Infrastructure Development and Its Relationship with SDP Growth


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Infrastructure Development and Its Relationship with SDP Growth

  1. 1. Infrastructure Development and Its Relationship with SDP Growth A State-wise Study Advanced Management Research ProjectReport Prepared By:Abhirup Das 09BM8002Class of 2011 IIT Kharagpur VINOD GUPTA SCHOOL OF MANAGEMENT, IIT KHARAGPUR
  2. 2. IntroductionA major area of concern for sustaining the real gross domestic product (GDP) growth in India has beenlack of adequate infrastructure, which can support the growth process. Realizing this, Government ofIndia as well as the State Governments has ventured into making heavy investment in infrastructureespecially from the First Five-Year Plan onwards. The major focus of infrastructural investment has beenon irrigation, transportation, electric power, agricultural markets, etc between different regions as wellas in terms of agricultural growth. On the verge of 12th Five Year Plan (will commence in 2012-13), it isnecessary to look into the performances across the states as well as the country as a whole.Scope of Research Project The research project will identify various parameters of measuring infrastructural health of all states ofIndia through factor analysis and will analyze relations between above mentioned parameters andmacroeconomic factor like state GDP or industrial production. With the help of statistics, it will alsoestablish an econometric model to describe the relationship as well as degree of correlation amongvarious factors (trend analysis).Literature SurveyAt present various comparative studies on state wise performance is available. Some part of researchdevoted to the comparison of pre reform and post reform regime (economic reform of 1991-92 isconcerned here), whereas some were concentrated on forecasting of economic factors. Resources arealso focused on analysis of a particular segment (e.g. agricultural infrastructure) of a specific state.B.B. Bhattachrya and S. Sakthvel’s analysis of the growth performance and structural changes indomestic product of Indian states in the last two decades reveals that the development process hasbeen uneven across states. It also argues that preconception of so called growth states may be wrong.They also established an inverse relationship between population growth and income growth at thestate level in the recent years.L. Venkatachalam (2003) recognizes the need of focus on broader and long-term sustainableinfrastructure. He advises on understanding of changing operating environment caused by economicreform and increasing importance of private sector initiative.Dr. K. A. Familoni, in his paper The Role of Economic and Social Infrastructure in Economic Development:A Global View; pointed out Economic and Social Infrastructure as the basic foundation on which thesuperstructure of development and growth can be put up. They play a vital role in the development ofdeveloped as well as developing nations. Development is by far attainable in a continuous, steady,quantitative and qualitative ways when the very basic foundation is strong.Sarnambar Roy recommends that Indian States will have to put stress on Additional ResourceMobilization (ARM) measures, phasing out of socially irrelevant subsidies and Effective DebtManagement (EDM), in his creditability analysis of states. AMRP | 2
  3. 3. K. N. Murty and A. Soumya (IIM-B, 2009), in their paper on public investment in infrastructure in India,have analyzed the likely macroeconomic effects of changes in public investment in infrastructure inIndia. They blamed the crowding out effect as private investment is unable to meet the desired level.Sources of Data and LimitationsThe data for the research purpose is collected from Centre for Monitoring the Indian Economy (CMIE)database, Directorate of Economics & Statistics of respective State Governments, and for All-India --Central Statistical Organization (CSO). Base year for GDP/SDP’s are taken as 1999-00. This data set hassome limitation. The data refer only to expenditure on government projects and on private corporatesector projects and excludes investment in the household or unorganized sector (about 33% of totalinvestment in the economy). Secondly, the investment expenditure reported is the total expenditure forcompleting each project, not the expenditure by each project in a year. Therefore the investmentexpenditure is in fact spread across years. Finally, the data are collected from various sources as well asit is not available for some particular states (specifically some of the north-east states). Unavailability ofdata in any particular case is taken care by either exclusion of the corresponding parameter orappropriate assumption based on past data.1. Understanding of Infrastructure1.1 Definition and CategorizationInfrastructure is the services and utilities derived from the set of public works that normally has beenproduced and maintained by the public sector, even if it may be produced in the private sector. Watersupply, electricity, sanitation, transportation, telecommunications, irrigation dams, regulated marketsand banks are some of the examples of infrastructure for public consumption and use. The agriculturalinfrastructure includes all of the basic services, facilities, equipment, and institutions needed for theeconomic growth and efficient functioning of the food and fiber markets. As far as nature ofinfrastructure 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 ofothers, rather they are complementary to each other and are indispensable and connected part ofeconomic development. Economic theory argues that benefits derived from all these kinds ofinfrastructure jointly are greater than that of the sum of benefits from each category of individualinfrastructure. In other words, the net benefit of providing diverse kinds of essential infrastructuretogether tend to generate more amount of net benefits than that of providing a single infrastructuralfacility.1.2 Importance of InfrastructureThe strong positive correlation between the level of infrastructure and the economic development hasbeen a well-established fact in the concurrent economics literature. In Keynesian macroeconomicmodel, the income or the output in the economy originates from the level of investment made in theeconomy. 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 fromabroad, income from investment comes both from investment expenditure especially by privateindividuals as well as from government spending. In spite of the income in the Keynesian model refers to AMRP | 3
