Infrastructure and Fiscal Management

India’s record in reducing absolute poverty is poor by the standards of developing countries and, indeed, of South Asia (Olinto et al 2013). Government investment in infrastructure has fallen over the past two decades, first following economic reforms and macroeconomic adjustment policies and later as part of fiscal consolidation. Infrastructure levels today are lower than in East Asia in the 1960s. A lesson learnt from the experience of the East Asian growth “miracle” is that for rapid growth and poverty reduction, large investments in physical and social infrastructure are necessary (World Bank 1993). In India, the infrastructure gaps are large. If India seeks to sustain high levels of growth over an extended period and make a rapid dent in poverty, the government at all levels needs to invest large amounts to fill these large infrastructure gaps. And public investment in infrastructure, in contradistinction to other kinds of public expenditure, tends to crowd in private investment rather than crowd it out, especially in a liberalised economic environment (Blejer and Khan 1984; Argimón et al 1997; Bahal et al 2015; Dash 2016).

In developing countries, there are also few alternatives to government investment, given especially the risks involved in infrastructure development and the length of gestation. A World Bank study in the 1990s (Briceño-Garmendia et al 2004) found that governments and public utilities financed about 70% of all infrastructure investment in developing countries and official development assistance another 5%; the share of private investment was only 20%–25%, of which over 80% was in telecom, electricity, and toll roads. In India, the hope that private investment would fill this gap has been belied by the experience of public-private-partnerships (PPPs) over the past 15 years. Experience suggests that the Twelfth Plan’s target—about 50% of infrastructure investment would come from private sources—was too optimistic.