In Defense of Infrastructure Spending

In today’s economic thought, the importance of infrastructure for sustained economic development is well recognised. Several studies have been done on the subject such as The World Bank's World Development Report(WDR) of 1994 which discussed links that exist between infrastructure investment and economic growth and UNDP's Human Development Report(HDR) of 1996 which delineated the links that have to be created so that economic growth translates into human development. Reading them together, makes it evident that infrastructure investment and human development cannot be divorced from one another. It is however, of utmost importance to accelerate and sustain human development as well. No country, according to the HDR, that started with fast growth and slow human development has been able to sustain its growth without the corresponding increase in the productivity of the people.

However, to kick start and fuel growth basic infrastructure development is necessary, without which a country will remain uncompetitive and therefore unable to use its people power effectively in a global environment. India has serious inadequacies in its physical infrastructure which limits its growth rate. Given that resources are very scarce, all investments, including investment in brick and mortar, must be made to have a positive impact on human development. This is easier stated than accomplished. It will not happen automatically. A conscious commitment to keeping people's concerns at the heart of all investment plans must be nurtured, and innovative strategies must be devised. If the national development strategy is people-centered in this way, international technical cooperation also will have better and bigger impact. To implement strategies for long term development, a controlled environment will be more suitable.

A government should think of itself exactly as a very large company, with the profit motive which drives a company, to be replaced by a people development motive. A company to increase profitability will have to make capital expenditure from time to time. A company shying away from capital expenditure due to lack of funds or any other excuse would damage its profitability and competitiveness in the long term. Similarly, with the long term object of the welfare of the people in mind, a government has to make capital expenditure, not just in terms of infrastructure such as roads and electricity, but also by building schools and hospitals, as well as constant innovation to improve the efficiency of the government machinery. To say that they are always running at a deficit and therefore sit on their asses will obviously develop into a vicious cycle where the much needed revenues cannot be generated without the prior expenditure.

Two-thirds of India's people live in villages. The village in India is not at all idyllic. It is a hard place to live in. And the reason for that is lack of basic infrastructure. This lack can account for a good deal of the differences in capabilities and opportunities of people in villages compared to their counterparts in towns and cities. There is a positive relationship between human development, infrastructure development, rural-urban equity, and economic growth.

Kerala today is well equipped to accelerate growth and economic opportunities because it has established a good human development foundation. It has the highest ranking in India according to the Human Development Index developed by the UNDP. Between 1987 and 1992, Kerala's annual rate of growth in per capita income (6.2 per cent) was almost twice the average for India (3.8 per cent). With a little help from improving efficiency via infrastructure development, Kerala’s growth rate can easily cross over into double digits.

A lack of infrastructure increases the costs of manufacturing and therefore affects the final consumer adversely. For example, in China a truck can cover 1500 kms per day, whereas in India, the average truck covers only 300 kms. This will obviously increase the costs of freight substantially, and further will increase manufacturing costs due to the stocking costs which rise due to the delay in delivering goods. The bad roads especially in Kerala, cause tyres to wear out much faster than other states in India. And of course, there is also the time factor. In Tamil Nadu, a bus can cover an average of 65 kms per hour on any national or state highway. In Kerala however, an average of 40 kms will be considered good. On my day to day travel to and from Changanachery on a state highway, my car gives me an average of 13 kms to a litre of diesel costing me Rs. 2.5 per km. In Tamil Nadu however, I get an average of 19 kms to a litre which costs me only Rs. 1.74 per km, which makes it 43% more expensive in Kerala. Multiply that by the thousands and thousands of cars and so on, and you get your money for the highway right there.

Some people might be opposed to better roads, cause their products sales might be adversely affected if tyres and so on last longer… Ehem..

How will I collect my revenues and give maximum benefit to all my people? Well I haven’t figured it ALL out yet, but I know I can. In time.

The problem with a democracy is exactly what my good friend Paulose mentioned in his comment to my previous post, which is that in a democracy, people will get what the majority want, like cheap electricity, if that’s what they want. However, people have no idea of how best that they will get what they want in the long term, what will best for a better future for their children and for the country at large. Therefore, they might argue against introducing STD phonecalls, saying that only the rich wanted it. You all remember the time that we had to make trunk calls right? Well, if we had kept listening to them….

As a benevolent dictator, I will listen to my people, and do what’s best for them in the long term so that they have a better future. As a parent takes decisions for their young children, since what they want is not always good for them, as a dictator, I shall have to be firm but loving.