Economic Infrastructure

UNIT 4 ECONOMIC INFRASTRUCTURE

Structure
4.0 Objectives
4.1 Introduction
4.2 Importance of Infrastructure
4.3 Privatisation and Commercialisation of Infrastructure
4.4 Infrastructure Development in India
4.4.1 State-wise Distribution of Infrastructure

4.4.2 Suggestions for Infrastructure Development

4.5 Transport Sector in India

4.6 Telecommunications
4.7 Energy Resources
4.7.1 Sources of Commercial Energy

4.7.2 Sources of Non-Commercial Energy

4.8 Energy Problem in India

4.9 Let Us Sum Up
4.10 Key Words
4.11 Terminal Questions

4.0 OBJECTIVES
After studying this unit, you will be able to:
• Explain the concept of infrastructure;
• Appreciate the role of infrastructure sector in economic growth;
• Identify the various types of infrastructure;
• Distinguish between physical infrastructure and social infrastructure;
• Describe the present state of infrastructure sector in India; and
• Assess the government initiatives on infrastructure sector.

4.1 INTRODUCTION
Infrastructure refers to basic physical and structural facilities, which are essential
for an economy to function. There is no universally accepted definition of
infrastructure. In India, for example, different organisations include different
sectors or industries under the category of infrastructure. According to the National
Statistical Commission of India, infrastructure possess six characteristics: (i)
high sunk cost, (ii) natural monopoly, (iii) Non-tradability of output (produced
and sold at the same location), (iv) presence of economic “externalities”, (v)
non-rivalness in consumption (consumption by one user does not exclude others
from its consumption), and (vi) price exclusion (enjoyment of benefits could be
subject to payment of user charge).
We give a broad list of sectors which can be included in the infrastructure sector
in Table 4.1. 61
Determinants of Growth Table 4.1: List of Infrastructure Sub-Sectors

Category Infrastructure Sub-Sectors

Transport • Roads and bridges
• Ports
• Inlands waterways
• Airport
• Railway track, tunnels, viaducts, bridges1
• Urban public transport (except rolling stock in case of
urban road transport)
Energy • Electricity generation
• Electricity transmission
• Electricity distribution
• Oil pipelines
• Oil/gas/liquefied natural gas storage facility2
• Gas pipelines3
Water sanitation • Solid waste management
• Water supply pipelines
• Water treatment plats
• Sewage collection, treatment and disposal system
• Irrigation (dams, channels, embankments and so on)
• Storm-water drainage system
Communication • Telecommunication (fixed network)
• Telecommunication towers
Social and • Education institution (capital stock)
commercial • Hospitals (capital stock)
infrastructure • Three-star or higher category classified hotels located
outside cities with population of more than one
million
• Common infrastructure for industrial parks, Special
Economic Zones, tourism facilities and agriculture
markets
• Fertiliser (capital investment)
• Post-harvest storage infrastructure for agriculture and
horticultural produce including cold storage
• Terminal markets
• Soil-testing laboratories
• Cold chain

Infrastructure can be classified as (i) social infrastructure, and (ii) physical

infrastructure. Social infrastructure is concerned with the supply of such services
that meet the basic needs of a society. Examples of social infrastructure are
provision of health services, drinking water, sewerage and sanitation facilities,
electricity, education, etc. We will discuss about social infrastructure in Unit 5.
Physical infrastructure is directly concerned with the needs of such production
sectors as agriculture, industry, trade, etc. In physical infrastructure, we include
such services as power, irrigation, transport, communications, storage, etc. In
this Unit, you will learn the importance, privatisation and commerialisation
of infrastructure as well as infrastructural development in India. Transport,
Telecommunication and energy resouces will be further discueesd.
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 Economic Infrastructure
4.2 IMPORTANCE OF INFRASTRUCTURE
Infrastructure has a two-way relationship with economic growth. Infrastructure
promotes economic growth. Economic growth brings about changes in
infrastructure. Let us discuss these two aspects in detail.
Infrastructure Promotes Economic Growth
(i) Output of infrastructure sector such as power, water, transport, etc. are used
as inputs for production in the directly productive sectors (manufacturing,
agriculture, etc.). Therefore, shortage of infrastructure can result in sub-
optimal utilisation of production capacity of other sectors.
(ii) Infrastructure such as transport improves productivity significantly.
(iii) Infrastructure provides key to modern technology in practically all sectors.
(iv) A close association has been observed between infrastructure spending
and GDP growth. Studies have indicated that 1 per cent growth in the
infrastructure stock is associated with 1 per cent growth in per capita GDP.
(v) Generally around 6.5 per cent of the total value added is contributed by
infrastructure services in low income countries. This proportion increases
to 9 per cent in middle income countries and 11 per cent in high income
countries.
Economic Growth Promotes Infrastructure
Growth, in turn, makes demands on infrastructure. This can be illustrated with
the help of the relationship between GDP growth and demand for infrastructure,
as in Fig. 4.1.
Increases traffic
GDP growth
demand

Requires changes in
transport supply

If provided, catalyses GDP

growth, otherwise constricts it

Affects traffic demand

Fig. 4.1: Demand for Infrastructure

With increase in the level of per capital income in a country, there is a change in
the composition of infrastructure.
(a) In low income economies, basic infrastructure such as water and irrigation
are the most important.
(b) In middle income economies, demand for transport grows very fast.
(c) In high income economies, power and telecommunication occupy more
importance.
Due to such linkages between infrastructure and the rest of the economy,
efficiency, competitiveness and growth of the economy hinges upon the state of
the development of infrastructure sector.
63
Determinants of Growth Characteristics of Infrastructure
Earlier we mentioned that there are six characteristics of infrastructure. We
describe below some more characteristics of infrastructure.
The infrastructure sector has certain peculiarities that help us to distinguish this
sector from other sectors of the economy. Among these, the more important
distinguishing features can be identified as follows:
(i) Public Goods: Most of the physical infrastructure services have some
elements of public good in them. These services are available to the public;
the consumers may be charged for these services or the same may be supplied
free. But even when they are supplied against a price, it is not always possible
to exclude those consumers who choose not to pay for them.
(ii) Externalities: The social benefit of the infrastructure services far exceeds the
cost involved in their generation. This in turn creates problems in pricing
of these services. It is difficult to charge a price in order to recover the cost
fully.
(iii) Monopolies: Due to the inherent nature of infrastructure services, it is
difficult for more than one supplier to exist in one location. It thus creates
the possibility for monopolies and their regulation.
(iv) Public Sector Domination: The existence of externalities particularly in the
field of social welfare has resulted in a dominant position by public sector
in production and supply of infrastructure services.