  4. 4. short-term income, usually measured on annual basis, the investment made also comprise long-terminvestment such as investment in basic infrastructural facilities. Since the model is based on the notionthat there is a direct positive relationship between income and the investment, investment ininfrastructure is economically reasonable.2. Regional Disparity in Absolute and Relative Economic TermsThere are 29 states and 6 Union territories in the country (considering Delhi as a state). Disparities invarious socio-economical factors can be observed among the states. Geographic location, naturalresources, existing infrastructure, political environment as well as degree of economic reform are therationale behind widely varied per capita SDP across states. Table1.State Domestic Product at current price (New-series) (Rs. Cr.) Per Capita (Rs.)(Adjusted State Mar-07 Mar-08 Annual Growth 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 AMRP | 4
  5. 5. Figure 1: Inflation Adjusted Per- Capita SDP across States (in Rs.)Before drawing any conclusion regarding current economic performance of the states, some factorsneeds 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 AMRP | 5
  6. 6. • “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 namelyeconomic infrastructure services, social services and specific infrastructure projects pertaining to localimprovement. A brief description of these categories follows:Based on a paper on ‘Evaluating Investment on Basic Infrastructure’, B.E. Aigbokhan gives examples ofeconomic infrastructurePublic Utilities Power, Telecommunication, Piped water supply and piped gas, Sanitation and sewage, solid waste collection and disposalPublic 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 airportsRole in the It provides services that are part of the consumption bundle of residents; large-scaleEconomy 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 AMRP | 6
  7. 7. 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 Realistic and reliable indicator of modernization or development than any otherresource single measure. It is one of the necessary conditions for all kinds of growth – social,development political, cultural or economicHealth 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 personnelState-wise specific infrastructure projects are actually categorized in to above two but funding of theprojects does not purely come from government expenditure, rather it is executed on PPP (public-private partnership), BOT (build-operate-transfer) etc various modelsThough the investment pattern can be broadly generalized into these categories, relative investmentvaries 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 subsequentyear (Figure 2). In fact, a growing preference is implementing projects with a specific goal, rather thantaking the general way of running long term programs. Where most of the developed states mostlyadopting the project based approach and their expenditure often beyond planned limit, states fromnorth- east and “BIMARU’ states are being failed to take the initiative (Figure 3). AMRP | 7
  8. 8. Figure 2: All State government combined expenditure break-up for infrastructure sector Table2. State government expenditure on infrastructure sector in the year 2008States Total expenditure Economic Social Specific (Rs. Cr.) Factors Factors ProjectsJammu &Kashmir 17045.82 20.05% 17.58% 38.27%HimachalPradesh 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%ArunachalPradesh 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 35265.68 18.54% 23.10% 27.86% AMRP | 8
  9. 9. Pradesh 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.) AMRP | 9
  10. 10. 4. Relationship between Economic Health and Industrial Activity of a StateTable2. Industrial Investment (All industries annually)State 2007 (In cr) % of GDP 2008 (In cr) % of GDP Y-o-Y GrowthJammu & 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 NAManipur 15.97 0.30% 20.06 0.34% 25.61%Nagaland 73.57 1.23% 69.53 1.07% -5.49%Arunachal Pradesh NASikkim NAJharkhand 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% AMRP | 10
  11. 11. 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 forindustry purpose, though the ratio of investment varies for different states. It can be concluded thatgrowth in SDP certainly affects the industrial activity of a state in almost same way (the correlationcoefficient of spending in industrial sector as a % of SDP over the two years being 0.902). Furtheranalysis shows that both industrial investment and gross output growth have a positive correlation withSDP growth. Figure 4: Industrial investment as a % of SDP is almost fixed in recent years, though they vary in absolute terms AMRP | 11
  12. 12. Now the question remains if change in SDP does have any impact on state government and privatesector activities in infrastructure sector. The following table summarizes state-wise infrastructureactivities 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 Growth Over Growth Over State Mar-08 Previous Year Mar-08 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 isalmost un-correlated with SDP growth rate (correlation factor being ~.05). This result can be mostlyattributed to long term nature of projects where the benefits achieved from it spread across years aftercommencement of the project. Also some amount of investment goes for in terms of economic theorywhich stresses on more focus on ‘social’ infrastructure (subsidies, cap on outflow of funds) which isquite different from generic infrastructure in terms of various factors.5. The Determinants of Growth in the States AMRP | 12
