Is infra a key to India's growth?

Tue, 27 Dec Pre-Open

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Time and again, we have heard that India's infrastructure is in an abysmally poor state. Lack of policy initiatives, high interest rates and environmental issues are the main bottlenecks that have impacted infrastructure spend in the recent past. And since infrastructure is the backbone for growth, any impediments here can have a direct bearing on the long term growth prospects of the economy. In fact, India's growth prospects have suffered in the last few quarters due to this very reason.

However, Justin Lin, chief economist at World Bank has made an interesting observation about the role that infrastructure plays in the overall growth, for developing countries like India. It may be noted that since India is a vastly populated country it has competitive advantage in labor intensive industries. And these industries are typically small in nature having minimal capital requirements. Having a financial institution that can best serve the needs of such industries can boost the consumption levels as well as exports thereby enhancing the growth prospects.

Secondly, Lin also points out that consumption levels, if on a decline, can be increased through proper income distribution. It is true that income is concentrated amongst the rich, where propensity to consume is low, and thus over a period of time consumption may decline. However, having systems and policies in place that promote equal income distribution like creating an environment favorable for labor intensive industries, can go a long way in improving consumption levels. Policies that aim at creating wealth for individuals who lie at the bottom of the income pyramid increases consumption directly as probability of savings is less (earnings are spent on current consumption).

This also creates capital for future growth over a period of time as necessities are met and standard of living increases gradually. This can lead to increase in skill levels (savings that gradually accrue are spent on self improvement) leading to increase in wages which further improves income distribution. Thus, while infrastructure is critical for the growth of any economy consumption plays an equally important role especially for labor intensive developing countries. And it is true that India is one such play. So, while it can be said that infrastructure bottlenecks do have an impact on the near term growth prospects they can't derail India's long term growth story.