4.3 PRIVATISATION AND COMMERCIALISATION

OF INFRASTRUCTURE
Private participation in infrastructure development depends upon its capability
to commercialise the infrastructure services.
Need for Privatisation and Commercialisation
The different factors that call for immediate privatisation and commercialisation
of infrastructure can be identified as follows:
(i) Massive Investment Needs: Infrastructure development requires massive
investments and it is not possible for the state to meet all the investment
needs.
(ii) Managerial Constraints in the Public Sector: While the infrastructure business
is becoming more complex, public sector has not been able to meet the
managerial challenges and as a result the supply could not grow at the desired
pace. The fiscal stringency has also created a demand for accountability
for public spending. Therefore, a demand has arisen for commercialisation
and greater privatisation of infrastructure sector in order to inject greater
efficiency.
(iii) Changes in Technology: The possibility of marginal pricing and exclusion
provides greater scope for commercialisation. Technological changes have
made it possible to unbundle the infrastructure service thereby introducing
the elements of competition. The use of new technology enables the charging
of the marginal user.
(iv) Globalisation: The availability, quality, cost and reliability of infrastructure
services are key factors in attracting foreign investment. Globalisation
64 has been aided significantly by advances in transport, telecommunication
 and storage technology. Such advances in infrastructure enable better Economic Infrastructure
management of logistics by combination of purchasing, production and
marketing function. Besides facilitating suppliers to respond to the consumer
demands promptly a significant cost saving is achieved in investment and
working capital.
Prerequisites for Private Investment
Entry of private capital in infrastructure sector is not merely a matter of simple
policy initiatives. A few other important and critical areas would have to be
identified and a suitable environment created.
(i) Commercialisation of Infrastructure: Infrastructure services should not be
treated as public goods. In this regard, the possibility of commercialisation
will depend on the ability to segregate payers and non-payers and prevention
of any incidence of ‘free riding’. Thus, the excludability is a key factor in
commercialisation.
(ii) Pricing Policy: The role of private sector is not restricted to that of provider
of funds. It has to play the role of efficient and accountable operator of the
facility. The issue of pricing of infrastructure services becomes critical here.
In this sphere the long track record of uneconomic pricing and prevalence
of subsidies will be major obstacles.
(iii) Demand Orientation of Services: The existing procedure of financing
infrastructure facilities is based on plan allocation and is mainly supply-
oriented. Insufficient stress on the existing and the anticipated demand has
resulted in deviations in different countries and consequently a large part
of such investments are not providing sufficient returns. Privatisation will
necessitate a demand-oriented approach.
(iv) The challenge for policy is to find appropriate market signals which indicate
the future trend of infrastructure demand and to coordinate the supply of
such facilities in such a manner that investment in infrastructure provides
appropriate returns.
(v) Allocation of Risk: Allocation of risk is of key importance in commercialisation
of infrastructure. The risk should be appropriately demarcated and allocated
to different stake¬holders. This is important for two reasons:
(a) There is a tendency among the private shareholders to shift the risk to
the government.
(b) There is also a tendency among the shareholders to shift the risk on
each other.
(vi) Direct Participation by the Government: While the existence of elements of
monopoly in infrastructure will necessitate regulation by the government,
constraints in financing and user charging will render the direct participation
by the government necessary. Therefore, a transparent framework
for promotion of synergistic firmness of public-private partnership in
infrastructure is required.
Lessons from Private Investment
Lessons so far have not been encouraging. Investments in the couple of fiscals
through 2012 backfired, leaving in their wake stalled projects and a mountain
of stressed assets. After a decade, private investment capacity is yet to recover
meaningfully.
65
Determinants of Growth Private investments in thermal generation are already in deep trouble with
stranded capacities, stressed loans and weak demand. While airports, ports and
power transmission have robust engagement models, new investment activity is
tepid. In railways, and urban infrastructure, private investments are negligible.
It’s down sharply at the state level as well.
National highways remain the only bright spot, where policy actions and the
de-risked hybrid annuity model (HAM) have revived projects. And the recent
toll-operate-transfer (TOT) auction is a good example of asset monetization and
crowding-in of private capital.
Private sector participation in infrastructure delivery helps deliver tangible
benefits, and there is anecdotal evidence to support this, even as the fiscal space
remains constrained. In highways, airports, ports and renewables, the private
sector’s role has been landscape altering. The private sector has also delivered
efficiently – both on project execution (where land and clearances have not been
a constraint) as well as operations.
However, history has taught us that public private participation (PPP) is no silver
bullet. Broad-basing private investment in infrastructure requires relentless
commitment and holistic efforts from both the Centre and the states.

4.4 INFRASTRUCTURE DEVELOPMENT IN INDIA

Development of infrastructure has always been given highest priority in our
growth programmes. Economic returns and not success in wresting concessions
should govern the relative share of investments in each economic activity; the
rule may be different for social actions.
Table 4.2: Relative Quality of Infrastructure in India
Indicator Best (score) China Rank/score India Rank/score
Road France (6.6) 54/4.4 85/3.4
Railways Switzerland (6.8) 21/4.6 24/4.4
Ports Singapore (6.8) 56/4.5 82/3.9
Air Transport Singapore (6.9) 72/4.6 67/4.7
Electricity Denmark (6.9) 49/5.5 112/3.1
Fixed lines Taiwan (70.8) 55/21. 113/2.9
Mobile subscription Hong Kong (190.2) 113/64 117/61.4
Overall Switzerland (6.7) 69/4.2 86/3.8

