Wednesday, June 22, 2011

Infrastructure Development and Its Relationship with SDP Growth


Introduction

A major area of concern for sustaining the real gross domestic product (GDP) growth in India has been lack of adequate infrastructure, which can support the growth process. Realizing this, Government of India as well as the State Governments has ventured into making heavy investment in infrastructure especially from the First Five-Year Plan onwards. The major focus of infrastructural investment has been on irrigation, transportation, electric power, agricultural markets, etc between different regions as well as in terms of agricultural growth. On the verge of 12th Five Year Plan (will commence in 2012-13), it is necessary to look into the performances across the states as well as the country as a whole.

1. Understanding of Infrastructure

1.1 Definition and Categorization

Infrastructure is the services and utilities derived from the set of public works that normally has been produced and maintained by the public sector, even if it may be produced in the private sector. Water supply, electricity, sanitation, transportation, telecommunications, irrigation dams, regulated markets and banks are some of the examples of infrastructure for public consumption and use. The agricultural infrastructure includes all of the basic services, facilities, equipment, and institutions needed for the economic growth and efficient functioning of the food and fiber markets. As far as nature of infrastructure is concerned, there are different kinds of infrastructure such as economic infrastructure, social infrastructure, agricultural infrastructure, financial infrastructure, technological infrastructure etc. defined in broader terms. But this classification does not signify that each dominates at the cost of others, rather they are complementary to each other and are indispensable and connected part of economic development. Economic theory argues that benefits derived from all these kinds of infrastructure jointly are greater than that of the sum of benefits from each category of individual infrastructure. In other words, the net benefit of providing diverse kinds of essential infrastructure together tend to generate more amount of net benefits than that of providing a single infrastructural facility.

1.2 Importance of Infrastructure

The strong positive correlation between the level of infrastructure and the economic development has been a well-established fact in the concurrent economics literature. In Keynesian macroeconomic model, the income or the output in the economy originates from the level of investment made in the economy. It should be noted that out of all the four factors contributing to income of a nation namely, government expenditure, consumption expenditure, investment expenditure and net income from abroad, income from investment comes both from investment expenditure especially by private individuals as well as from government spending. In spite of the income in the Keynesian model refers to short-term income, usually measured on annual basis, the investment made also comprise long-term investment such as investment in basic infrastructural facilities. Since the model is based on the notion that there is a direct positive relationship between income and the investment, investment in infrastructure is economically reasonable.


2. Regional Disparity in Absolute and Relative Economic Terms


There are 29 states and 6 Union territories in the country (considering Delhi as a state). Disparities in various socio-economical factors can be observed among the states. Geographic location, natural resources, existing infrastructure, political environment as well as degree of economic reform are the rationale behind widely varied per capita SDP across states.
Table1.State Domestic Product at current price (New-series) (Rs. Cr.)
State
Mar-07
Mar-08
Annual Growth
Per Capita (Rs.)(Adjusted for Inflation)
Jammu & Kashmir
29030
31793
9.52%
20604
Himachal Pradesh
22843
24800
8.57%
38378
Punjab
121209
144309
19.06%
38859
Haryana
130236
154231
18.42%
48456
Uttar Pradesh
309834
344346
11.14%
14083
Rajasthan
153344
176420
15.05%
22350
Delhi
125282
143911
14.87%
65156
Uttarakhand
31380
35592
13.42%
28671
Bihar
99579
114616
15.10%
11416
Orissa
95065
119066
25.25%
22287
West Bengal
264542
307895
16.39%
27062
Assam
64429
71625
11.17%
18877
Meghalaya
7330
8472
15.58%
25349
Tripura
10322
10821
4.84%
24034
Mizoram
2996
3305
10.33%
23174
Manipur
5403
5848
8.24%
18347
Nagaland
5978
6470
8.23%
18490
Arunachal Pradesh
3413
3888
13.93%
25110
Sikkim
2039
2298
12.72%
29506
Jharkhand
63229
69253
9.53%
17956
Gujarat
262723
306813
16.78%
40004
Maharashtra
508836
590995
16.15%
40614
Goa
15248
17215
12.89%
70329
Madhya Pradesh
133073
149840
12.60%
16963
Chhattisgarh
64706
79419
22.74%
24522
Andhra Pradesh
277286
326547
17.77%
31533
Karnataka
205852
238348
15.79%
31305
Kerala
145009
165722
14.28%
39815
Tamil Nadu
276917
304989
10.14%
34417

Figure 1: Inflation Adjusted Per- Capita SDP across States (in Rs.)

