Indian Economy - CMA

Infrastructure and Economic Development in India

The economic development or prosperity of a country depends on the development of agriculture and industries. Further, infrastructure plays a pivotal role in increasing agricultural and industrial production. In this article, we will look at economic infrastructure development in India.

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Economic Infrastructure Development in India

Industrial and agricultural production requires machinery, equipment, skilled manpower, a good management team, energy, banking and insurance facilities, marketing facilities, transport services, and also communication facilities, etc.

All these constitute the infrastructure of an economy. Of these, the infrastructural facilities include irrigation, energy, transport, communications, banking and finance, insurance, science and technology, and also social overheads.

Let’s take a look at the private and public sector’s contribution to the infrastructure facilities in India.

infrastructure development in india

                                                                                                                                         Source: Pixabay

Private Investment in Infrastructure

Over the years, the Indian Government came to a realization that it does not have to maintain the monopoly in infrastructure.

Traditionally, it was the Government’s responsibility to provide infrastructure services for various reasons. Some of these reasons were heavy capital investments, long gestation periods, externalities, high risks, and also low returns on investment.

Learn more about Energy Sector in India here in detail.

Unfortunately, under the Government’s ownership, the infrastructure was proved inefficient and corrupt. Further, in India, the demand for infrastructure always outpaces the supply.

Therefore, in 1991, the Government started attaching high priority to create and enable an environment for private participation in the infrastructure sector.

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Also, a public-private partnership can encourage better sharing of risks, accountability, cost recovery, and also the management of the infrastructure. Here are some important steps that the Government has taken in this direction:

  • In 1997, the Government set up the Infrastructure Development Finance Company (IDFC). Further, it had an authorized capital of Rs. 5,000 crores.
  • The Government announced a tax holiday to companies who develop, maintain and operate infrastructure facilities. These facilities include roads, bridges, new airports, ports, railway projects, and also those dealing with water supply, sanitation, and sewerage projects.
  • Further, there is an income tax exemption on dividend, interest and long-term capital gains earned by companies or finds which are set up to develop, maintain, or operate an infrastructure facility.
  • The National Highways Authority of India (NHAI) Limited now has a higher corpus of (an increase of Rs. 200 crores). This enables it to leverage funds from the domestic as well as international capital markets.
  • In order to channelize domestic savings into infrastructure investments, the Government has enhanced tax rebate limits for investments in shares and debentures offered by infrastructure companies.

Public-Private Partnership (PPP) and Infrastructure

A very interesting thing to note is that while the Government is emphasizing the importance of infrastructure for the economic development of the country, it is cutting back its own investment in the infrastructure sector.

Also, the public-private partnership (PPP) in infrastructure is gaining importance. According to the Economic Survey of 2009-10, PPP projects were found to be highly important.

The report says that PPP projects offer a wide range of benefits in terms of leveraging public capital in order to attract private capital and undertake a larger number of infrastructure projects.

Further, these also help in introducing the private-sector’s expertise and cost-reducing techniques as well as efficiencies in operations and maintenance.

Solved Question for You

Q1. What are the benefits of a public-private partnership project in infrastructure?

Answer: The benefits are:

  • Leveraging public capital to attract private capital and undertaking a large number of infrastructure projects.
  • Introducing the private sector’s expertise and cost-reduction techniques as well as efficiencies in operations and maintenance.
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