Table 4.2 provides the report’s scores for India (and the inevitable comparison
with China) for seven infrastructure indicators as well as an overall score. For
comparison purposes, the highest-scoring country on each indicator is listed.
For the first five indicators and the overall quality, scores are on a seven-point
scale, the higher the better; while for the two telecom indicators, they reflect the
numbers of connections per 100 people.
We can draw three pretty obvious messages from this picture. First, notwithstanding
pockets of success, our overall infrastructure strategy hasn’t delivered to the extent
necessary. One reason for this is that we have not approached “infrastructure” as a
fully integrated network. Two, the benefits of successful projects are significantly
diluted by their linkages on failed ones. The “weakest link” principle is essentially
why our overall infrastructure experience is so negative, despite some strategies
and projects being successful. Third, the cost of moving from the 80-100 rank
range to the 50-70 range is going to be enormous – the trillion dollar aspiration
66
of the 12th Five-Year Plan reflected this. But the money needs to be spent in a Economic Infrastructure
consistent way across sectors and, most importantly, over time, to get the best
value from it. It is a lot easier to move down the rankings than it is to move up.
4.4.1 State-wise Distribution of Infrastructure

Fig. 4.2: Typology of Development

India’s infrastructure sector has been troubled for quite some time now. The full
extent of the crisis is becoming apparent only now, with banks facing increasing
difficulties in recovering loans made to the sector. The non-performing assets
(NPA) crisis that Indian state-owned banks face today is in large measure the flip
side of the unravelling of the infrastructure boom of the past decade. State-wise
distribution of infrastructure can be seen from Fig. 4.2.
4.4.2  Suggestions for Infrastructure Development
It was around the Ninth Plan (1997-2002) that India seriously woke up to the
infrastructure challenge. With a slew of interventions, the key indicator of
infrastructure development, gross capital formation in infrastructure (GCFI) as
a percentage of gross domestic product (GDP), started a steady upward climb.
From 2002 onwards, the government aggressively pushed public-private
partnerships (PPPs) to generate infrastructure investments. The results exceeded
expectations. The share of private capital in infrastructure investments, which
67
Determinants of Growth stood at 22 per cent during the 10th Plan period (2002-07), moved up to 37 per
cent in the 11th Plan period (2007-12). The 12th plan (2012-17) optimistically
budgeted for 48 per cent.
Going forward, the challenges are manifold. We can lists down 12 priority
suggestions for revitalising the infrastructure agenda.
1. Reform the Railways: Three reports provide a clear reform agenda: the
Rakesh Mohan Committee (2002), the Kakodkar Committee on Railway
Safety (2012), and the Pitroda Expert Group for Modernisation of Indian
Railways (2012). The Rakesh Mohan Committee suggested that the Railways
must eventually be corporatised into the Indian Railways Corporation (IRC).
The government would need to set up an Indian Rail Regulatory Authority
(IRRA) to distance the IRC from the government. The IRC should be
governed by a reconstituted Indian Railways Executive Board (IREB). The
government of India should be in charge of only setting policy direction,
constituting the IRRA and the IREB.
2. Privatisation of Coal Mining: India boasts the world’s fifth-largest
coal reserves. Yet, we all are aware of the bottlenecks in supply and our
dependence on Coal India. Coal mining was nationalised in 1973. It now
needs to be denationalised with a sense of urgency.
3. Resurrect the river-linking plan: The government had set up a task
force in 2002 to resurrect the idea in the hope of creating another iconic
infrastructure initiative. The reasons were powerful. Increasing disposable
incomes would prompt voters to demand better water services and pay for
them; similar pressures in agricultural water demand would arise due to
diversification of Indian agriculture. Rising energy costs would make pump
irrigation increasingly unattractive. Rapid growth in urban agglomerations
would seriously strain their ground-water-dependent supply systems. The
phenomenon of simultaneous droughts and floods would be substantially
addressed, and inland water transport would be fostered.
4. Stop bidding out projects without sovereign clearances in place: Here
are two ways to bite the bullet. First, have the sponsoring government
authority set up a 100 per cent government-owned special purpose vehicle
(SPV) to implement the project. This SPV should secure all permissions and
clearances. Then the authority should bid out the SPV to the highest bidder.
Second, let all infrastructure PPP bids carry a special annexure listing all
of the permissions required, thereby delineating the responsibilities of the
sovereign sponsoring authority. Get babudom and its political leadership to
be publicly and monetarily accountable. Let them not merely bid out project
as bemused observers.
5. Form an infrastructure ministry: There are 12 ministries at the central level
that directly look after infrastructure. The rural development, environment,
industry and commerce, and heavy industries ministries raise the count to 16.
Adding the NITI Aayog, finance ministry, the Prime Minister’s Office and
the Cabinet Secretariat (Cabinet Committee on Infrastructure, the number
comes to 20).
And they are all co-ordinating with 29 states. It is about time such
“coordination” was institutio­nalised through a ministry for infrastructure.
6. Reshape IIFCL to catalyse long-term funds: The Interim Report of the
68 High-Level Committee on Financing Infrastructure (August, 2012), headed
 by Deepak Parekh, argued for a significant restructuring of the role of India Economic Infrastructure
Infrastructure Finance Company Ltd (IIFCL) from that of a normal lender
to one that provides guarantees for bonds and extends subordinated debt.
This would make HFCL a catalyst in channelling large long-term inflows
for infrastructure projects.
7. Independent regulatory authorities: The Planning Commission’s
draft legislation of 2006 recommends that regulators need to be directly
responsible to the legislature. Selection should not only be fair (Create a
“National Infrastructure but also “best in class”). India should consider opting
for multi-sectoral regulators for communications, electricity, fuels and gas,
and transport. This would eliminate proliferation of regulatory commissions,
help build capacity, promote consistency of approach and check costs. In the
case of states, a single regulatory commission for all infrastructure sectors
may be more productive and cost-effective.
8. Set up land bank corporation: Enactment of the Land Acquisition Act 2013
has given rise to apprehensions on adequate and timely availability of land for
development purposes. Energetic and visionary state land bank corporations
need to be created. They should be empowered under the clause of “public
purpose” to acquire large tracts of unused, unusable or waste land. They
should be sufficiently capitalised by state governments and have the power
to leverages more finance on the strength of their land-bank inventories.
They could also oversee resettlement and rehabili­tation obligations.
9. Push hydro-electricity: India has exploited only 24 per cent of its hydro
potential at an installed capacity of around 35,000 megawatts against an
“identified potential” of 148,701 Mw. A realistic target would be to try and
restore hydropower to at least an overall share of 20 per cent in India’s energy
basket by the end of the 2025. This would require an addition of 62,000 Mw
of hydro capacity over the next 5 years.
10. Implement the 74th Amendment for urban governance: The 74th
Amendment to the Constitution in 1992 sought to bring about a major
change in the functioning of urban local governments. Unfortunately, very
little additional empowerment of municipal bodies has happened.
11. Clean up electricity distribution: Distribution reform requires micro-
management of millions and millions of end-users with metering, billing,
collection, theft reduction, mafia control, and local area infrastructure
upgradation. This systemic micro overhaul across the length and breadth of
the country with attention to detail and a granular set of related activities
needs massive orchestration. Large-scale appointment of “distribution
franchisees in PPP mode” is the only practical solution.
12. Create a National infrastructure Partnership Commission: There is
an all-pervasive belief in the private sector that the manner in which risks
are currently shared between the government and private players in PPP
contracts is heavily skewed against the private sector. Where, then, is the
so-called “partnership”? Such a partnership should be carefully nurtured.
There is the Infrastructure Concessions Regulatory Commission in Nigeria,
the PPP Advisory Unit in Ghana, the PPP Centre in the Philippines and the
PPP Unit in South Africa. In the case of South Africa, for example, one of
the key functions of the PPP Unit is “contract renegotiations”.

