electricity 24X7, stable voltage and frequency
Roads All weather
Railways Not over-crowded, do not overcharge for freight
Ports Low turn-around time
Airports Handle growing traffic
Telecom & broadband Internet all over the country
Investment in Infrastructure (%GDP): XI th FYP
Public sector constitutes 70% of total infrastructure investmentsSource: 11th FYP Vol. I
The Concerns
• Can public sector provide the resources that are necessary to meet the targets?: fiscal constraints
• Will private sector come forward to provide the resources to meet its share of the effort?: institutional framework
Resources for accelerating growth (Rs trillion, 2006-07 prices)
Financing the Plan X th FYP XI th FYP % change
2002-07 2007-12
Balance from Current Resources -1.6 10.4 -753.9
Borrowings 12.2 14.2 16.0
Net inflows from abroad 0.2 0 -100.0
Resources of PSEs 5.8 11.9 105.8
Total Resources 16.5 36.4 120.5
Source: 11th FYP Vol. I
Assessing role of infrastructure
• How crucial is it to meet the goals of infrastructure investment?
– What has led to the acceleration in growth?
Growth has meant rising output per unit of labour
Capital Intensity flat during growth acceleration
Infrastructure Intensity has also plateaued in the last 15 Years
Investment alone has not led to growth acceleration
• Flat capital intensity and infrastructure intensity, yet productivity growth has increased
Services dominate industry in growth performance
Services dominate agricultural growth even more sharply
The sectoral differences in growth have altered the economic structure
Sources of growth: Bosworth, Collins and Virmani (IPF, 2007)
Economy/ Period
Output (Q)
(Q/W) Contribution of
K Education Factor productivity
India
1960-80 3.4 1.3 0.8 0.2 0.2
1980-04 5.8 3.7 1.4 0.4 2.0
China
1960-80 4.0 1.8 0.8 0.4 0.6
1980-04 9.5 7.8 2.8 0.4 4.5
Did capital and infrastructure inadequacy lead to structural change?
Motivation for analysis
• When the economy is increasingly market driven, can public sector infrastructure supply be adequate in composition and quantity?
• Will private sector participation in infrastructure development lead to adequate quantum and composition of infrastructure?
• Are there any lessons from India’s experience?
Distant returns make public sector driver of investment
Infrastructure Sectors
Infrastructure Using Sectors
Pvt Invest OutputSell
Infra sectors Infra using sectors
Pub. Invest OutputProvide
Infrastructure: Gravitation of collaborations
Countries with private capital (%) in 2002: Income elasticity of PPPs
Income groups Electricity Generation (155 countries)
Electricity Distribution
(155)
Telecoms (164 countries)
Low income 33 26 37
Lower Middle 39 31 51
Upper Middle 58 39 66
Developed 70 43 83
Source: Estache (2004)
How stable will be infrastructure development?
• Tests for causality between infrastructure and growth: lessons for PPPs?
The Granger Causality Tests: GDP growth and per capita stock of capital
Infrastructure KDoes notCause
GDP growth Causes Infrastructure K
Transport KDoes notcause
GDP growth Causes Transport K
Communications K Causes GDP growth Causes Communications K
Electricity K CausesGDP growth (Industry + Services)
Causes Electricity K
Conclusions
• Effect of growth on infrastructure development appears more prominent than the other way round
• This implies that favourable fiscal position is important for infrastructure development
• There are sectors where growth impact of infrastructure development is more immediate and therefore may be more attractive for PPPs
Thank You