  13. 13. The rate of investment is generally regarded as one of the most important factors explaining growth inany economy and it is therefore appropriate to consider whether inter-state differences in growth areassociated with differences in the rate of investment in individual states. The growth rate of SDP wouldbe explained in terms of the common explanatory variables traditionally used like the magnitude ofinvestment in states, industrial activity and the factors of infrastructure index.g= C +a* independent var. which is a linear equation where C and a constantSeveral separate regression equations (g= C +a* independent variable where C is a constant and a is theintercept) which are to be estimated in which the dependent variable in each case wasg = growth of SDP, while the independent variables were1. 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 levelThree 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 alreadydefined above. The results are reported belowg= 0.152 - 0.06366 IPUB R2 = 0.040955g = 0.137756 + 0.010789 IPVT R2 = 0.1649g = 0.137876 +0.010141 ITOT R2 = 0.0264No significant relationship can be found between the variation in growth across states and the variationin 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 thevariation in growth for different states.The above result does not imply that public investment is not important. There may be large errors inthe data-set because of factors mentioned earlier (especially inclusion of future investment inunfinished projects is likely to introduce a larger error the more inadequately managed the investmentprogramme). Incomplete projects due to lack of funding and delays may not fuel the growth asexpected.As private investment is subject to greater financial control the data error arising from a large number ofunfinished and under-funded projects is likely to be much smaller. Because of efficient use of resourceand time, private investment is more directly correlated with growth. It can be concluded that private AMRP | 13
  14. 14. investment matters and under-performing states needs to be focused to ensure private sectorparticipation for development initiatives.5.2 Industrial ActivityConsiderable part of a states investment is devoted for industrial sector. Though private sector isdominant participant, it is supported by governments which provide the basic frame-work as well asinvestments. 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 R2 = 0.05985 g = 0.122652 + 0.012 IINV R2 = 0.170444The above relationship re-establishes the fact that a state’s capability of representing itself as anattractive destination for investment and providing a business conductive environment would add to itseconomic growth.5.3 Quality of InfrastructureThe CMIE has calculated a composite index of the relative infrastructure quality of different states basedon 13 separate components. The individual components are : per capita electric power, percent ofvillages electrified, railway route length per 000, surfaced road length per 000, unsurfacedroad length, handling capacity of major ports, gross irrigated area as % of cropped area, tele-density plusthe following per lakh of population: bank branches, post offices, primary schools, hospital beds, andprimary 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 testedfor the impact on growth in the states by estimating separate regression equations. The independentvariables in this case are growth in % village electrification (V) and growth in tele-density (T) g= 0.136157 + 0.096952 V R2 = 0. 1292 g = 0.139103 + 0.39027 T R2 = 0.02444The positive relationship between growth and the two infrastructure related parameter (villageelectrification and tele-density) broadly matches with expectations. Significance of these factors leis intheir origin- government expenditure and consumption expenditure which are direct contributor to astate’s growth.6. ConclusionStatistical results have been achieved somewhat mixed result. They generate expected confirmationthat 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 ingrowth. They also recommend that public investment is not as certainly allied with growth as apparently AMRP | 14
  15. 15. expected. Although, all these results, including the lack of an important relationship in some cases, aresubject to limitation of the data available (like absence of composite infrastructure index).7. Future Plan of WorkMore work needs to be done in improving the data available on possible factors which may help explainthe variations in growth across states, which will provide the statistical analysis the desired robustness.After examining the factors and their relative importance, this study is to be extended further to devisea strategy for slow growth states for achieving economic development while addressing their fundingissues.References: Murty K. N. and Soumya A. : Macro Economic Effects of Public Investment in Infrastructure in India, IGIDR , August 2009 BHATTACHARYA B.B. and SAKTHIVEL S. : REGIONAL GROWTH AND DISPARITY IN INDIA: A COMPARISON OF PRE AND POST-REFORM DECADES, INSTITUTE OF ECONOMIC GROWTH UNIVERSITY OF DELHI Krishna K. L. : PATTERNS AND DETERMINANTS OF ECONOMIC GROWTH IN INDIAN STATES, ICRIER, SEPTEMBER, 2004 Roy Sarnambar : CREDIT RATING OF INDIAN STATES – THE SOCIAL SECURITY INVESTMENT ANGLE, India Life AMC FAMILONI DR. K. A. : THE ROLE OF ECONOMIC AND SOCIAL INFRASTRUCTURE IN ECONOMIC DEVELOPMENT: A GLOBAL VIEW Venkatachalam L. : INFRASTRUCTURE AND AGRICULTURAL DEVELOPMENT IN KARNATAKA STATE, Institute for Social and Economic Change, June 2003 Ahluwalia M. S. : State Level Performance Under Economic Reforms in India, Conference on Indian Economic Prospects: Advancing Policy Reform Stanford University, May 2000 AMRP | 15