Before drawing any conclusion regarding current economic performance of the states, some factors needs to be taken care:
·         Delhi and Goa are not comparable with other state (Because of their small size and political-economic importance, they do not represent the diversity of a state)

·         Political instability, geographical barrier and consequently poor infrastructure affect SDP for north-east states and Jammu & Kashmir. In spite of this they are ahead of some central states in terms of year on year growth, though the overall production as well as per-capita is far less than national average


·         “Growth States” like Punjab and Haryana continues to deliver superior performance, but growth has rather moderated for others like Maharashtra and Gujarat. Concurrent economic research argues that these two states are already achieved a certain scale of per-capita production with a considerable size of economy, and growth rate seems to be quiet  impressive while comparing with states with small size and less matured economy

·         Legacy of the so called BIMARU states (Bihar, Madhya Pradesh, Rajasthan and UP) as a consistent group of poor performers, continues with only exception- Rajasthan. Bihar and Uttar Pradesh and Madhya Pradesh performed very poorly, growing much more slowly than the average, but the other members of this group, Rajasthan have performed reasonably well.


·         Regional disparity in absolute term can be observed by wide variation of per-capita output of states (Figure 1). But the more interesting finding is the degree of dispersion in growth rates increased very significantly in the recent years. The coefficient of variation of the growth rates increased from 0.15 in the period 1985-89 (before economic liberalization of India) to .31 in the current period 2006-09.

3. State Government Expenditure Pattern on Infrastructure Sector


 State government expenditures on infrastructure can be categorized in to three main areas namely economic infrastructure services, social services and specific infrastructure projects pertaining to local improvement. A brief description of these categories follows:
Based on a paper on ‘Evaluating Investment on Basic Infrastructure’, B.E. Aigbokhan gives examples of economic infrastructure
Public Utilities
Power, Telecommunication, Piped water supply and piped gas, Sanitation and sewage, solid waste collection and disposal
Public Works

Roads, Major dam and canal works for irrigation and drainage, and other transport projects like urban and interurban railways, urban transport, seaports and waterways and airports
Role in the Economy
It provides services that are part of the consumption bundle of residents; large-scale expenditures for public works increase aggregate demand and provide short-run stimulus to the economy; and it serves as an input into private sector production, thus boosting output and productivity. The provision of economic infrastructure can expand the productive capacity of the economy by increasing the quantity and quality of such infrastructure thereby accelerating the rate of economic growth and enhancing the pace of socio-economic development.

Social infrastructures and their role as defined in the same paper:

Education
Education is a very important source of economic growth. Even though education may be a social investment, it is also an economic investment since it enhances the stock of human capital.
Human resource development
Realistic and reliable indicator of modernization or development than any other single measure. It is one of the necessary conditions for all kinds of growth – social, political, cultural or economic
Health
Health is one of the major determinants of labour productivity and efficiency. Public health measures include the improvement of environmental sanitation both in rural and urban areas, removal of stagnant and polluted water, slum clearance, better housing, clean water supply, better sewage facilities, control of communicable diseases, provision of medical and health services especially in maternal and child welfare, health education, family planning and above all, for the training of health and medical personnel

State-wise specific infrastructure projects are actually categorized in to above two but funding of the projects does not purely come from government expenditure, rather it is executed on PPP (public-private partnership), BOT (build-operate-transfer) etc various models
Though the investment pattern can be broadly generalized into these categories, relative investment varies among states. The average distribution of expenditure in the year 2008 is approximately 17.43%, 27.14% and 49.50% respectively for the above mentioned areas and the trend is followed in subsequent year (Figure 2). In fact, a growing preference is implementing projects with a specific goal, rather than taking the general way of running long term programs.  Where most of the developed states mostly adopting the project based approach and their expenditure often beyond planned limit, states from north- east and “BIMARU’ states are being failed to take the initiative (Figure 3).
Figure 2: All State government combined expenditure break-up for infrastructure sector

