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Economic growth in India: the role of

physical and social infrastructure
a b
Ranjan Ku Dash & Pravakar Sahoo
a
Indian Council for Research on International Economic Relations
(ICRIER) , New Delhi‐110003, India
b
Institute of Economic Growth (IEG) , Delhi University ,
Delhi-11000, India
Published online: 24 Feb 2011.

To cite this article: Ranjan Ku Dash & Pravakar Sahoo (2010) Economic growth in India: the role
of physical and social infrastructure, Journal of Economic Policy Reform, 13:4, 373-385, DOI:
10.1080/17487870.2010.523980

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 Journal of Economic Policy Reform
Vol. 13, No. 4, December 2010, 373–385

Economic growth in India: the role of physical and social infrastructure

Ranjan Ku Dasha and Pravakar Sahoob,*
a
Indian Council for Research on International Economic Relations (ICRIER), New Delhi-110003,
India; bInstitute of Economic Growth (IEG), Delhi University, Delhi-11000, India
Journal
10.1080/17487870.2010.523980
GPRE_A_523980.sgm
1748-7870
Original
Taylor
402010
13
Dr
pravakarfirst@[Link];
00000December
SahooPravakar
&
and
ofArticle
Francis
Economic
(print)/1748-7889
Francis2010
Policypravakar@[Link]
Reform
(online)

We investigate the role of physical and social infrastructure in economic growth in India
after controlling for other important variables such as investment, labour force, and
trade, using the Two-Stage Least Squares (TSLS) and Dynamic Ordinary Least Squares
(DOLS) techniques, for the period 1970 to 2006. In this context we develop a composite
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index of physical infrastructure stocks and examine its impact on output. We find that
physical and social infrastructures have a significant positive impact on output apart
from gross domestic capital formation and international trade. Further, the causality
analysis supports the results, revealing unidirectional causality from infrastructure
development and human capital to output growth in India.
Keywords: India; infrastructure; output; TSLS and DOLS

1. Introduction
India has become one of the fastest growing countries in the world after China and it needs
to maintain the growth momentum in a sustainable manner to improve the overall standard
of living and reduce poverty. The policy makers in India have reiterated time and again the
need to improve the investment climate in the country in order to drive growth by creating
a world-class business environment. The trade and transaction costs are crucial for the
investors in the competitive globalized world economy and many studies have found that
lack of an abundant and quality infrastructure is one of the major reasons for high transac-
tion costs, affecting a sustainable high growth rate. Infrastructure development, both
economic and social, is one of the major determinants of economic growth, particularly in
developing countries such as India. The role of infrastructure development in economic
growth has been well recognized in the literature (Aschauer 1989; Easterly and Rebelo
1993; World Bank 1994; Röller and Waverman 2001; Calderón and Servén 2003; Canning
and Pedroni 2004; Sahoo and Dash 2008, 2009). Further, investment on physical and social
infrastructure positively affects the poor directly and indirectly in multiple ways (World
Bank 1994; Jones 2004; Estache 2006). Infrastructure development is one of the major
factors contributing to overall economic development in many ways, such as (i) direct
investment on infrastructure creates production facilities and stimulates economic activities;
(ii) it reduces transaction costs and trade costs, improving competitiveness; and (iii) it
provides employment opportunities and physical and social infrastructure to the poor. In
contrast, the lack of infrastructure creates bottlenecks for sustainable growth and poverty
reduction.

*Corresponding author. Email: pravakar@[Link]

ISSN 1748-7870 print/ISSN 1748-7889 online

© 2010 Taylor & Francis
DOI: 10.1080/17487870.2010.523980
[Link]
 374 R.K. Dash and P. Sahoo

