Infrastucture Development Need And Availability

Jamia Millia Islamia University Department of Economics B.A (H) Economics IIIrd year

Presentation

Infrastructure Development Need and Availability

By: Group-III     

Jamaluddin Fayyaz Manouchiher Roshangar Ghulam Abbas Ehsani Sumit Wadhwa Abdul Samad Wani

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Infrastructure Development Need and Availability     

introduction and definition of infrastructure What is the need for infrastructure development? Availability of infrastructure in India Plans and Policies of Indian government toward the infrastructure development Conclusion

Introduction: The term infrastructure has been used since 1927 to refer collectively to the roads, bridges, rail lines, and similar public works that are required for an industrial economy to function. This term has also been used for the permanent military installations necessary for the defense of a country. Infrastructure typically refers to the technical structures that support a society, such as roads, water supply, wastewater, power grids, flood management systems, communications (internet, phone lines, broadcasting), and so forth. Economically, infrastructure could be seen to be the structural elements of an economy which allow for production of goods and services without themselves being part of the production process, e.g. roads allow the transport of raw materials and finished products. According to Romer’s model (1987), Infrastructure is a cost reducing technology (Paul Michael Romer is an economist and professor at Stanford University. He is considered as an expert on economic growth). According to him infrastructure can promote specialization and long-run growth. The Romer’s model predicted that the degree of specialization is directly or positively correlated with the core infrastructure.

An asset can be considered to be part of the infrastructure when it is an integral part of a total system, i.e. if the asset is removed the system is incomplete, or the particular asset is necessary for the system to deliver the required standard of service. Infrastructure assets generally have the following attributes:  

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They are large networks constructed over generations which are not often replaced as a whole system The system or network has a long and indefinite life because its service capacity is maintained in perpetuity (by continual refurbishment or replacement of components as they wear out). The system components are interdependent and not usually capable of subdivision or separate disposal, and consequently are not readily disposable within the commercial marketplace.

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The system interdependency may limit a component life to a lesser period than the expected life of the component itself. The assets have a high initial cost and a value which is difficult to determine.

A region cannot be so easily termed having ‘inadequate’ infrastructure. There are various facets of infrastructure services availability and a region, while lacking in one or more, may possess adequate supply of others. Consequently Infrastructure can be subdivided into constituent components. Infrastructure is composed of 3 broad areas as follow: I. II. III.

Physical Infrastructure; Financial Infrastructure; and Social Infrastructure.

Further subdivided, the following components of Infrastructure are identified:a) Agro-specific Infrastructure - consisting of irrigation infrastructure and agricultural credit; b) Transport & Communication Infrastructure - consisting mainly of Roads and Railways; c) Power Infrastructure; d) Financial Infrastructure - consisting mainly of Banking Services; e) Education infrastructure; and f) Health infrastructure. (a), (b) & (c) constitute Physical Infrastructure, and, (e) & (f) constitute Social Infrastructure. Infrastructure

Physical Infrastructure

Financial Infrastructure

Agro-specific Infrastructure

Banking Services

Transport Infrastructure

Life insurance corporations

Social Infrastructure.

Education infrastructure

Health infrastructure

Communication Infrastructure

Power Infrastructure

The physical infrastructure covering transportation, power and communication; social infrastructure including water supply, sanitation, sewage disposal, education and health, which are in the nature of primary services and financial infrastructure has a direct impact on the quality of life. The visible signs of shortfall in capacity and inefficiencies include increasingly congested roads, power failures, long-waiting lists for installation of telephones and shortages of drinking water illustrate gap between demand and supply of infrastructure and also raises questions concerning the sustainability of economic growth in future. A high transaction costs arising from inadequate and inefficient infrastructure can prevent the economy for realizing its full growth potential. Thus, infrastructure is very important in sustaining the

3|I n fr as tr u ctu re devel o pme nt nee d a nd avail abili ty economic development.