Table2. State government expenditure on infrastructure sector in the year 2008
States
Total expenditure (Rs. Cr.)
Economic Factors
Social Factors
Specific Projects
Jammu & Kashmir
17045.82
20.05%
17.58%
38.27%
Himachal Pradesh
10613.78
18.69%
27.09%
67.31%
Punjab
26518.98
20.66%
16.34%
17.40%
Haryana
22079.43
28.18%
25.99%
56.09%
Uttar Pradesh
87304.42
13.79%
26.44%
15.16%
Rajasthan
37757.47
21.16%
27.01%
26.81%
Delhi
18159.63
3.48%
28.76%
38.49%
Uttarakhand
9974.61
14.65%
28.36%
51.07%
Bihar
31565.86
14.06%
31.26%
12.75%
Orissa
22844.33
16.32%
28.09%
18.55%
West Bengal
46644.08
11.91%
28.86%
53.34%
Assam
15150.3
18.84%
32.72%
11.06%
Meghalaya
2771.14
26.05%
27.19%
13.69%
Tripura
3835.11
12.37%
24.61%
6.20%
Mizoram
2559.15
22.12%
27.23%
8.91%
Manipur
3716.16
17.25%
19.36%
76.07%
Nagaland
3562.91
20.26%
18.44%
0.00%
Arunachal Pradesh
3068.13
30.41%
23.03%
4.70%
Sikkim
2819.62
11.37%
15.54%
134.38%
Jharkhand
18359.89
17.54%
27.35%
3.75%
Gujarat
42681.06
18.60%
27.65%
76.51%
Maharashtra
80240.29
16.50%
33.37%
85.72%
Goa
3559.18
28.38%
26.14%
10.29%
Madhya Pradesh
35265.68
18.54%
23.10%
27.86%
Chhattisgarh
15029.22
20.89%
27.40%
12.16%
Andhra Pradesh
74875.38
22.58%
24.92%
93.13%
Karnataka
48031.09
23.85%
27.32%
74.03%
Kerala
29044.99
10.30%
27.59%
117.64%
Tamil Nadu
55748.48
13.94%
28.21%
34.27%

* Addition of percentage values may exceed or less than 100% as states have borrowed fund or un-utilized fund.


Figure 3: State government expenditure pattern on infrastructure sector for the year 2008 (in Rs. Cr.)














4. Relationship between Economic Health and Industrial Activity of a State

Table2. Industrial Investment  (All industries annually)
State
2007   (In cr)
% of GDP
2008   (In cr)
% of GDP
Y-o-Y Growth
Jammu & Kashmir
2820.5
9.72%
4047.52
12.73%
43.50%
Himachal Pradesh
10875.92
47.61%
24475.73
98.69%
125.05%
Punjab
32324.58
26.67%
39986.76
27.71%
23.70%
Haryana
37038.62
28.44%
47856.42
31.03%
29.21%
Uttar Pradesh
70485.91
22.75%
91591
26.60%
29.94%
Rajasthan
28411.66
18.53%
34302.71
19.44%
20.73%
Delhi
6450.22
5.15%
6966.88
4.84%
8.01%
Uttarakhand
13405.6
42.72%
18677.32
52.48%
39.32%
Bihar
5533.1
5.56%
5636.84
4.92%
1.87%
Orissa
35871.08
37.73%
52217.74
43.86%
45.57%
West Bengal
43806.14
16.56%
50801.8
16.50%
15.97%
Assam
11795.26
18.31%
13019.65
18.18%
10.38%
Meghalaya
610.07
8.32%
832.51
9.83%
36.46%
Tripura
443.84
4.30%
464.19
4.29%
4.58%
Mizoram