69
Determinants of Growth Self-Assessment Exercise A
1) Describe the importance of Infrastructure in an economy.
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2) Distinguish between ‘economic infrastructure and social Infrastructure.
........................................................................................................................
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3) Explain how there is a two-way relationship between infrastructure and
economic growth.
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4.5 TRANSPORT SECTOR IN INDIA

Transport infrastructure in India has grown at an unprecedented rate since
economic liberalisation. At the highest ever pace of construction, we have built
more than 35,000 km of national highways in the last four and a half years. The
country had never before seen world-class expressways such as the Eastern
Peripheral Expressway and Western Peripheral Expressway or engineering
marvels such as the Dhola Sadiya Bridge and Chenani Nashri Tunnel. The
Bharatmala Pariyojana is unique and unprecedented in terms of its size and
design, as is the idea of developing ports as engines of growth under Sagarmala.
The development of 111 waterways for transport, with multinational companies
already carrying their cargo over the Ganga, is also a first ever, as are FASTags, the
promotion of alternative fuels such as ethanol, methanol, biofuels, and electricity,
as well as innovative modes of travel such as seaplanes and aeroboats.
An efficient transport infrastructure is the biggest enabler for growth. To that end,
it has been one of the foremost priorities of our government to build a transport
infrastructure that is indigenous and cost-effective, links the remotest corners
of the country, is optimally integrated across various modes and is safe and
environment friendly. A lack of good transport infrastructure has been a major
hindrance for growth in the country in the past and our focus has been on rectifying
this. Bharatmala and Sagarmala programmes are going to be game changers in this
regard. They will improve both penetration and efficiency of transport movement
on land and water, respectively. In the process, they will help connect places of
production with markets more efficiently, help reduce logistics costs, create jobs
and promote regionally balanced socioeconomic growth in the country.
Our road and sea transport networks are being developed for providing better,
seamless and more efficient access not just within the country, but also to our
neighbouring countries using an optimal mix of roads and waterways – whether
it is to Afghanistan and beyond through Chabahar, or Bangladesh, Myanmar and
Thailand through upcoming highways and waterways.
70
Multi-Modal Integration Economic Infrastructure

From a transportation perspective, India has about 18 per cent of the world’s
population and only 2.5 per cent of its land area, but accommodates a fleet of
210 million motor vehicles as of now. This adds to the stress. It is imperative that
we adopt more efficient ways of moving people in our cities.
It is fast becoming necessary to persuade personal motor vehicle users to shift to
public transport to mitigate the negative impacts of road congestion, deteriorating
air quality and increasing carbon emissions.
Today’s public transport systems, which follow fixed routes and schedules, can’t
offer such conveniences. Innovative, multi-modal integration is vital to drive a
change. Different modes, when appropriately combined, could offer inclusive,
comfortable and frequent door-to-door services to commuters. In Bengaluru and
Hyderabad, an open innovation challenge – which invited ideas from technology
and service providers, mobility entrepreneurs and citizens to improve last-mile
connectivity to mass transit systems – yielded smart solutions that were cost-
effective, innovative and easy to integrate.
Second, cities need to increase the number of public transport vehicles significantly
to ensure safe, comfortable, frequent and crowd-free commutes to all. Third, it is
time for the government to widen the definition of public transport to include small
buses, vans and pooled vehicles that offer on-demand services. Ongoing studies
indicate that bus aggregator systems – a model that uses technology (mobile
apps) to allow passengers to book seats in buses operating on routes within city
limits, pay fares online and track location – have managed to pull people out of
their private vehicles and bring about a modal shift.
Smart solutions exist, but there are major barriers in achieving these. Improvements
and upgradation could be expensive unless alternative funding sources are
identified. Also, governance is highly fragmented with different modes being
managed by different entities which do not talk to each other. Finally, operators
are often reluctant to make their data public, thereby hampering the use of apps
to integrate systems.
A progressive and forward-looking approach can help us overcome such barriers.
In India, lead transport authorities could be set up to coordinate planning and
financing of public transport modes in an integrated manner. They should have
legal backing and the financial muscle to ensure that their plans are adhered
to. International models like the Transport for London, the Land Transport
Authority of Singapore and Translink in Vancouver, are worth replicating with
local adaptations. Operators should also be mandated to allow commuters access
to data to plan trips.
Three important developmental features of the transport sector in India can be
noted as follows:
(i) A rail dominant economy in the 1950s has become a decidedly road dominant
economy presently. Road transport now accounts for over 60 per cent of inter-
city freight traffic (tonne-km) and over 80 per cent of inter-city passenger
traffic (pass-km).
(ii) During the same period, Indian Railways shifted from being a freight
dominant operation to a passenger dominant operation.
(iii) The main links of the parallel and competing road and rail networks have
become saturated under the current technological and operational regime. 71
Determinants of Growth What India needs at present is holistic planning for its transport infrastructure that
should minimise energy use and emissions while maximising competitiveness
of domestic industry.