Need for the Infrastructure Development: Social infrastructure deals with the provisioning of drinking water and sanitation, education, and health which defines the quality of life of citizens. These services affect day-to-day life of people and have long-term impact in terms of longevity and earning capacity. Development of social infrastructure comprising education, health and medical care, nutrition, housing and water supply which is instrumental in contributing to substantial improvements in human resources development which, in turn, initiate and accelerate economic development with increased Telesis. Physical quality of life and human well being are pivotal on the enhanced availability of these social services. These services are key to overall increased productivity. Investment in human development programme, enable the poor to help themselves and try to give a fair chance of getting those rewards. Talking about operations Management (Operations management is an area of business that is concerned with the production of goods and services, and involves the responsibility of ensuring that business operations are efficient and effective. It is the management of resources, the distribution of goods and services to customers, and the analysis of queue systems) which has 3 major aspects namely;  Quality  Cost and  Time That is to produce and deliver product and services at the right time with the right quality and right cost. These objectives can only be achieved when all the players involved from extraction to consumption work in a synchronized way. Infrastructure plays a major role in order to obtain these objectives. These can be achieved by following:    

Traffic management at the ports (Capacity Management), i.e., maximum utilization of the ports Modernization of the airports (in India) and Scheduling of the air planes at the airports Good environmental management practices through recycling, waste management Inventory or logistics management to better utilize the transportation facilities Maximum utilization of the resources (Manufacturing machines) through a continuous and regulated supply of electricity

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The above figure shows the influence of various infrastructural factors on operations of an organization or a project. We see the input and output is shown in the figure. So what should be the inputs or requirements which in turn would give us the output at the right time with a high quality and a low cost of production. The infrastructures required by people are: Sanitation, Water Supply, Electricity Supply and Environmental Safety. In the same way the infrastructure required for information are; telecommunication and IT Infrastructure. Infrastructure required in supply chain management are; Aviation, Ports, Roads and Railways and Plants and machinery. If the above mentioned requirements are fulfilled then the output achieved would be delivered at right time with high quality and low cost. In the same way the customer Satisfaction would be high and we would be able to deal with environmental management problems which are a very serious problem in this modern age that includes Waste minimization, Reverse logistics (Reverse logistics stands for all operations related to the reuse of products and materials) and Recycling. The output of the well managed operations creates better services and products which are the assets of any country. Manufacturing of the products adds value to the Nation's economy and delivering of high quality service raises the standard of living of the country contributing to its development. Therefore “Economic development is a consequence of infrastructural development”. For instance, development of agriculture depends, to a considerable extent, on adequate expansion and development of irrigation facilities. Industrial progress depends on the development of power and electricity generation, transport, and communications. Obviously if proper attention is not paid to the development of infrastructure, it is likely to act as a major constraint on the economic development process in the country.

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A revisit Along with Independence, India inherited famine and poverty from its colonial rulers. There was dire need for housing, health facilities, education, roads, power, irrigation projects and drinking water facilities for millions of underprivileged people. This called for proper economic planning. Unfortunately, the task of planning fell into the hands of those who were sympathetic to the feudal lobbies. These rich and powerful people had less concern for the social uplift of the poverty stricken masses. The outcome was that they lost sight of the main objective of planning the economy by keeping the overall national interest in view. It created economic inequalities among the States and erected roadblocks on the path of building infrastructure. Even today the people in power tend to fall victims to this skewed vision.

The rural/urban scenario It is 61 years after Independence. Today, the rural population accounts for nearly 68-70 per cent of the total population and nearly half of them still live in poverty and illiteracy. How good is the rural infrastructure? The latest report of the National Sample Survey Organization on village facilities is a revelation in itself. To quote from the report, “One fourth of our villages do not have electricity; only 18 per cent of them get tap water; 54 per cent of them are more than 5 km away from the nearest health centre; one third of them do not have pre-primary schools and 78 per cent do not have post offices”! Yes, “India still lives in its villages”. India's economic growth and development is predicated to a large extent upon the development of its 700-million strong rural population. Majority of the population lives in about 600,000 small villages and are engaged primarily in agriculture, directly or indirectly. A substantial portion of India's current agricultural labor force has to move to non-agriculture sectors for incomes in all sectors to go up. The challenge is to manage the transition of 80% of the rural population from a village-centric agricultural-based economy to a industry based economy. Grey areas of India Rural Infrastructure 

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A set of basic facts define the constraints within which the economic growth and development of India's rural population must be addressed. Fundamentally, they relate to resource constraints, the nature of infrastructure, and the future trajectory of the geographical distribution of the population. These services includes, at a minimum market access, educational, health, financial, entertainment, transportation, and communications. Further, services depend on the availability of infrastructure. Infrastructure investment is irregular and inadequate to support 600,000 villages and the average cost of providing infrastructure is inversely related to the scale of the operation. Limitations on the financial and other resources available for providing infrastructure made it impossible to provide infrastructure at every village in India. Even if they were provided at every village, it will not be commercially sustainable. The basic geographical structure of population distribution will change once India shifts from being agriculture based country to industry based nation.

