UNIT 4
INFRASTRUCTURE IN INDIA SINCE 1991
INTRODUCTION TO INFRASTRUCTURE:
The infrastructure is important for faster economic growth and alleviation of poverty within the country. The adequate infrastructure within the sort of road and railway transport system, ports, power, airports and their efficient working is also needed for integration of the Indian economy with other economies of the world.
The following are the important constituents of infrastructure:
1. Power and the source of its production like coal and oil;
2. Roads and road transport;
3. Railways;
4. Communication, especially telecommunication
5. Ports and airports; and
6. For agriculture, irrigation constitutes the important infrastructure.
A distinguishing feature of infrastructure is that while the demand-supply gap just in case of other factors is often met by importing some of them, the deficiency of infrastructure can't be made up through imports. Because location-based the need for relevant infrastructure facility are often met through development of its capacity within the domestic economy. For instance, you can't import power facility, roads, ports or railways as they have to be built up in the domestic economy.
FEATURES OF INFRASTRUCTURE:
It is worthwhile to say some distinctive features of infrastructure – First, the building of infrastructure requires large and lumpy investment and that they contribute to output, after a long time that's their gestation period is quite long. Second, because of large overhead capital and lumpy investment, the significant economies of scale are found in most of them. Due to the many economies of scale found in many infrastructure services, they have the characteristics of natural money. The third important feature of infrastructure facilities is they create externalities.
For example, building of rural roads will benefit agriculture as the farmers are able to sell their products in towns where they will get remunerative prices. Besides, they will get some inputs like fertilizers, pesticides and other industrial products at relatively cheaper prices as their transport costs decline thanks to improved transportation. Power plants generate both positive and negative externalities. The construction of power plants produces electricity which is employed for industrial helps production and commercial use and thereby helps in acceleration of economic growth. An influence plant also produces negative externalities within the form of emission of pollutants, especially CO2.
The above feature of infrastructure means that competitive market system won't be able to achieve a socially optimal level of infrastructural services in most of the cases. Besides, in many of infrastructural facilities, there are significant economies of scale and thus they have the features natural monopoly. In other words, we find market failure to realize their socially optimal level.
Therefore, these infrastructural facilities are either built or run by the govt and public sector enterprises or if private sector is permitted to form investment in them and run them, they have to be regulated by the govt, in order that they should not exploit the consumers. for instance , the distribution of electricity which is an infrastructural service is being provided by two power Companies of Tata and Reliance in several regions of Delhi, the electricity rates and other charges are being regulated by an authority appointed by the govt . Similarly, in telecommunication, which is another infrastructural service, various companies like Airtel, Vodaphone, Idea, MTNL are providing this service of wireless telephony (i.e., mobile service) are being regulated by TRAI.
IMPORTANCE OF INFRASTRUCTURE:
It needs to be emphasized that good quality infrastructure is vital not only for faster economic growth but also to make sure inclusive growth. By inclusive growth we mean that benefits of growth are shared by the majority of the people of a country. Thus the inclusive growth will lead to the alleviation of poverty and reduction in income inequality in the country.
For example, micro, small and medium enterprises (MSME) are dispersed throughout the economy and production by them and their growth require access to quality and reliable infrastructure services to compete efficiently with large-scale enterprises which may often build some of their own infrastructure like installing their own small power plants or generators. Besides, large-scale firms can even locate themselves near ports and near transport hubs where required infrastructure is out there
Small enterprises, on the other hand, are dispersed widely within the economy and need to rely on the availability of the general infrastructure facilities. Thus, by building up general infrastructure facilities helps the small enterprises to compete successfully with large-scale industries and being labor-intensive generate large employment opportunities for the workers. This will help to alleviate the poverty in developing countries.
The expansion in infrastructure facilities like irrigation, rural electrification, roads and road transport will promote agricultural growth and setting up of agro-processing industries. These general infrastructure facilities will help farmers and owners of processing industries to get their requirements of raw materials, fertilizers and other inputs at cheap rate and also help them to bring their products to the markets which are located in big towns and cities.
