Reflections of a vigorous economy
Infrastructure and economic growth is a combination of multiplier and network effects
The need for infrastructure creation in India is now being widely debated and analysed. It would be prudent to try and better understand how infrastructure creation contributes to the economic well-being of a nation. Some of the fundamental questions that come to the mind are: How much does infrastructure creation matters for an economy? What “multiplier effect” does infrastructure have?
Given the massive scale of infrastructure projects and, consequently, the public and private investment in such projects, it is worthwhile reiterating the economic, financial, and social benefits of infrastructure creation. A better idea about the benefits that accrue from assets helps in making optimal decisions.
The link between infrastructure and economic growth has long been recognised. In a recent paper titled “Growth and Infrastructure Investment in India: Achievements, Challenges, and Opportunities”, Aswini Kumar Mishra, Kunapareddy Narendra, and Bibhu Prasad Kar have yet again established how a solid link between infrastructure and economic growth exists.
They find that not only do the infrastructure investments have a “huge impact on national and local development, but they also exhibit a very high rate of return, even compared to other investments, perhaps due to its spill-over or externality effects”. Two key takeaways from the paper are the “statistically significant” positive impact on growth that infrastructure investments have and the positive correlation among the various infrastructure sectors.
The second point implies that, for example, better transportation infrastructure helps the economy not just by directly contributing to growth but also through assisting storage infrastructure in delivering better returns and eliminating wastage of goods. Warehousing infrastructure can add more value in an environment where the transportation linkages to the warehouses improve and vice versa.
The ability to create great economic value from land at a significant distance from the centre of consumption depends on not just creating warehouses or light manufacturing infrastructure, or growing crops on the land, but also on the ability to create facilities to transport
Hard infrastructure such as airports, seaports, railroads, telecom towers, power transmission networks, and renewable energy can be created at a rapid pace with the optimal economic dynamics only when the socalled soft infrastructure of a robust regulatory regime is in place and fully functional
goods produced in the area to the consumption point. This ability to generate value through the “network effect” of infrastructure to create positive linkages between various assets is a crucial component to maximise the economic, financial, and social value creation.
In the paper “IFC Economics Notes 1, The Impact of Infrastructure on Growth in Developing Countries”, Antonio Estache and Gregoire Garsous have some additional interesting takeaways. They maintain that the poorer a country, the more infrastructure matters to economic growth; but not surprisingly, they also conclude that the weaker the institutions (legal and administrative frameworks) in a country, the lower the growth payoff from infrastructure investments.
For an economy such as India, in which there is socio-economic movement as significant part of the population continues to rise out of poverty to form the new middle class, the study
points out the ability of investments to create infrastructures that the new middle-class entrants can utilise to improve their lives. Credible institutions, credible policies, and an effective conflict-resolution mechanism matter more than ever in this context.
For the country to truly create the infrastructure that contributes to economic growth, strong institutions will be essential. In essence, “hard” infrastructure such as airports, seaports, railroads, telecom towers, power transmission networks, and renewable energy can be created at a rapid pace with the optimal economic dynamics only when the socalled “soft” infrastructure of a robust regulatory regime is in place and fully functional.
While the direct impact of highquality infrastructure gets attention, the indirect advantages and “network effects” of infrastructure assets do not get as much attention, perhaps since they are harder to quantify. That said, finding the “correct” pace of infrastructure creation while working under the various constraints of regulations, financing, and availability of skills is crucial.
While it is true that rapid infrastructure (asset creation) is needed, it is equally true that the necessary financing facilities must match the pace of such asset creation. It is essential that new assets are created with robust financing structures that can sustain over long periods of time. The recent issues in the infrastructure sector suggest that though avoiding low-quality assets is important, it is equally important to avoid good assets funded using poor “capital structures”. Infrastructure assets do add significant economic value if countries can find the right balance between infrastructure creation and ensuring sustainability of financing.