6|I n fr as tr u ctu re devel o pme nt nee d a nd avail abili ty The Government has launched “Bharat Nirman" for the development of rural infrastructure. Plans proposed for the development of India Rural Infrastructure are      

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Irrigation, Roads, Housing, Water Supply, Electrification, Telecommunication Connectivity. The task ahead for the development of India Rural Infrastructure are : To connect 66,800 habitations with population over 1000 with all weather roads. To construct 1, 46,000Km of new rural roads. To upgrade and modernize 1, 94,000Km of existing rural roads. Total investment of Rs. 1,74,000 crore envisaged under "Bharat Nirman", investment on rural roads estimated to be at Rs. 48,000 crore. To provide corpus of Rs. 8000 crore to Rural Infrastructure Development Fund (RIDF).

The cities shelter around 30 per cent of the population who contribute to the economic growth. However, the most vital part of economic growth, which is infrastructure, hardly matched the demands of even this 30 per cent of urban dwellers, spreading chaos at the slightest provocation with the danger of turning the clock backwards. This mismatch has been seen in the Mumbai deluge in September 2005 and a little later in Bangalore, shattering the “Shanghai dreams” that so many harbor. India being the seventh-largest country in the world has maintained an infrastructure management that has enabled India to reach new heights. Indian infrastructure report suggests a fairly good state of infrastructure planning in India. The infrastructure building and engineering in certain spheres like power, telecommunications, information technology, transport etc. needs more infrastructure resource solutions. Indian infrastructure companies manage the infrastructure requirement in these areas. The infrastructure companies in India also look after the infrastructure construction and development. India also has many infrastructure finance companies that provide funding and financing for infrastructure development projects in India. One of them is Infrastructure Development Finance Corporation or the India Infrastructure Finance Company Limited. Coming to infrastructure management services, these include services from:   

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Infrastructure Architect - He helps in designing the basic blocks of infrastructure utilities Infrastructure Analyst - His job is to analyze the infrastructure business works in India. Infrastructure Advisory - He advises about the infrastructure solutions to a particular problem and also evaluates and reports the risk involved in any particular infrastructure development. Infrastructure Bank - It provides the infrastructure finance and asset management for infrastructure assets in India.

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The Indian infrastructure sector involves prolonged infrastructure research for the infrastructure technologies to be updated. For the infrastructure optimization and reaching a level of a standardized infrastructure outsourcing the bottlenecks in the system need to be smoothened. The infrastructure requirements list the need for technology designed for the infrastructure today. These are being provided through coordination among the developed countries like USA, UK etc. and the Government of India.

The Chinese tales The Chinese success stories are told and retold by many. Can India set her standards by looking at China? Can one draw a parallel between those mega cities with the Indian ones, or its infrastructure development for that matter? It is debatable. However, what can be compared is the Chinese commitment. Look at their endeavours in making the Expressways. According to a recent newspaper report, when India completed 6000 km of her Expressways in six years, China had done 40,000 km within that time. Even today the Indian government endlessly debates the privatisation of airports. At least some of the analysts perceive a ‘damaging drag’ on the economy due to problems connected to infrastructure. Growth potential is dependent on the quality of performance of infrastructure to a great extent - a fact the Chinese realised much earlier than us.

