The Dash (2009) and Halder (2009) concluded that

 The seminal work of Aschauer
(1989; 1993) suggests that infrastructure investment contributes positively to
output growth. The findings of Aschauer were supported by World Bank (1994),
which identified that infrastructure investment contributes to output growth
through enhancing productivity, stimulating economic growth and improving
quality of life. In Indian context as well, a positive relationship between
infrastructure development and output growth has been observed. Barnes and
Binswanger (1986) found that infrastructure growth helps in agriculture
productivity and private investment. Datt and Ravillion (1998a) observed that
the states having higher investment in infrastructure have better growth rate
as well as faster poverty decline. In recent studies, Sahoo and Dash (2009) and
Halder (2009) concluded that infrastructure investment has significant
contribution in output growth. Further, Ehlers (2014) suggests that overcoming
infrastructure investment bottlenecks would accelerate economic growth; however,
a delay in completion of the projects may have various social and economic
costs. India is still far behind in offering the minimum required
infrastructure facilities to its citizen, especially in remote areas. The empirical research on role of infrastructure in
economic growth started after the seminal work by Aschauer (1989) where he argued
that public expenditure is quite productive, and the slowdown of the US
productivity was related to the decrease in public infrastructure investment.
Optimal and efficient use of infrastructure for
economic growth. Hulten (1997) and Canning and Pedroni (2004) emphasize that
there is an optimal level of infrastructure maximizing the growth rate and
anything above would divert investment from more productive resources, thereby
reducing overall growth. While the benefits of infrastructure-based
development can be debated, the analysis of US economic history shows that at least under some
scenarios infrastructure-based investment contributes to economic growth, both
nationally and locally, and can be profitable, as measured by a high rate of
return. The benefits of infrastructure investment are shown both for
old-style economies (ports, highways, railroads) as well as for the new age
(airports, telecommunications, internet…). In addition to Aschauer’s work,
Munnell’s paper supports the point that infrastructure investment improves productivity. Munell
demonstrates that the decrease in multifactor productivity growth during the 1970s
and 1980s relative to the 1950s and 1960s is due to the decrease of public
capital stock rather than the decline in technological progress. By
showing that public capital plays an important role in private sector
production, Munnell helps Aschauer establish that infrastructure investment was
a key factor to
“the robust performance of the economy in the ‘golden age’ of the 1950s and
1960s.” Even though the revenue streams
on infrastructure construction investment fall due to diminishing returns, Edward Gramlich
indicates that the rate of return on new construction projects was estimated at
15%. Furthermore, the rate of return on maintenance of current highways was estimated at 35%.
It means that even without further new construction, the investment in
the maintenance of the core infrastructure is very profitable. Research
conducted by the World Pensions Council (WPC) suggests that while China
invested roughly
9% of its GDP in infrastructure in the 1990s and 2000s, most Western and
non-Asian emerging economies invested only 2% to 4%
of their GDP in infrastructure assets. This considerable investment gap
allowed the Chinese economy to grow at near optimal conditions while many South American,
South Asian
and African economies suffered from various development bottlenecks:
poor transportation networks, aging power grids, mediocre schools.
Infrastructure development, both economic and social, is one of the major determinants of economic
growth, particularly in developing countries.

     Direct investment on infrastructure
creates, (a) Production facilities and stimulates economic activities, (b)
Reduces transaction costs and trade costs improving competitiveness and (c)
Provides employment opportunities to the poor. In contrast, lack of
infrastructure creates bottlenecks for sustainable growth and poverty
reduction. Infrastructural investments in transport (roads, railways,
ports and civil aviation), power, irrigation, watersheds, hydroelectric works,
scientific research and training, markets and warehousing, communications and
informatics, education, health and family welfare play a strategic but indirect role in the
development process, but makes a significant contribution towards growth by
increasing the factor productivity of land, labour and capital in the
production process, especially safe drinking water and sanitation, basic
educational facilities strongly influence to the quality of life of the people. Many
studies have found a positive relationship between the level of economic development (measured
by per capita income and other indicators), and quality of housing and access to basic
amenities like electricity, safe drinking water, toilets (Human Development Report of India 2011). There
is a precise
link between infrastructure and development. Infrastructure investment
directly affects the economic development. Therefore, that the only way to build
up a country’s productive potential and raise per capita income is to
expand the capacity for producing goods, this need not refer simply to the
provision of plant and machinery, but also to roads, railways, power lines,
water pipes, schools, hospitals, houses and even “incentive” consumer goods such as consumer
durables, all of which can contribute to increased productivity and
higher living standards. World
Development Report(1994) published by the World Bank under the title
“Infrastructure for Development” rightly mentions that “the adequacy of infrastructure helps
determine one country’s success and another’s failure in diversifying
production, expanding trade, coping with population growth, reducing poverty,
or improving environmental conditions.” “The link between infrastructure
and development is not a once for all affair, it is a continuous process and progress in
development has to be preceded, accompanied and followed by progress in
infrastructure, if are to fulfil our declared objectives of
self-accelerating process of economic development”(Dr. V.K.R.V. RAO). The poor road
connectivity, unavailability of sanitation facility, safe drinking water,
medical facilities as well as electricity has been well documented in
literatures and various policy reports.