Thus, according to Thirlwall, “For poor farmers improved infrastructure will reduce their input cost and increase agricultural production and reduce traders’ monopoly by improving their access to markets. Nearly two-thirds of African farmers are stop from national and world markets, due to poor infrastructure and market access. Better transport means greater access to public resources including schools, hospitals and other health facilities”.
It follows from above that the expansion of infrastructure facilities will ensure sustained growth of employment in agriculture and small-scale rural industries and bring prosperity within the rural areas and during this way ensure inclusive growth. Besides, this may also help to prevent the mass exodus of the rural people to urban areas where they cause problems of urban congestion, growth of slums and acute housing shortage.
Lack of adequate infrastructure not only holds lack economic development, it also causes additional costs in terms of time, effort and money of the people for accessing essential social services like healthcare and education. Emphasizing the importance of adequate infrastructure, authors of Economic Survey of India for the Year 2013 -14 quite rightly write, “Rural economic growth in recent years has put enormous pressure on existing infrastructure particularly on transport, energy and communication. Unless it's significantly improved infrastructure will still be a bottleneck for growth and obstacle to poverty reduction”. In other words, it's the challenge to ensure strong, sustainable and balanced development through integration of the economy with environmentally sustainable development of infrastructure.
It may be noted that with large investment in infrastructure during the last decade (2003-04 to 2013-14) India has become the second fastest growing economy of the world but within the two years (2012- March 2014) economic growth slowed down and this has been mainly due to the stalled infrastructure projects which held back economic development. it's therefore urgently needed that infrastructure projects tend environment clearance quickly and investment in them be sped up if the Indian economy is to be brought back on the fast growth trajectory.
The availability of good quality infrastructure raises productivity levels within the economy and brings down costs of the enterprises. Besides, the supply of adequate infrastructure helps to expand trade not only within a country by improving transport facilities but also promote foreign trade through improvement of ports and airports. It also helps to diversify production by the firms as they're ready to get the required supplies of raw materials and other inputs from the places where these are available in abundance. Furthermore, with improved infrastructure the firms can produce goods in accordance with the demands of the people of various regions and countries.
According to world bank estimates, within the year 2008 developing countries made investment of around $ 500 billion a year in new infrastructure—transport, power, water, sanitation, telecommunication, irrigation then on equal to 20 per cent of GDP but the need for infrastructure investment remains large. In developing countries one billion people still lack access to wash water, two billion people lack access to sanitation and electric power and adequate transport facilities are still lacking in developing countries.
Significant additional resources from the private sector will be needed for infrastructure in emerging market countries if the Sustainable Development Goals are to be achieved. On the brink of 80 percent of all infrastructure investments are government funded in these countries, yet it's recognized that public sector investments alone won't be sufficient to bridge the infrastructure gap. Scaling up the role that non-public firms and investors play in infrastructure provision will require a far better understanding of the benefits and drawbacks of public versus private provision, including the issues and incentives that require to be considered so as to find the right balance between the two.
A lack of adequate infrastructure within the world’s poorest countries exacerbates socioeconomic issues like poverty, unemployment, and poor access to energy, education, and healthcare. It's estimated that nearly $2.5 trillion in infrastructure financing is required annually to meet the stress of the Sustainable Development Goals in developing countries, and to bridge the gap between current and needed investment.
With the right conditions in place, private firms can mobilize additional resources for infrastructure financing, and may also deliver greater efficiency and long-term societal benefits. However, unlocking the infrastructure development potential of private entities in low-income countries requires a shift in thinking about how infrastructure is provided. And examining how public policy and therefore the private sector interact is critical to identifying and implementing sustainable and scalable solutions to those infrastructure related development challenges.
The relative merits of the present forms of infrastructure provision must be assessed against those that private firms and investors can provide. Such an assessment requires a framework which will be wont to examine the various incentive structures and compare and contrast the risks and rewards inherent in each kind of delivery.
For countries with large tax bases, relatively low levels of debt, budgetary surpluses, or high levels of savings relative to investment needs, the space for infrastructure investments under public finance could also be high relative to infrastructure needs, reducing the impetus to mobilize commercial finance. In other words, there could also be good reasons to choose public financing, so what's important is to analyze and assess the choice between public, private or a mix during a given country context.