Infrastructure Spending Infrastructure has continued to be one of the most important issues gaining the attention of policymakers over the past two years. The Planning Commission of India, which is becoming a powerful institution for key economic policy decisions, appears to be determined to push public infrastructure investment. There seems to be a consensus among policymakers that the issue of infrastructure needs immediate attention. After several years of hiatus, infrastructure investment is witnessing a pickup - albeit at a gradual pace. A set of measures is being introduced by the government for different sectors to accelerate infrastructure spending growth. It is expected infrastructure investment to pick up to US$47 billion (4.7% of GDP) by F2009 from US$24 billion 3.5% of GDP) currently. Although this is a relatively moderate pick-up, it should provide some push to the overall investment cycle, including the manufacturing sector. India's Infrastructure Spending Is One-Seventh of China. We believe that the single most important macro constraint on the Indian economy, holding back its average growth, is the low spending on infrastructure. India is currently spending a miniscule amount compared with its needs, according to our estimates. Our analysis indicates that China is spending seven times as much as India on infrastructure (excluding real estate) in absolute terms. In 2003, total capital spending on electricity, roads, airports, seaports and telecom was US$150 billion in China (10.6% of GDP) compared with US$21 billion in India (3.5% of GDP). It is believed that there is a need for a national plan to increase infrastructure spending gradually to US$100 billion p.a. (8% of GDP) by 2010, from an estimated US$24 billion (3.5% of GDP) in 2004, to push India on to a sustained growth path of 8-9%.

Public Expenditure: Recognizing the importance of social capital the Government has placed social services as the centre stage of the development strategy. Social sector expenditure enhanced to Rs.972178.99 Lakhs in

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Education

Health

1999-00 2000-01 2001-02 2002-03 2003-04 2004-05

434871.82 439599.87 429286.88 414532.71 417506.11 455619.78

166536.52 170852.57 164743.42 171551.03 188193.92 203554.56

Water Supply 26108.15 18069.85 16292.43 21630.10 25284.19 20179.79

Housing

Others

2266.99 2639.11 2844.60 6173.06 12128.52 9998.03

134599.59 148059.44 154538.32 183517.63 216664.17 282828.83

Total Social Sector 764383.07 779220.84 767705.65 797404.53 859776.91 972178.99

Total Budgetary Expenditure 2072783.12 2175244.26 2155697.25 2568769.74 2527095.13 2873678.99

Source: Budgetary Documents of various years.

India is passing through the phase of population explosion. According to the theory of demographic transition India is experiencing the second stage of demographic transition from past half decade. The population of India as on 1900 was 23.83 Crores and it was increasing at an average rate of 1.96. In August of 1999 India became the second country to have its population reach the one billion. The increase in population to such an extent was as a consequence of the increase in the birth rate. In the year 2004-05 it reached 1.087billion from one billion in 1999. Thus, the population during the period 1999-2005 has increased by 8.7 per cent. The public expenditure on education as recorded in 1999-00 was 434871.82 while it is increased to 455619.78 in 2004-05. Thus the public expenditure on education has increased by 4.77 per cent. Therefore we can clearly conclude that there was a gap between the available infrastructure development and the need for it.

Private investment infrastructure: The government of India has increasing realized that infrastructure need not be a public sector monopoly. In the past, the responsibility for providing infrastructure services was vested with the government-the reason being: heavy capital investment, long gestation periods, externalities, high risks and low rates of return on investment. The infrastructure under government ownership has however proved thoroughly inefficient and corrupt. The demand for infrastructure facilities and services has always outpaced supply; besides the quality of existing supply is very poor. The consequent of shortfall in the capacity and inefficiencies in infrastructure facilities are patent in the increasingly congested roads, chronic transport, bottleneck, frequent power failure and load shedding, long waiting lists for installation of telephones and shortage of drinking water. The widening gap between demand and supply of infrastructure and the extremely poor quality of the existing supply raises important questions concerning the sustainability of economic growth of the country in the coming years. In order to sustain an annual GDP growth rate of 8-9 per cent, it is imperative to accelerate the rate of investment in infrastructure. According to finance ministry expert group on commercialization of infrastructure projects (June 1996) the total infrastructure investment was required to be about US$ 88 billion to US$ 99 billion during 1996-2001 and another US$

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165 billion during 10th planning period (2001-06). And now, according to the GOI the country needs US$ 320 billion (at 2005–6 prices) in infrastructure spending over the next five years (2007-12). Like the previous planning period this massive investment is clearly beyond the capacity of the government. Since the financial resource available to government are very limited and recently the government of India is passing through the challenging era, close to half of US$ 320 billion will need to come from the private sector to maintain the current growth rate and to bring millions of Indians out of poverty.