4.6 TELECOMMUNICATIONS
Few areas of India’s economy have enjoyed as sharp a pace of structural change
as that in the telecom sector. The rapid pace was the outcome of the New Telecom
Policy, 1999. It brought in vigorous competition among firms and technologies.
The drastic pace of structural change highlights the possibilities in other segments
of infrastructure for eliciting massive investment by the private sector, and for
benefitting the consumers through competition between old and new technologies.
The major features of the telecom sector can be identified as follows:
(i) The structure and composition of telecom growth have undergone a
substantial change in terms of mobile versus fixed phones and public versus
private participation.
(ii) In 1999, both mobile phones and private sector separately accounted for 5 per
cent of total number of phones. Presently, mobile phones account for a little
over 92 per cent of total phones and the private sector accounts for 78 per
cent of total phones. From basic telephony to Value Added Services (VAS)
several remarkable changes have happened that have resulted in not only
expanding the base of mobile users but also providing more user-friendly
services to consumers. Mobile phone has surpassed their primary role of
voice communications and have become more of an infotainment device for
mobile users.
(iii) Although India has a 1010 million strong telephone network, including
mobile phones, the tele-density (number of phones per hundred population)
at about 80 is much less than over 120 in the UK, the US, and Australia.
(iv) While tele-density lags behind the world, present trends suggest that catching
up is presently underway. For this, massive investments, including FDI, are
planned.
(v) India also lags behind the world to a considerable extent in the field of
broadband telecom.
(vi) The telecom market in India is a highly competitive market but is driven by
regulatory and other policy issues.
Telecom operators are no longer in control of their industry with companies
such as Apple, Google, and Samsung, emerging as the new leaders and start-ups
ranging from cloud communication companies to secure chat ones scorching the
telecom highway. In the Big Data value chain too, telecom companies merely
generate the data but have little control over its usage and much less over its
commercialization. Their future depends on services such as Internet TV, mobile
payments and cloud services. But all that, for India’s telecom giants, is coming
at a huge cost. This steep cost base set against the shallow curve of their revenue
base is a mortal threat to many.
For the technology sector the issues may be considered.
• Focus areas will include Artificial intelligence, Big Data, Block-chain, Fin-
tech, 5G, loT, Massive MIMO, Network augmentation, etc.
• 5G is the next generation of broadband connection that offers 20 times faster
72
 data transmission speed than the 4G network. The much-awaited network Economic Infrastructure
trial for 5G services in the country is slated to start from June 2019 for a
period of three months, with the auctions planned for October 2019.
• Artificial Intelligence will alter the networking landscape, network
infrastructure, and enhance traffic management, as telecom companies
harness the power of AI to process and analyse huge volumes of Big Data
for better customer experiences, improve operations, and increase revenue
through new products and services.
• With less than 25 per cent towers fiberised against the global standards of
70-80 per cent, fiber leasing in India is heading towards a $2.56 billion
market by FY2020. Fiberised towers are expected to increase from 90,000
to 330,000.
Adaption of new technologies necessitate that telecom providers continuously
realign their business strategies and restructure themselves. In order to gain
a competitive edge, they invest in network infrastructure and forge JVs with
leading media and content providers. Add to this the burden of fluctuations in the
import duties on telecom equipment; a high GST; spectrum charges; competitive
tariffs; arbitrary right-of-way charges taken by States for permits to lay fibre,
etc., and Indian telcom are currently saddled with a debt of around $60 billion.
This has resulted in private sector consolidation, with further consolidation being
undersirable.
Recently, RBI issued a directive to banks to closely monitor the stress in telecom
accounts, as around 80 per cent of the debt is held by domestic banks. While the
industry has welcome the move, the government needs to address the other issues
plaguing the sector as well. Legislation is urgently required from the centre to
ensure that States takes a lower right-of-way permission charge. There is also a
need to review the existing tariff structure and to reconsider the decision to revise
the interconnection charges to zero. Other measures requiring relief include debt
restructuring, cut in licence fee and spectrum charges, etc., and efficient release
of locked up GST input tax credit.

Self-Assessment Exercise B
1) Describe any three features of the transport infrastructure in India.
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2) State the principal weaknesses of the transport sector in India.
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3) Examine the role of the communication infrastructure in the growth of the
Indian economy.
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Determinants of Growth
4.7 ENERGY RESOURCES
The need for energy in a developing economy can hardly be over-emphasised. It is
a basic input required to sustain economic growth and to provide basic amenities
of life to the entire population of a country. It is energy which is the dividing line
between a subsistence economy and a highly developed economy. In the affluent
United States, an average American consumes nearly 20 times as much energy
as an Indian does in our country. (Annual consumption of commercial energy in
per capita in India is estimated at 682 watts as against 14035 watts in the USA).
Empirically, it has been established that “inadequate supplies of energy can inhibit
development and that assurance of an adequate supply and mix of energy inputs
can be a great stimulus to development.”
India with installed capacity of 147.0 mn.kw, is the fifth largest producer of
electricity in the world, behind USA, China and Russia. Energy in India is
produced from different sources; these can be classified into two groups:
(i) Commercial sources – like thermal power, hydel power, power from oil, gas,
nuclear, etc.
(ii) Non-commercial sources – like firewood, dung-cakes, etc.
Of the two sets of sources, commercial sources occupy a more prominent
position. Thermal power accounts for about 81 per cent, hydro power for about
13 per cent, and nuclear for about 3 per cent. The bulk of the commercial energy
is consumed in the industrial sector followed by the transport and household
sectors whereas a large part of the energy requirement in the rural and domestic
sectors is met from non-commercial sources. It is expected that the relative
share of non-commercial energy will fall still further over the next decade. By
that time energy requirements of the economy would also multiply by two to six
times depending upon the rate of growth of the economy. Even if India achieves
only an annual average rate of growth of 5 per cent, the per capita consumption
of energy would multiply by about 2.5 times. It, therefore, becomes crucial to
identify the sources of commercial energy.
4.7.1 Sources of Commercial Energy
There are several sources of energy for an economy. We discus some of these
sources below.
a. Coal
The Ministry of Coal’s recently released Vision 2025 document estimates the
total amount of extractable coal in India to be about 52 billion tonnes. Without
improvements in coal technology and economics, the existing power plants and
the new plants added in the next 10-15 years might consume nearly all of the
extractable coal in the country over the course of their 30 to 40-year life span.
Coal is the largest naturally occurring source of commercial energy in India
and has been one of the principal sources of power production. Presently, coal-
based thermal power stations (including nuclear) contribute about 75.0 per cent
of the total power generation. The energy policy of the country provides that
to the extent practicable and economical, coal will be the principal source of
commercial energy. It is worth mentioning that the use of coal is on decline in
advanced economies, because it inflicts huge environmental costs.