Investment climate surveys on doing business in India repeatedly show that the limited
and poor quality of infrastructure facilities acts as a major impediment to business growth
in India. Similarly, improvement in social infrastructure, such as education and health, can
sustain the service-led growth that depends mainly on the availability of skilled and produc-
tive human power. Social infrastructure, such as education, health, and housing, is essential
to promote better utilization of physical infrastructure and human resources, thereby leading
to higher economic growth and improving quality of life (Hall and Jones 1999; De and
Ghosh 2003). For example, Hall and Jones (1999) argue that international differences in
levels of output-per-worker are determined by differences in human capital, physical and
social infrastructure. Further, Wagstaff (2002) noted that up to 1.7% of annual economic
growth in East Asia between 1965 and 1990 (about half the total GDP increase for the
period) has been attributed to massive improvements in public health and education.
Against this backdrop, there have been concerted efforts in recent years to improve both
physical and social infrastructure facilities in India.
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The People’s Republic of China (PRC) and East/Southeast Asian countries have made
rapid improvement in their macroeconomic situations, investment, exports and employment
over two and half decades because of a huge investment in physical and social infrastructure
(Straub et al. 2008). Indian policy makers realize that any credible efforts for sustainable
economic growth in India must involve substantial upgrading of infrastructure investment
and provision of quality infrastructure facilities. India has many advantages to offer to
potential investors, including high and steady economic growth, single-digit inflation, vast
domestic markets, a growing number of skilled personnel, an increasing entrepreneurial
class and constantly improving financial systems, including expanding capital markets.
However, provision of quality infrastructure would only enable India to reap these benefits.
In this context, examination of the precise economic contribution of infrastructure to output
growth in India would be of great use to policy makers and researchers.
The analysis of the present study not only focuses on the stock of physical infrastructure
but also on the impact of human capital on output on the basis of endogenous growth theo-
ries. A study that focuses on India is a contribution to the literature as there are hardly any
systemic studies on the impact of infrastructure development on output growth in India.
Further, most of the previous studies have taken only public expenditure/infrastructure
investment as the proxy for infrastructure, which may not be right given the lack of gover-
nance and poor outcomes of infrastructure investment in developing countries such as
India. Similarly, previous literature on the growth effects of infrastructure focuses on one
single infrastructure sector/indicator. Unlike other studies, where bivariate analysis between
infrastructure indicator(s) and output has been used to show the link between output growth
and infrastructure, the present study develops a composite index of stock of leading physi-
cal infrastructure indicators to examine the impact of infrastructure development on output.
The present paper takes care of issues of reverse causation and a spurious correlation due to
the non-stationarity of the data and complements existing studies, which focus mainly on
developed economies, by evaluating the role of infrastructure for the case of a developing
economy, i.e. India.

2. Macroeconomic performance and infrastructure development in India

Before examining the contribution of infrastructure development to economic growth in
India, it is appropriate to review the macroeconomic performance and infrastructure facili-
ties over a period of time. India has been consistently implementing economic reforms,
emphasizing a market economy and integrating with the rest of the world. As a result, India
 Journal of Economic Policy Reform 375

