Infrastructure development and economic growth in India

Abstract

In this study, we investigate the role of infrastructure in economic growth in India for the period 1970–2006 on the basis of the empirical framework developed by D.A. Aschauer (Is public expenditure productive? Journal of monetary economics, 23 (2), 1989, 177–200). In this context, we develop an index of infrastructure stocks and estimate growth-accounting equations to investigate the impact of infrastructure development on output. Overall, the results reveal that infrastructure stocks, labour force and total investment play an important role in economic growth in India. More importantly, we find that infrastructure development in India has a significant positive contribution toward growth than both private and public investments. Further, causality analysis shows that there is unidirectional causality from infrastructure development to output growth. From a policy perspective, there should be greater emphasis on infrastructure development to sustain the high economic growth which the Indian economy has been experiencing for the last few years.

Keywords:

• India
• infrastructure index
• investment
• output growth

JEL classifications:

• O1
• H4
• H54
• L9

Acknowledgements

We thank an anonymous referee for very useful and constructive comments. We also thank Drs Arup Mitra and Dipendra Sinha for their help and encouragement in writing this paper. However, the usual disclaimer applies.

Notes

∗Denotes significance at 5% level.

∗Significance at 5% level

∗∗significance at 1% level; all the variables are in real and log (Ln) values.

∗ No. of days required to register a business. Source: Global Competitiveness Report, 2007–2008.

∗Denotes the null hypothesis that the variable concerned is non-stationary can be rejected at 5% significance level. Asymptotic cutoff values for 5% significance level are −3.41 when the trend term is included and −2.86 when the trend term is not included (see Davidson and Mackinnon 1993).

1. Though there is no study examining the relationship between infrastructure development and output growth in the Indian context, there have been a few studies examining different aspects of the role of infrastructure in economic growth (see Section 3).

2. Some papers do this by design, e.g. Roller and Waverman (2001) evaluate the impact of telecommunication infrastructure on economic development, and Fernald (1999) analyses the productivity effects of changes in road infrastructure.

3. All the tables mentioned in the text are given in the Appendix at the end.

4. Though these issues are very important for infrastructure development in India, these are not the subject matter of this study. For details on these issues, see Nataraj (2007).

5. Though it is appropriate to use labour hours, its data are not available for India. Further, it is really difficult to estimate labour hours taking many approximations like average working days, average hours of work per day, particularly in the unorganized sector which absorbs around 90% of total labour force. There are also issues like strikes, lockouts, etc., which need to be accounted for while estimating labour hours.

6. The liberalization dummy takes the value 1 for post-1991 periods and 0 otherwise.