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 Economic Infrastructure

Fig. 4.3: Coal Energy

India’s coal reserves are mainly clustered around a belt extending over the
western part of West Bengal, Jharkhand, Orissa, north-eastern and central
Madhya Pradesh, the eastern fringe of Maharashtra and the northern extremity
of Andhra Pradesh. There are also some scattered deposits in Assam. The total
reserves of coal are estimated at 267 billion tonnes and proven reserves at 106
billion tonnes. Of these, about 27 per cent are of coking variety and 73 per cent
of non-coking variety. Because of the limited availability of coking coal, its use
is being limited to metallurgical purposes. The non-coking coal available in the
country is generally suitable for power generation.
The country has some lignite and tertiary coal deposits also. The total lignite
reserves are estimated at about 21,000 million tonnes; the reserves of tertiary
coal are estimated at about 900 million tonnes.
The coal sector is constrained by supply limitation, inadequate drilling capacity,
absence of a progressive regulatory framework, minimal private participation,
high turnaround time and long gestation periods in getting clearances for mining
projects. Available coal is of a low calorific value which enhances wastages and
adversely affects generation efficiency of power projects. Analysts estimate that
one tone of imported high-grade coal is equivalent to 1.56 tonnes of domestic
coal, which has high ash content.
There is a need to attract investments in making available dedicated cargo vessels
and modern and exclusive deep-sea coal terminals. In addition, the sector has
to embark on a phase of climate change related research and development and
incorporate clean technologies.
The long-term growth of the coal sector requires a confident and renewed mindset
in developing coal resources through decontrol of the coal sector, listing of Coal
India on the capital markets, establishment of an independent regulator and a
level playing competitive environment, which supplements the framework of the
holistic energy and infrastructure sector in India.
b. Oil (Petroleum)
The second half of the present century may well be called the oil age. In 1950, 75
Determinants of Growth the world oil consumption was only 650 million tonnes whereas by 1973 it had
increased to nearly 3,000 million tonnes. In 1973 there took place a sharp upward
revision of crude prices by the oil-producing countries (a large number of whom
organised themselves in the Organisation of Petroleum Exporting Countries or
OPEC in short. OPEC dominated the market by producing two-thirds of world
oil production and over 90 per cent of net exports. Presently, 11-member OPEC’s
share in oil production has come down to just over a quarter of global production;
their share in total world’s exports stands at about 55 per cent.) The demand for
crude oil being inelastic but persistently increasing, a rise in its prices blew up
what came to be known as an international oil crisis. India was no exception. Ever
since oil exploration work in India has been stepped up, an aggressive campaign
has been mounted to discover oil and gas in the on-shore as well as offshore areas.