experienced higher economic growth and better macroeconomic performance during the
1990s.
The higher growth rate in India since 1991 was accompanied by substantial growth in
the service sector and marginal improvement in industrial sectors. Per capita income growth
also improved substantially in India during post-reforms period. Other important macro
indicators, such as gross domestic savings, gross domestic capital formation, and indicators
on the external sector, such as the current account balance, foreign exchange reserves and
balance of payments, have also improved during the post-reform period. Overall, there has
also been a positive movement in most of the macro indicators, except the fiscal deficit, both
on the domestic and external sector front. Indeed, in recent years, India has been the fastest
growing country in the world after China.
However, for India to maintain the growth momentum, it is essential to strengthen
infrastructure facilities such as transportation, energy, communication, and so on. Table A1
(see Appendix) reports the physical transport, telecommunication, information and energy
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infrastructure indicators for India vis-à-vis other developing countries. India lags behind
other developing countries except other South Asian countries, such as Pakistan, Sri Lanka
and Bangladesh, in almost all indicators. Similarly, infrastructure and business indicators
of India vis-à-vis other East and South East Asia countries are presented in Table A2 (see
Appendix). With the exception of Singapore, no country in the region is performing well in
the overall infrastructure quality index. Singapore has a score of 6.6 out of 7, indicating a
high level of infrastructure, followed by Republic of Korea with a score of 5.6. PRC has a
score of 3.6, which is higher than most of its counterparts in the region but is not as high as
Singapore or Republic of Korea. Although India has managed to receive a score of 3.1,
there are huge differences in terms of the number of days required to start a business. In
India, it takes about 80 days to start a business, whereas in smaller economies, such as
Bangladesh and Pakistan, it takes much less time. Similarly, India lags behind in providing
basic infrastructural facilities compared with many other countries in South Asia and East
Asia. India is far behind in indicators such as secondary school enrolment, life expectancy,
per capita health and education expenditure and hospital beds per thousand population.
More importantly, the improvement in all these indicators over time for India is far from
satisfactory compared with other countries. Infrastructure demands strong planning, coor-
dination, decentralization, private participation and commercialization of service providers
rather than a top-down approach. Some of the major issues for infrastructure development
in India include public–private partnerships; budgetary allocation; infrastructure financing;
fiscal incentives and tariff policy.
In recent years, the Indian economy has been showing signs of overheating because of
basic infrastructure constraints, both physical and human. Clearly, there is a wide gap
between the potential demand for infrastructure for high growth and the available supply1
(IIR 2006). In this context, the government is also planning for huge investment in infra-
structure along with private investors. As there exits a huge infrastructure deficit and there
is a pressing need for improving infrastructure investment, a proper study examining the
exact and dynamic relationship between output growth and infrastructure development in
India would be useful for both academicians and policy makers.

3. Theoretical framework, infrastructure index and data sources

Since the objective of the paper is to examine the effect of infrastructure stocks on growth,
we use a general production function framework with infrastructure stock as an additional
variable along with capital and labour
 376 R.K. Dash and P. Sahoo

Yt = f ( Kt , Lt , It ) (1)

where Yt is gross output produced in an economy using inputs such as capital (Kt) and labour
(Lt) and supporting infrastructure (It).
However, trade theories (Kruger 1975; Bhagawati 1988) suggest that free trade enriches
the nations in various ways. Subsequently, the economic growth literature triggered by the
endogenous growth theory (Grossman and Helpman 1990; Barro and Sala-i-Martin 1995)
emphasizes international trade in achieving a sustainable rate of economic growth by
increasing labour productivity, generating greater capacity of utilization, bringing more
technological progress and opening up more employment opportunities. There is also
empirical evidence of trade-led growth in South Asia and India (Nataraj et al. 2001; Parida
and Sahoo 2007). Following these studies, we include variables such as trade openness and
exports in the production function. In addition, social infrastructure, such as education,
health and water and sanitation, is also important for economic growth (Barro 1991). In
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order to assess the impact of human capital on growth, we consider public expenditure on
health and education.2 Higher public expenditure on social infrastructures induces more
literacy, better health and manpower skill, which leads to higher productivity and growth.
Thus, the new production function is as follows

Yt = f ( Kt , Lt , It , Ttt , EXPhet , IMt ) (2 )

where Ttt implies total trade and EXPhet is public expenditure on health and education.
We have also considered another health indicator, infant mortality (IM). Thus, the output
variables we consider in this study are real GDP. Trade variables are real total trade
(export + import) and real total exports. The present study uses gross domestic capital
formation3 (GDCF) as a proxy for capital. Labour force stands for the total active labour
force available. The empirical approaches to examine the impact of infrastructure on
growth uses a variety of definitions of infrastructure development, such as infrastructure
investment or some indicators of physical infrastructures. However, we have made a
composite index of major infrastructure indicators to examine the impact of infrastructure
on growth.4

Infrastructure indicators
The infrastructure index has been made by using the Principal Component Analysis (see
Appendix). We include major infrastructure indicators such as

(1) per capita electricity power consumption,

(2) per capita energy use (kg of oil equivalent),
(3) telephone line (both fixed and mobiles) per 1000 population,
(4) rail density per 1000 population,
(5) air transport, freight million tons per kilometre,
(6) paved road as percentage of total road.

