“Investment in infrastructure is essential for more rapid and inclusive economic growth.” Discuss in the light of India’s experience. UPSC IAS Mains 2021 General Studies (Paper – 3)
Infrastructure investments are a form of “real assets” which contain physical assets one sees in everyday life like bridges, roads, highways, sewage systems or energy. Such a type of asset is quite vital in a country’s development. Often, investors invest in infrastructure as it is non-cyclical and it offers stable and predictable free cash flows.
Benefits of investment in infrastructure:
- Stable and Steady Cash Flows: The potential for steady cash flows is one of the main attractive features of investment in infrastructure. It creates steady and predictable cash flows, given that the asset often comes with a regulated and contracted revenue model.
- Non-Cyclical: While the small Italian restaurant at the corner of the street may go bankrupt during a long economic recession, that same risk does not apply to infrastructure assets. Infrastructure assets are crucial to a country’s development which also means that they will still be used regardless of what stage the economy is in.
- Low Variable Costs: Infrastructure comes with extremely small marginal costs per use which are completely negligible.
- High Leverage: Leverage is the amount that is taken on. Given that infrastructure provides stable and predictable cash flows, it can take on high levels of leverage which leads to high-interest costs.
Role of infrastructure in rapid and inclusive economic growth:
- Creation of Jobs: Infrastructure development such as road construction, real estate, railway construction, etc. is labour-intensive resulting in increase in employment opportunities in formal and informal sectors and, thus, propelling domestic demand.
- Farmer Income: Investment in infrastructure would play a crucial role in ensuring doubling of farmers’ income through emphasis on increased irrigation infrastructure and storage, processing and marketing infrastructure.
- Health and Well-Being: Infrastructure enhancement of superior healthcare facilities, electronic health records and better equipped health infrastructure at primary levels (Telemedicine).
- Logistic Cost: Establishing world class roads, railways, ports and inland waterways will cut down logistic costs and improve competitiveness and promote exports. This would bring more revenues to the government and may promote socio-economic development.
India has been quite attentive with respect to infrastructure programmes. Setting up of a Development Finance Institution (DFI) with an initial capital of Rs. 20,000 crores, is expected to serve as a catalyst for facilitating infrastructure investment. Likewise, the National Infrastructure Pipeline seeks to boost the country’s spending on infrastructure.
However, the success of the infrastructure expansion plan would depend on other stakeholders of the pipeline playing their due role. These include State governments and their public sector enterprises and the private sector. Besides, there shall be proper implementation of holistic reforms in the banking sector.
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