Fig. 4.4: Country-wise Oil Reserve

Another recent development of concern for policy-makers is that the number
of crude oil futures and options contracts have increased manifold. These have
led to significant speculation in the oil market. With increased futures trading
and contracts, the control of crude pricing has moved from OPEC to banks and
markets that deal with futures trading and contracts.
Recent Initiatives
The dependence on imported crude has led to focussed attention on energy
security. The various strategies being pursued for achieving energy security
include the following:
(a) Increasing exploration efforts through the New Exploration Licensing Policy.
Product sharing contracts have been signed for 100 blocks.
(b) Exploring in new areas, especially in deep water and difficult frontier areas,
and also exploring in the deeper layers of the producing fields.
(c) Developing faster the newly discovered fields and stepping up the use of
new technologies for seismic surveys, work over, stimulation operations,
drilling of wells, etc. in producing areas.
(d) Improving the recovery factor from existing major fields by implementing
Enhanced Oil Recovery (EOR)/Improved Oil Recovery (IOR) schemes.
76 (e) Acquiring acreages abroad.
(f) Tapping alternative sources of energy such as Coal Bed Methane, Underground Economic Infrastructure
Coal Gasification and gas hydrates.
(g) Substituting fossil fuels in part by blending with hydrogen and biofuels like
ethanol and bio-diesel.
Other initiatives include: (i) creating a strategic reserve of 45 days (against 15-20
days of operational reserves), and (ii) taking oilfields on lease in countries like
Yemen, Sudan and Russia. The strategic reserve will be stored in non-porous
granite rocks on the west coast. The rocks will be blasted to create tanks that
will be below the water table.
c. Natural Gas
Natural gas has aptly been termed as the ‘Prince of Hydrocarbons’. It occurs
either as associated gas or free gas. Associated gas is produced from underground
reservoirs along with crude oil and the level of production depends entirely on
the level of crude oil production. Contrary to that, free gas, though occurring in
the underground reservoirs, is not associated with crude oil and can be produced
as required. It has the advantages of convenience and efficiency in use and is
environmentally benign.
Gas offers both technical and economic advantages, such as follows:
(i) elimination of expensive fuel stocking facilities in the station layout,
(ii) total absence of combustion wastes such as ash, slay and soot and apparatus
of plant for their removal, resulting in savings in operating and capital costs,
(iii) absence of pollutants,
(iv) more exact measurement of fuel use and finer control of excess combustion
air,
(v) combustion chamber boiler size and that of ancillary machinery, specially air
fans, can be reduced, for the same boiler rating compared with equivalent
coal fired boilers,
(vi) elimination of sulphur products and the resulting corrosion danger in boiler
terminal apparatus, and
(vii) capability of natural gas fired boilers to operate as load-modulating units
on electrical network.
Natural gas can be used for both domestic and industrial purposes. It finds
application in the power, fertiliser and petrochemical industries. While
government policy in the past has favoured the reservation of natural gas for
fertilisers, petrochemicals and other non-fuel uses, the picture on the supply side
and in terms of the potential demand for natural gas has changed substantially
in recent years.
d. Hydro Power
Hydro-electric power plays a major role in the field of power development in
the country. Its present contribution to the total electricity generation is about 15
per cent. Among others, there are at least five reasons why hydro-power should
be promoted.
• Peaking capacity: It is the best option to meet the peaking requirements of
the country’s demand. Gas, while eminently suitable for addressing peaking
demand, is constrained, as seen earlier.
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Determinants of Growth • Carbon footprint: Hydro power provides an effective mitigant to counter the
high carbon footprint embedded in fossil fuel usage.
• Energy security: Nothing can take away the need to reduce the dependence
on sources outside the country.
• Multi-purpose benefits: Hydro projects can provide multi-purpose benefits
to the country with benefits accruing for both irrigation and flood control.
• Life-cycle: Economically, these plants are far more attractive on account
of their longevity and limited maintenance requirements. Bhakra Nangal
remains a shining example of this.
Limitations
(i) The regions possessing large hydro-power resources do not have enough
demand for power to warrant development of the hydro-power resources
on a large scale.
(ii) Storage hydro-power stations with large capacities have high initial capital
requirements.
(iii) Performance of the hydro-power stations has been seasonally variable.
However, notwithstanding these limitations, the country has a sizable
quantum of untapped hydro resources, and there is a considerable scope
for development of hydro projects. In view of the intrinsic advantages of
hydro resources, they warrant development to the maximum extent possible.
In areas where adequate hydel resources cannot be developed, thermal
generation will have to be resorted to.
India has also entered into civil nuclear cooperation agreements with Argentina,
Britain, Canada, France, Kazakhstan, Mongalia, Namibia, Russia and the US.
e. New Sources
A few new sources of energy are nuclear energy, gobar gas, solar energy, wind
power and geothermal energy.
(i) It was largely in response to Homi Bhabha’s assertion that “no power is more
expensive than no power” (i.e., power at any cost is better than no power),
nuclear power generation was initiated in India in year 1969. Since then,
India has acquired all the capabilities needed to pursue this vision, from basic
research, plant designs, equipment manufacture, heavy water manufacture,
fuel fabrication, plant construction, operation and control systems to fuel
reprocessing. The energy potential available from the nuclear fuels is much
more than that from the coal deposits. As a matter of fact there is no other
energy source that gives large amounts of power using a small amount of
fuel and space. While India is amongst the top 10 countries of the world in
terms of production of electricity by hydro, coal, oil and gas, it is nowhere
near the top 10 with respect to nuclear power generation. It generates only
4,000 MW from this source. For a large country like India, this is an anomaly
in need of correction. In view of this, India is building up six new nuclear
plants and plans to achieve capacity of 63,000 MW by 2030. (The latest plant
located at Kundankulam (Tamil Nadu) went in operation on September 13,
2012) amidst protests over safety issues).
(ii) Gobar gas plants were designed as early as 1962; but they acquired
significance only after 1974-75. Presently, there are more than 20.00 lakh
such plants in operation.
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(iii) Solar energy is non-polluting, abundant, widespread and inexhaustible. It is Economic Infrastructure
increasingly being used for varied purposes, such as water heating, distillation
of water, timber seasoning, etc. Towards the end-2010, India launched the
National Solar Mission with the aim to source 20,000 MW of electricity by
2022.
(iv) Wind Energy farms do not require large investments, nor do they need heavy
operation and maintenance costs. The Global Wind Energy Councils report
places India at fifth position in wind power generation. Pilot projects are
also on to tap tidal energy and ocean energy.
4.7.2 Sources of Non-Commercial Energy
Sources of non-commercial energy include fuel-wood, agricultural waste and
animal dung. According to the Working Group on Energy Policy, the relative
proportion of the three sources is 65 per cent, 15 per cent and 20 per cent
respectively. About 82 per cent of non-commercial energy is used in the domestic
sector. For the rural households, non-commercial energy accounts for more than
80 per cent of the total energy consumption; for urban households the proportion
is about 51 per cent.

4.8 ENERGY PROBLEM IN INDIA

By ‘energy problem’ we mean the problem of providing fuels or energy in its
various forms at reasonable cost to those who need them, wherever they are. At
present, India faces an energy shortage of 6.7 per cent and a peak load shortage
of 2.3 per cent. Given the estimated elasticity coefficient at 0.95, an annual 9 per
cent growth in GDP would translate into 7.2 per cent annual growth in electricity.
In order to meet that demand, our power generation capacity would have to
increase more than six times by the year 2032.
That the overall energy scene is none-too-happy is evident from the reduced level
of self-sufficiency in oil, the yawning gap between power demand and supply,
the declining share of hydel power in total power generation, the increasing
dependence on coal imports and the insignificant commercialisation of non-
traditional sources of energy.
As of now, the major features of the energy problem in India are as follows:
The various energy sector policies are not consistent.
(i) Freight is equalised for oil products but not for coal. This leads to distortion
in choice of fuel and industrial location.
(ii) Even the equity principle is not followed in pricing.
(iii) There are serious distortions in the pricing of most fuels. Thus, bulk LPG
costs more than double the international price, naptha for fertilisers costs a
third less, high-speed diesel costs around a third more and kerosene costs half
the international price. Natural gas, too, is priced at below its international
price, leading to a higher demand.
Energy Policy
For a healthy development of the power sector, the following objectives have
to be met:
(i) Minimise investment costs to enable better utilisation of available financial
resources;
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Determinants of Growth (ii) Minimise net outflow of resources, especially foreign exchange;
(iii) Minimise costs of energy production to bring about economies in power
supply and keep power tariff at affordable levels without having to resort
to heavy and unsustainable subsidisation;
(iv) Maximise security of power supply and insulate from external and
international events and catastrophe.
In pursuance of these objectives, the various measures taken by the State can
be divided in two parts, viz., (a) energy pricing measures, and (b) non-pricing
measures.
A. Energy Pricing
Policies adopted in India have generally aimed at the following:
(i) Meeting the maximum energy needs of low income consumers;
(ii) Encouraging the shift from oil products to domestically produced fuels;
(iii) Providing pricing subsidies to sectors such as agriculture and specific
industries where energy prices for consumers were held down in order to
provide enough margin between output price and the costs of inputs;
(iv) Permitting price stability and avoiding frequent and abrupt adjustments;
(v) Prices should be left to be determined by administrative fiat. This should
also promote rational use and conservation of energy.
The overall trend is towards greater efficiency in pricing and recent pricing
decisions have certainly passed on the burden of increased import prices fully
and, by and large, equitably to all categories of producers.
B. Non-Price Measures
Non-price measures instituted immediately after the first oil price shock relied
largely on allocation measures.
(i) The government concentrated immediately on substitution of heavy fuel oil
(furnace oil) by coal whenever this was technically feasible.
(ii) Efforts have also been made towards regulation and management of energy
demand, as also to improve the efficiency of energy use in different sectors
of the economy.
(iii) On the supply side, efforts have been intensified for larger production of
both crude oil and refined products, as also of alternative sources of energy,
both conventional and non-conventional.
(iv) The other important steps have been:
– Improving the existing utilisation of assets.
– Reducing the transmission losses.
– Add power generation through private sector.
– Low voltage equipment sales are largely to industrial sector and public
utilities in India. Growth of low voltage equipment industry is related to:
(a) level of investment in the power sector and availability of electricity
in India, and (b) level of investments and growth in the industrial sector
in India.