The eigenvalues and respective variance of these factors are as given in Table A3. The first
factor or principal component has an eigenvalue larger than one and explains over two thirds
of the total variance. There is a large difference between the eigenvalues and variance
explained by the first and the next principal component. Hence, we choose the first principal
 Journal of Economic Policy Reform 377

component for making a composite index representing the combined variance of different
aspects of infrastructure captured by the six variables. The factor loadings for each of the
five original variables are given in Table A4.
Finally we estimate the following equations

ln Rgdpt = α1 + δit + β1 ln Rgdcft + β2 ln Lft + β3 ln Iindext + β4 ln ( RTtt / RExpt )

+β5 ln RExphet + β6 ln Im t + εt (3)

The expected sign of (β1, β2, β3, β4 and β5) is > 0 and β6 < 0; and Rgdp is gross domestic
product, Rgdcf is gross domestic capital formation, Iindex is infrastructure index, RTt
implies trade openness; RExp is real exports; RExphe is real expenditure on health and
education. Im is the infant mortality rate.
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Data sources
Annual data on total exports, total imports, Gross Domestic Product (GDP), per capita
GDP, gross domestic capital formation, expenditure on health and education, infant mortal-
ity, population density and labour force are taken from World Development Indicators CD-
ROM, World Bank (2007) for the period 1970–2006. Real GDP, real per capita income,
real export, real fixed capital formation public expenditure on health and education are
calculated by dividing by GDP deflator. Labour force is taken according to the International
Labor organization (ILO) definition of the economically active population that includes
both the employed and the unemployed. Infrastructure variables considered in this study are
air freight transport (million tons per km), electric power consumption (kWh per capita),
energy use (kg of oil equivalent per capita), and total telephones lines (main line plus cellu-
lar phones) per 1000 population, and are taken from World development Indicators, various
years. Data on rail density (per 1000 population) and paved road as percentage of total road
are taken from CMIE publications.

4. Econometric analysis
Empirical research evaluating the impact of infrastructure on output growth always comes
across the problem of endogeneity. It has been always debatable whether infrastructure
development leads to an increase in productivity, efficiency and competitiveness and
thereby output growth or output growth necessitates overall infrastructure development.
Given this reserve causality and possibility of more than one endogenous variable, we use
the Two-Stage Lease Squares (TSLS) method and Dynamic Ordinary Least Squares
(DOLS) method.5

Granger causality: the vector error correction (VECM) procedure

The vector error correction (VECM) procedure is used to ascertain the direction of causality
between infrastructure development and output. If all the variables are found to be inte-
grated of the same order, the Granger causality (Engle and Granger 1987) line can be used
to see the direction of causality between output and infrastructure development in India.
Since we found both GDP and infrastructure index are integrated of order one (I(1)), we use
a vector error correction mechanism to test the direction of causality. The general model for
Granger causality for I(1) variable is given as.
 378 R.K. Dash and P. Sahoo

p −1 p −1
∆Yt = η + ∑α i ∆Yt −i + ∑ β j ∆X t − j + Θ(Y − κX )t −1 + U t ( 4)
i =1 j =1

p −1 p −1
∆X t = η′ + ∑ γ i ∆Yt −i + ∑δ j ∆X t − j + Φ(Y − κX )t −1 + U t′ (5)
i =1 j =1

where the lagged Error Correction Term (ECM) (Y–κX)t–1 is the lagged residuals from the
cointegrating relation between Y and X (this term is not included in case the variables are
not cointegrated). As Engle and Granger (1987) have argued, failure to include the ECM
term will lead to misspecified models, which can lead to erroneous conclusions about the
direction of causality. Thus, if Yt and Xt are I(1) and cointegrated, Granger causality tests
can be carried out using equations (4) and (5). However, there are now two sources of
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causation of Yt by Xt, either through the lagged dynamic terms ∆Xt if all the βi are not equal
to zero, or through the lagged ECM term if θ is non-zero (the latter is also the test of weak
exogeneity of Y, see Engle et al. 1983). Similarly, Xt is Granger caused by Yt either through
the lagged dynamic terms ∆Xt if all the γi are not equal to zero, or through the lagged ECM
term if Φ is non-zero. Thus, this procedure has the additional advantage that the source of
causation can be identified in the form of either short-run dynamics or disequilibrium
adjustment.