INFRASTRUCTURE DEVELOPMENT PHASES
The public and personal sectors each have an incentive structure that presents a singular set of risks with reference to infrastructure provision. Viewing an infrastructure project as a process involving multiple stages from design and construction through to management, operation, and maintenance is a helpful thanks to examine and compare these risks. The unique challenges and risks involved in each stage cumulatively contribute to a project’s overall risk profile.
The diagram below may be a simplistic view of the lifecycle of an infrastructure project. The five phases of the lifecycle are either all undertaken by government entities or, within the case where there's private involvement, some are contracted out. Depending on which phases are undertaken by private enterprises and in what manner, the overall role of the private actors during a project is often increased. In some cases, private involvement may start as early because the pre-bidding phase, so as to work out whether a possible bid for a contract makes financial sense. Similarly for other phases of a project, the potential involvement of private firms in each phase is dependent on the incentives that phase holds for private firms and investors.
In many cases, infrastructure projects involve only government and public sector entities, from design through operation and maintenance. This is often often the results of legacy factors like habit and tradition, and/or the dominance of incumbent public institutions during a country’s economy. Government provision of infrastructure is that the norm in many emerging market nations, but this is often not always the simplest strategy. Beyond the limited resources available to governments or the inefficiencies displayed in relevant cases, public financing poses a number of additional risks that require to be considered carefully.
ADVANTAGES – UNDERSTANDING THE DIMENSIONS
The relative cost of financing is that the first risk involved public sector infrastructure financing. It's often assumed that government-provided infrastructure is less expensive than infrastructure financed by private entities. This is often not necessarily the case. Studies have shown that this misperception may result from the different ways in which risk is remunerated by the govt. and by private enterprises.
Public funding traditionally implies that liabilities inherent during a project are passed on to taxpayers. Unlike private investors, taxpayers often don’t have the ability to demand that they're remunerated for the risks they assume. So when an infrastructure project is publically financed, the risks that are borne by the taxpayer aren't fully priced into the cost of borrowing, often resulting in a lower cost estimate.
If taxpayers were fully compensated for risks they assume, the cost savings gained by publically financing a project could in many cases be substantially reduced.
In many infrastructure investments, the inability to recoup capital costs by the taxpayer often makes sovereign borrowing seem like the cheaper alternative. And this might be the narrow perspective assumed by policymakers when comparing the costs of private and public financing. Yet from an overall economic standpoint, public financing isn't necessarily cheaper and should actually imply a welfare loss for society within the long run. Therefore, to avoid any undue bias and to accurately reflect truth cost of an infrastructure project, the full cost of financing, including unaccounted risks borne by taxpayers, must be considered.
There is also often a tendency to overestimate the cost disadvantages of private sector financing. Financing comes at a premium with private firms due to their for-profit nature also as their risk aversion. While it's true that private investors do price in risk, counting on what structure their involvement takes, they will even be incentivized to sharply reduce costs at least in competitive markets and by doing so offset higher financing costs.
Public-private partnerships that are structured around a competitive bidding process demonstrate how the prices of involving private firms are often driven down. Submitting a competitive bid for a project requires private firms to seek the cheapest sort of finance available, potentially driving down costs and minimizing abnormal premiums. This process tends to align the value of financing a project more closely with the true cost of risk and therefore the degree of risk aversion.
In addition, efficiency gains from the bidding process can produce broader long-term public benefits. Looking at the incentives involved within the different phases of infrastructure provision also shows that pure government provision of infrastructure often involves a shorter-term project outlook which will in some cases be detrimental to the standard of the project delivered. While governments may take a long-term view of a project with reference to social benefits, which will be offset by the short-term concerns of state officials (such as reelection or the use of funds for more popular purposes like tax cuts), which may push policymakers toward cost minimization and, as a result, a diminishment of the quality of the project delivered and a rise in longer-term maintenance and operation costs. Private firms, against this, often make a rational option to consider longer time horizons on an infrastructure project. They weigh the benefits of providing top quality infrastructure against the likely costs of future maintenance and repairs. Private firms, in essence, may choose a “whole life” approach to project construction as long run costs are often reduced by building to higher standards. This observation was illustrated during a 2003 survey of 38 public private infrastructure projects done by the UK’s National Audit Office.