NA


Manipur
15.97
0.30%
20.06
0.34%
25.61%
Nagaland
73.57
1.23%
69.53
1.07%
-5.49%
Arunachal Pradesh


NA


Sikkim


NA


Jharkhand
27131.67
42.91%
29761.22
42.97%
9.69%
Gujarat
185132.5
70.47%
209558.4
68.30%
13.19%
Maharashtra
192130.1
37.76%
214767.5
36.34%
11.78%
Goa
6676.39
43.78%
7575.97
44.01%
13.47%
Madhya Pradesh
31502.91
23.67%
36431.68
24.31%
15.65%
Chhattisgarh
26570.6
41.06%
30862.15
38.86%
16.15%
Andhra Pradesh
75464.49
27.22%
95835.45
29.35%
26.99%
Karnataka
70453.34
34.23%
86223.98
36.18%
22.38%
Kerala
14856.41
10.25%
17075.9
10.30%
14.94%
Tamil Nadu
115435.9
41.69%
129523.1
42.47%
12.20%



From above data it can be concluded that almost every state are investing a certain % of their SDP for industry purpose, though the ratio of investment varies for different states. It can be concluded that growth in SDP certainly affects the industrial activity of a state in almost same way (the correlation coefficient of spending in industrial sector as a % of SDP over the two years being 0.902). Further analysis shows that both industrial investment and gross output growth have a positive correlation with SDP growth.
Figure 4: Industrial investment as a % of SDP is almost fixed in recent years, though they vary in absolute terms



Now the question remains if change in SDP does have any impact on state government and private sector activities in infrastructure sector. The following table summarizes state-wise infrastructure activities under implementation (data is not available for some of the north east states)
Table 2. Infrastructure project investments under implementation (Rs. Cr)
Intiative
Government

Private

State
Mar-08
Growth Over Previous Year
Mar-08
Growth Over Previous Year
Jammu & Kashmir
5300
-18.76%
1116
100.21%
Himachal Pradesh
9951
39.28%
17806
48.73%
Punjab
14447
213.09%
26950
104.14%
Haryana
7881
-36.37%
197771
24.87%
Uttar Pradesh
39477
198.26%
129227
195.56%
Rajasthan
16861
66.56%
30364
148.09%
Delhi
7148
2.26%
24636
19.84%
Uttarakhand
4865
-4.50%
10105
-24.82%
Bihar
4028
0.07%
661
-33.51%
Orissa
5104
20.45%
221302
26.30%
West Bengal
25206
1.32%
124686
56.92%
Assam
1741
3.87%
1043
14.43%
Meghalaya
600
58.19%
1554
72.89%
Tripura
238
0.00%
230
0.00%
Mizoram
228
0.00%
NA

Manipur
3227
14.15%
NA

Nagaland
NA

NA

Arunachal Pradesh
106
-26.56%
900
0.00%
Sikkim
3078
-18.77%
3732
-4.45%
Jharkhand
579
-15.97%
91595
7.51%
Gujarat
53978
65.30%
178826
22.30%
Maharashtra
83268
21.06%
172151
46.63%
Goa
366
0.00%
910
378.95%
Madhya Pradesh
13097
33.31%
79092
49.49%
Chhattisgarh
812
-55.57%
57187
86.13%
Andhra Pradesh
129563
85.80%
138448
85.24%
Karnataka
32913
-7.44%
78967
10.92%
Kerala
29678
-13.15%
11886
67.04%
Tamil Nadu
29302
53.38%
113102
89.75%

The findings shows that the growth rate of combined investment of government and private entities is almost un-correlated with SDP growth rate (correlation factor being ~.05). This result can be mostly attributed to long term nature of projects where the benefits achieved from it spread across years after commencement of the project. Also some amount of investment goes for in terms of economic theory which stresses on more focus on ‘social’ infrastructure (subsidies, cap on outflow of funds) which is quite different from generic infrastructure in terms of various factors.
5. The Determinants of Growth in the States