5. Empirical results
The result of estimated long-run coefficients of variables estimated by TSLS and DOLS
methodology are presented in Tables 1 and 2. First we present the TSLS result of estimation
of long-run coefficients of individual variables. Before discussing the second-stage of the
TSLS result, we first analyse first-stage regression.
In the first stage of TSLS, the infrastructure index is regressed on a set of instrumental
variables that affect infrastructure but not the output. However, empirical researchers find
it difficult to find a good instrumental variable for an endogenous explanatory variable (see
Wooldridge 2002) satisfying the underlying conditions. In the second stage, the predicted
values of infrastructure enter as one of the regressors of the output equation. The test for
strength of instruments has been conducted to ensure the robustness of coefficients. We use
four instruments (lagged value of infrastructure index, population density, lagged value of
labour force, and lagged value of infant mortality rate) for the infrastructure index, as used
in previous studies (Calderón and Servén 2004; Straub et al. 2008). We find a strong first-
stage relationship between infrastructure stock and instruments, and the F-test for excluded
instruments validates the instruments.6
Now we discuss the results of the second-stage regression. In particular, we are inter-
ested in whether innovations to infrastructure stocks have a long-run effect on GDP. As
noted earlier, our strategy involves estimation of an infrastructure-augmented income
regression. Following Loayza et al. (2003) we include the following control variables such
as gross domestic capital formation, labour force, expenditure on health and education,
export, infant mortality and trade. Given the importance on contribution of exports and trade
in empirical growth literature, we have taken both exports and total trade alternatively in our
growth estimations. All the estimated coefficients have predicted signs and are significant.
However, labour force is not significant, justifying the availability of abundant total labour
force. As expected (see Table 1) the coefficients of investment, export, and expenditure on
 Journal of Economic Policy Reform 379

Table 1. TSLS: dependent variable LGDP.

Eq. (1) Eq. (2) Eq. (3) Eq. (4) Eq. (5) Eq. (6)
Constant 11.28** 19.79** 23.33** 11.42** 19.38** 22.89**
(6.33) (8.81) (4.99) (6.41) (8.21) (4.43)
Lgdcf (investment) 0.33* 0.19* 0.17 0.30* 0.22* 0.23#
(2.52) (1.99) (1.58) (2.17) (2.01) (1.78)
LLf (Labour) 0.03 0.02 0.02 0.03 0.01 0.01
(1.32) (1.28) (1.09) (1.16) (0.63) (0.62)
LIndex (Infrastructure Index) 0.46** 0.40* 0.46* 0.44** 0.37* 0.50*
(2.94) (2.74) (2.20) (2.89) (2.34) (2.06)
LExp (Export) 0.27** 0.21** 0.23** – – –
(3.57) (3.56) (3.76)
LTt (Total Trade) – – – 0.29** 0.20** 0.22*
(3.66) (2.89) (2.60)
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LIM (Infant Mortality) −0.58** −0.57** −0.59** −

(–3.82) (–3.14) (–3.64) 0.56**
(–2.77)
Lexphe (Exp. On Health and – – 0.14* – – 0.11
Education) (2.09) (1.27)
Adj. R2 0.96 0.98 0.99 0.98 0.98 0.99
S.E 0.04 0.03 0.03 0.04 0.03 0.04
Notes: # significance at 10% level, * significance at 5% level, ** significance at 1% level. Figures in the
parentheses denote t-ratio. All the variables are in real and log (L) values.

Table 2. Dynamic OLS dependent variable LGDP.