When the general public sector is that the sole provider of infrastructure, it's also often forced to play various roles, a situation which will potentially result in conflicts of interest.
Broadly speaking, the role of state is to both safeguard the public interest and provide public goods. So assigning all of the stages of infrastructure investments to the public sector entails a dual mandate upholding the interests of the taxpayer while simultaneously promoting and implementing the delivery of infrastructure that are often at odds with it.
In most cases where this conflict arises, taxpayers are left with the consequences. These can include poor infrastructure quality, cost and time overruns and, in some cases, greater economic maladies.
China provides an example. A three-decade infrastructure spending strategy there delivered massive amounts of latest infrastructure, yet public financing of the projects and price overruns resulted during a huge build-up of debt (approximately one third of China’s $28.2 trillion debt), monetary expansion, instability in financial markets, and economic fragility.
Similarly, due to the political nature of the public sector, traditional sorts of infrastructure provision can give rise to political risks. Though each political context is unique, factors like political interests and political capital tend to become greater and more influential when the state alone is liable for financing and delivering projects.
In situations where these issues exist, the potential for risk increases alongside the cost of the project. If there's political capital to be gained by the delivery of an infrastructure project, it follows that the project’s location, timing and other factors could also be driven or influenced by political considerations. For instance, should an infrastructure project’s development fall at a time that's politically sensitive, as an example during an election cycle, economic rationale could also be overshadowed by political motivations. This will affect both the value and quality of the project.
Furthermore, the standard of state provision is contingent the institutional capacity of the state and clear national plans for infrastructural provision.
A lack of institutional capacity increases the risks of cost and time overruns, also as poor project quality. In some instances, it may be a more rational choice by the state to easily repair or improve existing infrastructure instead of build new infrastructure, the development of which can be driven by political concerns.
FRAMING THE APPROACH TO INFRASTRUCTURE PROVISION
To provide a general framework, a number of assumptions are made in developing the diagram. One among these is that there's a symmetrical relationship between the private and public sectors.
That is, that neither entity has complete dominance over the other and therefore the two can operate as equal entities whose incentive structures aren't affected by the other. Within the world this may often not be the case since public actions in many ways affect the space for private investments. Of course, private firms and therefore the government each bring distinct advantages to the provision of infrastructure. The point of the diagram is that long-term cost issues and risks got to be considered when assessing these advantages. And a key observation arising from this framework is that a long-term view of infrastructure investments may often assign a higher price to public provision than the one that's typically assessed. This is often particularly the case in politically fragile political environments.
Conclusion Both costs and time exceed initial estimates in 90 percent of infrastructure projects, according to recent studies. Depending on the structure of private involvement in these projects, it's possible to dramatically decrease these overrun risks. Competitive bidding in public-private partnerships, with no option to renegotiate a finalized contract, is an example of how private entities can contribute to the present decrease. When possible, governments should plan to minimize the conflicting responsibilities of delivering infrastructure projects while simultaneously providing cost and time discipline. Those that don't avoid these conflicts are less likely to be effective than if the development of a project is contracted bent private entities.
Reaching the Sustainable Development Goals are going to be difficult without greater involvement by private firms and investors in infrastructure financing and provision. In scaling up private investments, a critical issue is that the perception and integration of the costs of doing so. While this is often a complex and context specific issue, a general framework which will assist the choice process can help to realize it. Such a framework can assess the motivation structures of governments and personal firms and grade them on different aspects of infrastructure investment. If overall risks and context are factored in, that process can provide a clearer way forward to scaling up infrastructure development during a manner that's most beneficial to every country.
The key question relates to the balance between public and private financing of infrastructure investments, and here it's also important to recognize the complementarity of the public and private sector. Targeted public investments are a necessary component in nearly all sectors, given the networked nature of infrastructure and therefore the poverty, environmental, and social objectives that it serves. Those public investments needn't crowd out commercial finance if designed properly, and should actually crowd in commercial finance.
This paper merely provides ideas for a general framework to provide a holistic shift within the approach to infrastructure financing.
Needless to say, further research is required to allow for greater accuracy in comparing the risks and incentives of government and private providers.
INTRODUCTION
India, being an economy, has assigned a great importance on the private sector of the country for attaining rapid economic development. The govt. has fixed a specific role to the private sector within the field of industries, trade and services sector.