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     The World Bank Group (2004)
focuses on the financing of developing country infrastructure. It discusses about the financial matters for the
development of infrastructure of not only about the efficiency of allocation
but also for the reason for certain distinctive economic characteristics which
includes a high capital intensity, elements of natural monopoly, investments
which are location specific and all of them affect  the private sector incentives for long term
capital relation. After the recent developments in private financing more opportunities of
investment came by the wave of privatization and liberalization in early 1990s
helped companies invest in power plants, roads, and telecommunication
facilities in the developing world. Moreover global capital markets have the
potential to fund all economically viable infrastructure projects in developing
countries with respect to their size, depth and range of instruments. In Public
Private Partnership projects, private partnership in infrastructure is
controlled by sector specific regulations or long-term concession contracts.
Concession agreements made under national laws authorize the government to
award concessions to private entity through competitive public bidding which
includes construction, finance, operations and manage infrastructure assets,
and to collect tolls and tariffs. Multilateral which includes more than two
parties have come increasingly to achieve their targets and strategic vision by
viewing infrastructure financing within the broader context of finance for
development. The unique role of multilaterals in promoting infrastructure
finance includes their years of experience, their focus on poverty alleviation
and their capacity to provide long term loans.

     This also talks about the
strategic agenda to promote infrastructure financing which must focus on three
elements. First, multilaterals need to expand their current
offering of loans and guarantee instruments to facilitate access to global and
local capital markets by both private and public providers of infrastructure
services. Political, contractual, regulatory, and foreign exchange risks will
have to be dealt with. Political risk mitigation has advanced in recent years
and now includes a private political-risk insurance market and new programs by
export credit agencies. But instruments to mitigate the other risks remain less
developed. The challenge is to achieve an appropriate allocation of risks
between the private and public sector, without inducing moral hazard—which
implies not having the government or public sector shouldering excessive risk.
Apart from infrastructure loans to public and private providers, most
multilaterals are able to provide partial credit guarantees, political risk
insurance, and partial risk guarantees. Instruments that require further
evaluation and development are those relating to local-currency lending and
guarantees, and liquidity backstopping to mitigate exchanged evaluation risk.
The second item on the agenda for promoting infrastructure finance is to apply
the new financing and risk-mitigation instruments to sub sovereign providers of
infrastructure services, such as municipal utilities. Facilitating the access of
sub sovereign entities to capital markets complements the wider economic reform
agenda of fiscal decentralization, wherein local entities assume responsibility
for providing infrastructure services. However, carefully structured incentives
will be required to encourage fiscally responsible behaviour by these sub
sovereign infrastructure providers. Some multilaterals, such as the European
Bank for Reconstruction and Development and the Inter-American Development
Bank, have been able to engage at the sub sovereign level without a government
counter-guarantee. The World Bank, including the International Finance
Corporation, is working on similar facilities. The third element is to work
with public providers of infrastructure services to fundamentally improve their
creditworthiness. Corporate level reforms in investment planning, financial
reporting, and corporate governance will have to be pursued, in addition to
enhancing investor protection (as discussed above). Although the focus on
improving the creditworthiness of public enterprises is not entirely new, there
is a need to renew capabilities to deliver advisory and implementation support
to achieve this transformation. Ultimately, the infrastructure financing
requirements of most developing countries cannot be met without reaching
commercially defensible standards of creditworthiness.


     The focus of India, in recent times, on
infrastructure is evident from the data of infrastructure investment as a
percentage of GDP. The investment on infrastructure as a percentage of GDP has
increased from 8.37% in financial year 2012 to 10.70% in the year 2017.
However, the sector is facing various challenges. For an example, in the
current five year plan targeted investment in infrastructure projects were
approximately Rs. 53.38 Trillion, however only 34 % of the targeted investment
has been achieved. Further, the investment commitment has been made mostly by
central government, state government and public sector undertakings. The
investment participation by private sectors has fallen to the tune of 53% in
current five year plan. The inherent characteristics of infrastructure projects
like long gestation period, high investment requirement, environmental factors,
and large number of parties involved etc. possess various risks to these
projects. For an active participation from private companies, government must
persuade, train them to mitigate risks, offer fast track clearances etc. The
uncertain cash flow, illiquid investment profile as well as high initial risks
are the three major risk factors which slows private participation in
infrastructure projects. The Global Infrastructure Index 2016 ranks India at 23rd
Position, just below South Africa and two points below of Indonesia see
Appendix I. The poor ranking is on account of poor business environment, weak
financial tool as well as poor infrastructure quality. The poor infrastructure
score of the index raises a major concern on the quality of infrastructure as
well as on quality of local supplier. The present study is focused to
understand the issues related to financing of Infrastructure sector in India.



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