Government investment and private investment move in opposite directions. For example, during the 1969-1987 period, when government investment is growing private investment is stagnant, shown in following Figure given below. Meanwhile, during the period of 19872005, government investment remains relatively stable, allowing private investment to grow. Given these graphs, it appears likely that crowding out has played a major role in the Indian economy.

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What will be the future role of public sector enterprises in the field of infrastructure, after the entry of private sector? The public sector enterprises will continue to shoulder the major burden of providing critical infrastructure services but public sector reforms would be necessary to broad-base their management, to upgrade their technology, to improve their performance and quality of services and generate adequate investable resources through rationalization of service charges and better recovery of costs.

Infrastructure Is Key for Job Creation India's strengths of a huge skilled and semi-skilled work force, entrepreneurial expertise and natural resources are currently being inadequately utilized because of lack of infrastructure. According to UN estimates, the working-age population (15-64 years of age) in India will increase by 71 million to 762 million in 2010. India is set to be the largest contributor to the additional working-age population globally over the next five years, accounting for 23% of the worldwide increase, according to UN estimates. India already has an unemployed population of 36 million, based on official estimates (we think actual unemployment could be double this). India is undergoing a transition, in which the working-age population is likely to keep rising faster than the non-working-age population (i.e. its age dependency ratio should improve further). With improving dependency, India will have the opportunity to create a virtuous cycle of more productive job opportunities, greater savings, increased investment and higher GDP growth. However, this will require the implementation of a well-thought-out macro - as well as micro - strategy by the government. Infrastructure is, in many ways, the key to unlocking underutilized manpower. Efficient and low-cost infrastructure is the key facilitator of globalization and labor arbitrage. India has been able to make big inroads in software services and business process outsourcing due to the availability of high-quality telecom facilities, the infrastructure backbone for IT and ITES, at a reasonable cost. However, the manufacturing sector is constrained by relatively inefficient and high-cost infrastructure - namely roads, railways, airports, seaports and electricity. It is believed that the lack of adequate infrastructure is becoming a constraint on inter-state as well as global trade. This is evident in India's share of global goods exports, at just 0.8% in 2004, compared with China's 6.5%. With the exception of a select few, Indian companies that have globally competitive cost structures are not able to scale up their operations. Low government spending on infrastructure hurts high-employment-generating, labourintensive small enterprises the most. While large companies can draw on their own resources for basic infrastructure services,

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such as a captive electricity plant or a diesel generator set, small enterprises suffer when public infrastructure support is lacking. In many cases, it is not cost per se but the sheer lack of infrastructure that holds back small enterprises. In addition to attracting domestic investors for aggressive capex, improved infrastructure should also pull in foreign direct investment in manufacturing and augment a sustainable recovery in the investment cycle and growth.

Growth Potential According to the consultation paper circulated by the planning commission, a massive US$ 494 billion of investment is proposed for the eleventh plan period (2007-12), which would increase the share of infrastructure investment to 9 per cent of GDP from 5 per cent in 200607. This translates roughly into US$ 40 billion annual additional investment. The projected sector-wise shares are: 30.4 per cent in electricity, 15.4 per cent in roads and bridges, 13.7 percent in telecommunications and 12.4 per cent in railways among others. Significantly, 30 per cent of the total investment is expected to come from the private sector (including public-private partnership). Indian officials have invited foreign entrepreneurs to invest in the sector which would require investments worth US$ 500 billion to sustain India's fast-growing economy. For this, the government has already enacted many proactive measures like opening up a number of infrastructure sectors to private players, permitting FDI into various sectors, introducing model concession agreements, taking up new projects like the National Highway Development Project, National Maritime Development Programme among others. Some of the projects planned for the next five years include:         