The rate of investment is generally regarded as one of the most important factors explaining growth in any economy and it is therefore appropriate to consider whether inter-state differences in growth are associated with differences in the rate of investment in individual states. The growth rate of SDP would be explained in terms of the common explanatory variables traditionally used like the magnitude of investment in states, industrial activity and the factors of infrastructure index.

g= C +a* independent var. which is a linear equation where C and a constant

Several separate regression equations (g= C +a* independent variable where C is a constant and a is the intercept) which are to be estimated in which the dependent variable in each case was

g = growth of SDP, while the independent variables were

1. IPUB (cumulative expenditure in public sector projects as a ratio of SDP),
2. IPVT (cumulative expenditure in private sector projects as a ratio of SDP)
3. ITOT=IPUB+IPVT.
4. IGO (increase in gross output of all industries)
5. IINV (increase in gross investment in all industries)
7. V (percentage of villages electrified in the base year)  
9. T (tele-density).


5.1 Investment Ratios at the State level

Three separate regression equations were estimated in which the dependent variable in each case was g = growth of SDP in 2006 to 2009, while the independent variables were IPUB, IPVT and ITOT which already defined above.  The results are reported below

g=  0.152  - 0.06366  IPUB 
g = 0.137756 + 0.010789 IPVT 
g = 0.137876 +0.010141 ITOT 

No significant relationship can be found between the variation in growth across states and the variation in the public investment ratio while, the private investment ratio proves to be extremely considerable (coefficient has the expected positive sign). This variable explicate nearly one- sixth (16%) of the variation in growth for different states.
The above result does not imply that public investment is not important. There may be large errors in the data-set because of factors mentioned earlier (especially inclusion of future investment in unfinished projects is likely to introduce a larger error the more inadequately managed the investment programme). Incomplete projects due to lack of funding and delays may not fuel the growth as expected.
As private investment is subject to greater financial control the data error arising from a large number of unfinished and under-funded projects is likely to be much smaller. Because of efficient use of resource and time, private investment is more directly correlated with growth. It can be concluded that private investment matters and under-performing states needs to be focused to ensure private sector participation for development initiatives.

5.2 Industrial Activity

Considerable part of a states investment is devoted for industrial sector. Though private sector is dominant participant, it is supported by governments which provide the basic frame-work as well as investments. Two factors presented here are IGO (increase in gross output of all industries) and IINV (increase in gross investment in all industries)

g=  0.120971 + 0.061133 IGO
g = 0.122652 + 0.012 IINV

The above relationship re-establishes the fact that a state’s capability of representing itself as an attractive destination for investment and providing a business conductive environment would add to its economic growth.

5.3 Quality of Infrastructure

The CMIE has calculated a composite index of the relative infrastructure quality of different states based on 13 separate components.  The individual components are : per capita electric power, percent of villages electrified, railway route length per 000 sq.km., surfaced road length per 000 sq.km., unsurfaced road length, handling capacity of major ports, gross irrigated area as % of cropped area, tele-density plus the following per lakh of population: bank branches, post offices, primary schools, hospital beds, and primary health centers. Each indicator is computed for each State relative to the all India average=100. The composite index is the weighted sum of individual indices. (Details: CMIE 1997)

As the composite index is not available for recent periods, some of the individual components are tested for the impact on growth in the states by estimating separate regression equations. The independent variables in this case are growth in % village electrification (V) and growth in tele-density (T)

g=  0.136157 + 0.096952 V
g = 0.139103 + 0.39027 T

The positive relationship between growth and the two infrastructure related parameter (village electrification and tele-density) broadly matches with expectations. Significance of these factors leis in their origin- government expenditure and consumption expenditure which are direct contributor to a state’s growth.


 6. Conclusion

Statistical results have been achieved somewhat mixed result. They generate expected confirmation that change in the private investment ratios are positively and notably correlated with change in growth. They also give corroboration that certain factors of infrastructure are associated with variations in growth. They also recommend that public investment is not as certainly allied with growth as apparently expected. Although, all these results, including the lack of an important relationship in some cases, are subject to limitation of the data available (like absence of composite infrastructure index).