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(v) In 2002, the Accelerated Power Development and Reform Programme was Economic Infrastructure
launched. It has since become the focal point of reforms in the distribution
segment.
(vi) Power Grid Corporation in early 2014 has completed the National Power Grid
Project. Under this project all the existing power grids have been joined to
form a national grid. This will be accessible from any point in the country.
It will shift excess power to power-deficit States.
(vii) In early-2004, India Power Fund (IPF) was launched with the aim to:
– facilitate expeditious financial closure of power projects.
– accelerate investment in power sector.
– promote competition in line with Electricity Act, 2003.
(viii) The government has unveiled a hydrogen economy plan that envisages a
million hydrogen-fuelled vehicles on India’s roads by 2020.
In February 2012, the government brought out action plan for power reform.
It lays emphasis on the following: (i) Distribution reform to be expedited with
active involvement of states, (ii) Cost variations due to fluctuations in fuel prices
to be passed through, (iii) Rating methodology of utilities to enable lenders to
decide, (iv) Distribution franchise on the line of Bhiwandi in Maharashtra to be
promoted across India.
The government has exempted since February 2012 the power sector companies
from going through the auction route for the allocation of coal blocks for captive
use. However, for users other than public sector companies, the competitive
bidding method would replace the current practice of allocating blocks for notified
capture use.
Non-Conventional Energy
While the strategies discussed may help us see through to meet our basic energy
needs in the short and medium term, it must be recognised that our hydrocarbon
reserves are not going to last indefinitely. In fact, at current rates of production,
our proven oil reserves may hardly last out for another 20 to 30 years, (and even
less if the rate of production is stepped up). Hence, it is imperative that along
with other countries, we will need to participate in developmental work on
commercialising non-conventional renewable sources of energy such as solar
energy, wind power, ocean, bio-mass, geo-thermal energy, etc. Power generation,
based on non-conventional energy sources, has limitations of capacity but has
their own utility for small ratings. Most of these plants are totally pollution-free.
Specialised organisational and management skills are not called for. Our country
is ideally situated to harness a large quantum of such energy sources provided
economically feasible solutions are evolved to technological problems currently
faced in exploiting these exhaustible sources.
Among all these sources, solar energy – a new source of power – is being seen
as source of future to lead the world to a low-carbon future and, thus, away from
the looming climate crisis. It has big objectives.
First, it has to become cheap so that it can achieve grid parity and compete
with the dinosaur in the market: coal and oil. This can only happen when its
deployment is greatly scaled up. Second, it has to reinvent green growth. This
is why solar energy has been “sold” as an alternative industry, which will add to
employment. It is the economy of the future. Third, it has to secure need of the
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Determinants of Growth most energy-poor – in other words, this relatively expensive and certainly most
modern energy system should reach the poorest millions living in darkness. This
would mean cutting the cost of supply, building networks to distribute and doing
all that has not been done before. The Government has already initiated action
on this front. A threefold strategy has been pursued; these include:
(i) providing budgetary resources from the government for demonstration
projects;
(ii) extending institutional finance for commercially viable projects, with private
sector participation and external assistance;
Fourth, promoting private investment through fiscal incentives, tax holidays,
depreciation allowance, facilities for wheeling, power for the grid and
remunerative price for the power supplied to the grid.

Self-Assessment Exercise C
1) Mention the principal sources of energy in the Indian economy.
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2) Point out the principal sources of non-conventional energy in India.
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3) Bring out the principal features of energy problem in India.
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4.9 LET US SUM UP

India has been riding on fast growth rate for some time. The pandemic put Strong
brakes on this process. We are ready to push up the growth rates so That we
compensate for the lost time. In this endeavour infrastructure sector is poised to
play a critical role. Huge efforts are on way to ensure that growth process is not
hindered by inadquacies in the infrastructure sector.

4.10 KEY WORDS

Infrastructure: It refers to those services and structures that help in the growth
of directly productive activities like agriculture and industry.
Economic Infrastructure: It is directly related to the needs of production sectors.
Social Infrastructure. It is concerned with the supply of such services as meet
the basic needs of a society.
Public Goods: Two characteristics of public goods are important: (i) non-
excludability and (ii) non-rivalness. The consumption of public goods cannot be
restricted because of externalities and hence are available for use to everybody
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without charge.
Externalities: Effects of a private action of society; effects may be positive or Economic Infrastructure
negative.
Monopoly: A market situation in which there is only a single producer of a good
or a service.
Commercialisation of Infrastructure: To treat infrastructure as private goods,
and to restrict their use to those persons who are able to and willing to pay for
these services.

4.11 TERMINAL QUESTIONS

1. What is meant by ‘infrastructure’? Highlight the characteristics of
infrastructure.
2. Distinguish between economic infrastructure and social infrastructure.
Discuss the role of infrastructure in the growth process of an economy.
3. Briefly describe the features of infrastructure. Should there be private
participation in development of infrastructure sector?
4. Highlight the shortcomings of the transport sector in India.
5. Recent growth in the telecommunications has opened up huge opportunities
for growth in the Indian economy. Discuss.
6. Distinguish between conventional and non-conventional sources of energy
in India.
7. Solar power is fast emerging as a source of energy. Discuss.

FURTHER READINGS
Dhingra, I. C., Resource Base of the Indian Economy, Manakin Press (New
Delhi, 2020)
Government of India: Economic Survey, Recent Issue.
Annual Reports of concerned Ministries of the Government of India

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