The most dominant sector of India, i.e., agriculture and other allied activities like dairying, farming, poultry etc. is completely under the control of the private sector. Thus private sector is playing a crucial role in managing the whole agricultural sector and thereby providing the entire food supply to the millions.
Moreover, the major portion of the industrial sector engaged within the non-strategic and light areas, producing various consumer goods both durables and non-durables, electronics and electrical goods, automobiles, textiles, chemicals, food products, light engineering goods etc., is also under the control of the private sector.
Private sector is playing a positive role within the development and expansion of aforesaid group of industries. Besides, the development of small scale and cottage industries is also the responsibility of the private sector.
Finally, the private sector is also having its role within the development of tertiary sector of the country. The private sector is managing the whole services sector providing various sorts of services to the people in general. The entire wholesale and retail trade the country is also being managed by the private sector during a most rational manner.
Moreover, the main portion of the transportation, especially within the road transport is also managed by the private sector. With the growing liberalization of Indian economy in recent years, the private sector is being assigned with much greater responsibility in various spheres of economic activities.
ROLES OF PRIVATE SECTORS
1. Industrial Development:
During the pre-independence period, the private sector has played a responsible role in Indian economy where it set up and expanded cotton and jute textiles, sugar, paper, edible oil, tea etc. After independence, the national government gave sufficient stress on industrialization.
The private sector also made a serious attempt to invest on industries producing wide selection of intermediate products which include machine tools, chemicals, paints, plastic, ferrous and non-ferrous metals, automobiles, electronics and electrical goods etc. in this way, the private sector has developed the consumer goods industry, producing both durables and non-durables and have become self- sufficient within the production of various types of consumer goods.
2. Agriculture:
In India agriculture and other allied activities like farming, dairying, poultry etc. are playing a dominant role because it contributes nearly 30 per cent of GDP and it provided employment to just about 67 per cent of the entire working population of the country. Such a big sector is totally owned and managed by the private sector.
Thus, private sector is sort of dominant in respect of agriculture and other allied activities. In India, agriculture isn't conducted on commercial basis rather it's managed by the households as much of those activities are within the hands of small and marginal farmers.In India, the new agricultural strategy adopted by the govt. as been implemented by the private sector under the active support of the govt.
3. Trading:
Both the wholesale and retail trade in India are within the hands of personal sector. During a big country like India, having a huge size of population, the whole trading activities are managed by the private sector during a absolute best manner. But just in case of scarcity of any essential commodities, the private businessmen have their natural tendency in resorting to hoarding and black marketing of such commodities resulting in exploitation of the consumers.
In order to control such illegal activities, the govt. has introduced various control and regulatory measures within the sort of controls on price, movement of goods and on storage etc. Moreover, the govt. has been procuring food grains through its premier organization Food Corporation of India (FCI) and has introduced a huge network of the public distribution system (PDS) to participate within the trading of essential commodities for the interest of the buyer.
Moreover, in respect of international trade, the private sector is playing an important role in its promotion through active government support.The State Trading Corporation (STC) and Minerals and Metals Trading Corporation (MMTC) of the govt. arc playing a dominant role during this regard. However, during a country like India, the private sector is dominating over the entire trading sector of the country.
4. Infrastructure:
Private sector is also providing an active support to the infrastructural sector of the country. Although, the major areas of the infrastructural sector lies within the hands of public sector but still the private sector is participating in those areas which remain open for it. Private sector has been playing dominant role in respect of road transport, water transport etc. from the very beginning.
But after the introduction of new Industrial Policy, 1991, the govt. has opened some areas like power generation, air transport etc. for the participation of the private sector. Accordingly, within the post- 1991 period, the private sector has been actively participating in those new areas like power generation, air transport, building highways and bridges on Build, Operate and Transfer (BOT) basis etc.
5. Services Sector:
The services sector of the country is almost totally under the control of the private sector. The entire community and personal services, which contributed nearly 11.1 per cent of GDP in 1994-95, is entirely managed by the private sector. The entire professional services, repairing services, domestic services, entertainment services etc. are solely rendered by the private sector throughout the country.
