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Infrastructural Development - shweta - 12-14-2016

Infrastructural development is related to economics and depends on Central Govt

Infrastructure development is a vital component in encouraging a country's economic growth. Developing infrastructure enhances a country's productivity, consequently making firms more competitive and boosting a region's economy. Not only does infrastructure in itself enhance the efficiency of production, transportation, and communication, but it also helps provide economic incentives to public and private sector participants. The accessibility and quality of infrastructure in a region help shape domestic firms' investment decisions and determines the region's attractiveness to foreign investors. 
Infrastructure is basically the base in which economic growth is built upon. Roads, water systems, mass transportation, airports and utilities are all examples of infrastructure. It covers those supporting services that help the growth of directly productive activities like agriculture and industry. These services include a wide range starting from the provision of health services and education facilities to the supply of such need as power, irrigation, transport, communication, etc
Infrastructure has a two-way relationship with economic growth. One, infrastructure promotes economic growth, and two economic growth brings about changes in infrastructure.

The first, the forward linkage, between infrastructure and economic growth, derives from the following factors:

1.       Output of infrastructure sectors such as power, water, transport, etc. are used as inputs for production in the directly productive sectors, viz. agriculture, manufacturing, etc. Therefore, insufficient availability of the former results in sub-optimal utilisation of assets in the latter.
2.       Infrastructure development such as transport improves productivity significantly.
3.       Infrastructure provides the key to modem technology in practically all sectors.
4.       A close .association between infrastructure and GDP growth is observed in many studies. These studies have indicated that 1 per cent growth in the infrastructure stock is associated with 1 per cent growth in per capita GDP.
5.       Studies have also revealed that generally around 6.5 per cent of the total value added is contributed by infrastructure services in low income countries. This proportion increases to 9 per cent in middle income countries and 11 per cent in high income countries.
Thus given the above type of linkage, infrastructural development is important not only for economic growth, (vis-a-vis globalisation and technological innovation in manufacturing) but also for poverty reduction.

Second, the backward linkage, between economic growth and infrastructure, drives from the following.

Growth, in turn, makes demands on infrastructure.
This can be illustrated with the help of the relationship between GDP growth and demand for infrastructure, as follows:
Relationship between GDP Growth and Demand for Infrastructure
As a result, with increase in income levels, the composition of infrastructure changes.
For instance:
1.       In low income countries, basic infrastructure such as water, irrigation is more important.
2.       In middle income economies, demand for transport grows fast.
3.       In high income economies, power and telecommunications occupy more importance. Due to such linkages between- infrastructure and the rest of the economy, efficiency, competitiveness and growth of the economy hinges upon the state of development in the infrastructure sector.
Studies have indicated that with a 20 per cent sustained increase in public investment in infrastructure the government can accelerate real growth by 1.8 percentage points in the medium to long-term, i.e. six to ten years.

Infrastructure works directly and indirectly on a number of determinants of economic development.

On the demand side, it opens up possibilities of investment by making available a number of necessary inputs and services, opening up the size of the market as well as increasing the supply elasticity and efficiency of factors of production.

On the supply side also the development of infrastructure helps in mobilizing potential saving and channelising them into productive investment. Adequate quantity, quality and reliability of infrastructure are key to the growth of any economy. Importance of infrastructure has been generally taken as self-evident.

It has been repeatedly emphasized that availability of infrastructure is a necessary precondition of development. “The function of infrastructure is to release latent productivity in the factors of production singly and in coordination and bring about not only an increase in the output of individual factors and units of production but also mutually additive effect through coordination in inputs, output, space and time and thus maximize the overall rate of economic growth”

The relationship between infrastructure and economic development may be analysed by focusing on its impact on the basic determinants of development particularly through its links with capital formation and technological change. The phase at which the economic development takes place depends mainly on the level of infrastructure. The strong positive correlation between the level of infrastructure and the economic development has been a well-established fact in the development economics literature. In Keynesian macro economic model, the income or output in the economy derives also 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, consumption expenditure, investment expenditure, government expenditure and net income from abroad, income from investment comes from government spending. Though the income in the Keynesian model6 refers to short-term income, usually measured on annual basis, the investment made also includes long-term investment such as investment in basic infrastructural facilities. Since the model is based on the notion that there is a direct positive correlation between income and the investment, investment in infrastructure is economically justified. The expansion and improvement of the infrastructure is a necessary pre-condition for capital formation and increase in the production and productivity

Infrastructure may be considered as the WHEELS of the ECONOMY

Role of government
the government will continue to play a lead role in infrastructure development, in view of the importance of development of infrastructure for sustaining the growth momentum and to ensure inclusiveness of the growth process. With the rapid growth of economy in the recent years, the importance of infrastructure development is needed. The government has made an effort to facilitate the entry of private enterprise into this sector through changes in the legal framework.

To maximise the role of public-private partnerships (PPPs), the government has to take several major initiatives in the matters concerning PPPs including policy, schemes, programmes and capacity buildings.

Land acquisition and environmental clearances are best obtained by governments. Social and environmental clearances are best obtained by the government and not the private partner. Numerous projects have been stalled with huge time and cost overruns due to delay in land acquisition and transfer of possession to the private sector.

Building in the environmental and social dimensions of the PPPs needs to be made an integral part in the project development cycle. The key objective of these measures is to minimize the negative environmental and social impact and enhance its positive impact. Best practices include identification and customization of mitigation measures for each impact for each affected group, ensuring that impacts are not borne disproportionately by any one group.

Address the risk and return perceptions of foreign investors. India’s economic growth is creating opportunities for foreign investors. FDI has so far focused on ports, airports and, to some extent, roads. Foreign investors have not invested and have stayed away because of small project size, discomfort with existing legal and regulatory frameworks, currency risks and market risks.

Identification of potential financing sources, including long-term debt, tapping across various sectors; assistance of international funding agencies at concessional terms, especially for critical infrastructure where the private sector may not be immediately interested;