Infrastructure Projects & Economic Growth

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A quick glimpse of Good infrastructure and its impact in society is shown below (Courtesy : www.bostonfed.org)

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The table above highlights the positive indirect impact of the infrastructure on the society.

Comparison of India and China from Year 1990:

China and India are on extreme ends when it comes to infrastructure spending. China's spending on roads and power exploded since late 1990s, India did not care much about the spending on the infrastructure.

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Naturally the result is clearly visible in the multifold GDP growth of China when compared to India, especially from the 1990’s when they started investing in their infrastructure.

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Spending on infrastructure is considered wise when it continues to benefit economic output in the long-term. It is a high-risk and capital intensive investment, creating Long term assets with high Sunk-costs. Investing wisely in infrastructure becomes critically important for any economy.

Infrastructure capital is an input into aggregate production, but it comes at the cost of reduced investment in other types of capital. So, we should seek an optimal level of investment in infrastructure. If the investment is set too high on infrastructure that might divert the funds we have for spending in other growth related projects which might in turn hamper the growth in a different way.

Increasing government spending during periods of economic weakness to offset slower private-sector spending has long been an important policy tool. One form of government spending that has received a lot of attention is public investment in infrastructure projects. One criticism of public infrastructure programs is that they take a long time to put in place and therefore are unlikely to be effective quickly enough to alleviate economic downturns. But, the short-run effect is consistent with a traditional Keynesian channel in which output increases because of a rise in aggregate demand, combined with slow-to-adjust prices.

In Summary:

Spending on infrastructure will drive growth in emerging markets, where an insufficient investment in infrastructure has known to be creating negative impact; in more developed economies, excessive infrastructure investment will have little or no added value. The infrastructure challenge won't be solved overnight, but the National Infrastructure Plan is an important step in the right direction.