6. Role within the Indian Economy:
The private sector is playing a crucial role in Indian economy. The importance of this sector within the economy of the country is often visualized from the very fact that it contributes to the main portion of value and employment.
As per the latest available statistics for the year 1998-99, the private sector contributed about 76.7 per cent of internet domestic- product and therefore the remaining 23.3 per cent was contributed by the public sector. The role of private sector is quite dominant in agriculture and allied activities, small scale industry, retail trade etc.
Again, as per 1991 census, the percentage of population working within the government sector, including public enterprises and government administration was only 7 per cent and therefore the remaining 93 per cent of the working population are engaged within the private sector. Thus, even after making an enormous volume of investments within the public sector and completing quite 50 years of planning, Indian economy is still broadly based on the private sector.
7. Small Scale and Cottage Industry:
In India, small scale and cottage industries are playing a crucial role within the industrial development of the country. The whole small scale and industry is owned and managed by the private sector. As these industries are mostly labor-intensive in nature, thus they will utilize the local employment opportunities suitably.
The importance of those industries are often visualized from the fact that in 2001-02 the tiny scale and cottage industries, numbering 34.42 lakh units, have generated employment to the extent of 192.23 lakh, produced output worth Rs. 6,90,316 crore and contributed nearly 29 per cent of the entire exports of the country.
Considering the importance and therefore the various problems faced by these industries, the govt. has taken various steps for the promotion and development of those industries. These measures include both credit and non-credit measures. In India, there's vast potentiality for the expansion of the small sector.
The Government has also announced a small-scale Industrial Policy, 1991 for the promotion and development of the sector. The most important peculiarity of this sector is that the small scale and cottage units of the country, producing variety of products would still remain within the control and management of the private sector.
Considering the importance of the private sector, the govt. has been undertaking various supporting measures for promotion and development of this sector. But as this sector is usually guided by the profit motive and have little consideration about the national and social goals, thus the govt. has enacted various legislative measures for the control and regulations of the private sector during the last four decades. But too much control and regulations imposed on the private sector has resulted during a lot of hurdles on the path of their development leading to a slow rate of growth of the economy
Realizing this problem, the govt. has introduced the policy of economic liberalization for the uninterrupted growth of the private sector through the announcement of new and liberal industrial policy in 1991 and also introduced some other industrial policy reforms within the subsequent years.
BREIF NOTE:
Infrastructure is an essential ingredient to economic growth and prosperity in any country. Recently, the case has been made that state –led infrastructure investment is required to boost growth, especially within the current times of recession and high unemployment. this sort of spending directly stimulates the economy by creating employment and drives growth through the multiplier effect it's on other sectors of the economy to supply more efficiently with its given resources.
Traditionally, infrastructure investments are financed with public funds. However, government deficits and high debts to GDP ratios have limited the capital available for these projects, a global development which Namibia isn't exempt from. This has increased the need for increased private investment to deal with the infrastructure gap plaguing many emerging market economies.
Project finance has become the vehicle of choice to attract private capital as debt and equity investments are often split, and risk is often distributed. Equity investments are normally taken by corporate sponsors and developers while debt funding has been primarily provided by banks within the sort of syndicated loans. However, there are a myriad of parties which have an interest in investing in infrastructure, including pension funds, insurance companies and sovereign wealth funds.
Additionally, the public –private partnership model has allowed the public sector to take care of control of the planning and regulatory role. The public sector can also become the taker of goods or services produced by the project, allowing them to reap the advantages of higher efficiencies and better cost effectiveness related to the private sector.
With a strong demand and supply of personal capital and expertise, also because the proper structures in situ for cooperation, the largest challenge becomes attracting and maintaining private investors.
A survey conducted by Allen & Overy demonstrates which factors investors consider when embarking on infrastructure projects. Surprisingly, financial support and guarantees from government are very close to the bottom of the list. Instead investors look for stable regulatory settings and minimal political interference. In fact, uncertainties within the regulatory and political environment also as renegotiation of contracts are risks investors feel most uncomfortable with. The role of public sector in infrastructure development becomes clear. Provide a conductive investment environment for the private sector by minimizing policy uncertainty, curtailing political interference and promoting a transparent and stable regulatory setting.