The government is planning a 40,000-MW hydro power generation capacity during the 12th (2012-17) and 13th (2017-22) Plans. Additional power generation capacity of about 70,000 MW Constructing Dedicated Freight Corridors between Mumbai-Delhi and LudhianaKolkata Capacity addition of 485 million MT in Major Ports, 345 million MT in Minor Ports Modernisation and redevelopment of 21 railway stations Developing 16 million hectares through major, medium and minor irrigation works Modernisation and redevelopment of 4 metro and 35 non-metro airports Six-laning 6,500 km of Golden Quadrilateral and selected National Highways Constructing 1,65,244 km of new rural roads, and renewing and upgrading existing 1,92,464 km covering 78,304 rural habitations

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Conclusion It is believed that India is on the right track. And they are confident that the public and private sectors, working in partnership and in collaboration with development agencies, will be able to bring about significant and sustainable improvements in India’s infrastructure, which will also help the overall process of growth. But the country needed double-digit growth in manufacturing and services sectors in the next five years, and had to double farm output, if it was to meet the target. The Indian economy has grown at an average eight per cent in the past three years, and a 10 per cent annual GDP growth is difficult to achieve unless the country improves its infrastructure. According to the prime minister Mr. Manmohan Singh “Infrastructure development is a major constraint on the industrial growth in India. India is aiming to achieve 10-per cent annual GDP growth by the year 2011-12, but the country needed over $300 billion to upgrade its infrastructure over the next five years” Some believes that a key reason for India not being able to even sustain its growth rate of 89% is slow growth in infrastructure spending. They think the biggest hurdle to a vigorous capex cycle in the private sector is the lack of support from physical infrastructure. Although we are finally seeing a pickup in infrastructure spend as a percentage of GDP (to 4.7% of GDP in F2009 from 3.5% of GDP as of F2005), the pace needs to rise more sharply. They believe that, for GDP growth to accelerate to over 9% on a sustainable basis, infrastructure spending needs to rise to US$100 billion (around 8% of GDP) by 2010. In turn, to boost this spending, the government needs to improve the infrastructure investment environment to ensure greater participation by the private sector, raise public resources by initiating privatization of public sector companies and reduce the revenue deficit.

Infrastructure Report Summary (2008) The Indian construction industry comprises close to 300,000 players, employing a total workforce in the region of 30mn. Driven by strong demand from the transportation, power, urban infrastructure and irrigation segments, the industry contributed nearly 8.25% to India's gross domestic product (GDP) in 2006. This report forecasts the Indian construction industry to be valued at US$85.81bn in 2008 and at US$167.14bn by 2012. In the past few years, the Indian government's focus has been directed towards improvement of road and housing infrastructure. Also, development of airports in accordance with international standards has taken off in a big way, with a slew of projects across India. Some of the major projects being undertaken here include the large-scale greenfield development of airports in Bangalore, Delhi, Hyderabad and other cities at a combined worth of over US$35bn.The Indian government is set to invest about US$150bn over the next five to six years for the development of infrastructure, of which US$60bn will be poured into building roads across the country. It has also taken initiatives to strengthen capital inflows by allowing 100% foreign-equity participation in the construction industry. But to forestall speculation in real estate by foreign investors, the sale of undeveloped land has been prohibited. India has a skilled workforce, but its business environment is crippled by excessive government interference. Foreign investment remains restricted in many sectors, with greater

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liberalisation opposed by the Left. Hiring and firing procedures are governed by rigid labour laws under which companies employing more than 100 people need the permission of the state chief minister to lay off staff. Other concerns include the 670 or so industries reserved for small-scale producers, high import-tariffs levied on foreign-made goods, failing infrastructure, especially poor power supplies, and a warped bureaucracy needed to approve 'permits' for even the most routine tasks. But India is fast-tracking the creation of South East Asian-style SEZs, aimed at overcoming some of these bottlenecks. Although many international contracting groups do have a presence in India, the market has been difficult to penetrate, with high tariffs for imported building materials and a complex and bureaucratic system of government. There are 27 separate states in the country, all of them having their own specific regulations and codes. However, the government now allows majority foreign-ownership for joint ventures and actively encourages joint ventures with foreign contractors on major infrastructure projects, as there is a shortage of local firms with sufficient funds to handle such activity. Reference: http://www.en.wikipedia.org http://www.indiahousing.com http://www.tn.gov.in http://www.cmie.com http:// www.rbi.org.in http://www.oecd.org