1. By Shashanka Bhide NCAER November 21, 2008 Macroeconomic Considerations in Infrastructure Development

2. Outline Infrastructure development and India’s economic growth Financing Infrastructure: The 11 th FYP challenges Lessons for PPPs?

3. 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

4. Frustration ends in the 1980s

5. Raising investment and saving (%GDP): Change in the public sector’s role

6. Infrastructure Electricity Roads, bridges and railways Ports Airports Telecom Irrigation Water supply and sanitation Storage Gas distribution

7. Nirvana of Infrastructure TypeDesire Electricity24X7, stable voltage and frequency RoadsAll weather RailwaysNot over-crowded, do not overcharge for freight PortsLow turn-around time AirportsHandle growing traffic Telecom & broadbandInternet all over the country

8. Investment in Infrastructure (%GDP): XI th FYP Public sector constitutes 70% of total infrastructure investments Source: 11 th FYP Vol. I

9. 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

10. Resources for accelerating growth (Rs trillion, 2006-07 prices) Financing the Plan X th FYPXI th FYP % change 2002-072007-12 Balance from Current Resources-1.610.4-753.9 Borrowings12.214.216.0 Net inflows from abroad0.20-100.0 Resources of PSEs5.811.9105.8 Total Resources16.536.4120.5 Source: 11 th FYP Vol. I

11. Assessing role of infrastructure How crucial is it to meet the goals of infrastructure investment? –What has led to the acceleration in growth?

12. Growth has meant rising output per unit of labour

13. Capital Intensity flat during growth acceleration

14. Infrastructure Intensity has also plateaued in the last 15 Years

15. Investment alone has not led to growth acceleration Flat capital intensity and infrastructure intensity, yet productivity growth has increased

16. Services dominate industry in growth performance

17. Services dominate agricultural growth even more sharply

18. The sectoral differences in growth have altered the economic structure

19. Sources of growth: Bosworth, Collins and Virmani (IPF, 2007) Economy/ Period Output (Q) (Q/W)Contribution of KEducationFactor productivity India 1960-803.41.30.80.2 1980-045.83.71.40.42.0 China 1960-804.01.80.80.40.6 1980-049.57.82.80.44.5

20. Did capital and infrastructure inadequacy lead to structural change?

21. 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?

22. Distant returns make public sector driver of investment Infrastructure Sectors Infrastructure Using Sectors Pvt Invest Output Sell Infra sectors Infra using sectors Pub. Invest Output Taxes Provide

23. Infrastructure: Gravitation of collaborations Sectors Moving Infrastructure PublicPrivate Fixed Infrastructure PublicRailways Local body services Telecom Civil Aviation Ports Roads PrivateStorage?Telecom Civil Aviation Ports Roads

24. Countries with private capital (%) in 2002: Income elasticity of PPPs Income groups Electricity Generation (155 countries) Electricity Distribution (155) Telecoms (164 countries) Low income332637 Lower Middle393151 Upper Middle583966 Developed704383 Source: Estache (2004)

25. How stable will be infrastructure development? Tests for causality between infrastructure and growth: lessons for PPPs?

26. The Granger Causality Tests: GDP growth and per capita stock of capital Infrastructure K Does not Cause GDP growthCausesInfrastructure K Transport K Does not cause GDP growthCausesTransport K Communications KCausesGDP growthCausesCommunications K Electricity KCauses GDP growth (Industry + Services) CausesElectricity K

27. 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

28. Thank You