by shashanka bhide ncaer november 21, 2008 macroeconomic considerations in infrastructure...

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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