Variables Eq. (1) Eq. (2) Eq. (3) Eq. (4) Eq. (5)
Constant 8.47** 20.69** 23.21** 18.94** 5.76*
(4.51) (4.73) (3.67) (4.86) (2.23)
Lgdcf (investment) 0.27* 0.28* 0.46** 0.37** 0.32**
(2.66) (2.24) (3.46) (3.76) (3.04)
LLf (Labour) 0.09** 0.02 0.05* 0.05# 0.06*
(3.19) (1.21) (2.29) (1.81) (2.34)
LIndex (Infrastructure Index) 0.44* 0.55* 0.43* 0.47** 0.41*
(2.71) (2.42) (2.49) (3.47) (2.25)
LIM (Infant Mortality) – −0.46* −0.26 −0.22** −0.52**
(–2.44) (–1.46) (–2.85) (–3.05)
LExp (Export) 0.27** 0.23** 0.19** – –
(3.08) (3.64) (3.29)
LTt (Total Trade) – – – 0.24**
0.25**
(4.44)
(3.71)
Lexphe (Exp. on Health and Education) 0.17* 0.13* – 0.22* –
(2.29) (1.99) (2.34)
Adj. R2 0.98 0.98 0.98 0.99 0.99
S.E 0.03 0.04 0.031 0.028 0.031
D.W. Stat. 1.88 1.49 1.75 1.66 2.17
Sample size 1970–2006 1970–2006 1970–2006 1970–2006 1970–2006
Notes: # significance at 10% level, * significance at 5% level, ** significance at 1% level. Figures in the
parentheses denote t-ratio. All the variables are in real and log (L) values.
 380 R.K. Dash and P. Sahoo

Table 3. Long-run coefficients of individual infrastructure indicators.

DOLS 2SLS
Infrastructure indicators Eq. (1) Eq. (2) Eq. (3) Eq. (1) Eq. (2) Eq. (3)
Electricity power consumption (per capita) 0.188 0.235 0.184 0.197 0.171 0.197
Energy use (kg of oil equivalent per capita) 0.189 0.236 0.185 0.198 0.172 0.198
Telephone 0.146 0.183 0.143 0.153 0.133 0.153
Rail density (population) 0.18 0.235 0.184 0.176 0.171 0.176
Air transport, freight 0.168 0.21 0.164 0.176 0.153 0.176
Paved road as % of total road 0.19 0.24 0.187 0.20 0.175 0.20
Note: The long run coefficient of the individual infrastructure indicators are calculated by multiplying the
infrastructure index coefficient in eqn1, eqn2, eqn3 of TSLS and DOLS estimations with the respective factor
loadings of the individual infrastructure indicator.
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health and education are positive and significant, indicating a statistically significant posi-
tive impact on GDP. At the same time, the impact of infant mortality is negative and signif-
icant, implying that the low levels of standard of living and health facilities have a negative
impact on output growth. More importantly, the long-run impact of infrastructure is positive
(0.46) and statistically significant at 5% level. The results are almost similar with the infra-
structure index, having a positive and significant coefficient of 0.44 when exports are
replaced by total trade.
Similarly, the estimated long-run coefficients of variables by DOLS methodology indi-
cate a significant positive contribution by infrastructure to growth. The estimated coeffi-
cients of investment, export, trade, infant mortality and labour have predicted signs and are
generally significant. Moreover, the long run impact of infrastructure index is positive and
significant, with coefficients varying between 0.4 to 0.5 across different specifications (see
Table 2). As expected, the proxy for human development, i.e. expenditure on health and
education has a positive impact on output in India. The estimation satisfies the various diag-
nostic tests. The long-run elasticity of individual infrastructure indicators varies between
0.14 to 0.24. Infrastructure facilities such as energy use, rail and paved roads are the most
important infrastructures, having maximum contribution to growth (see Table 3).
Overall, the results reveal that, investment, infrastructure stock, labour force, export and
human capital variables, such as infant mortality and expenditure on health and education,
play an important role in economic growth in India. Some of the important results of the
study are (i) infrastructure development in India has a significant positive contribution to
growth; (ii) like physical infrastructure, human capital – such as the infant mortality rate,
and expenditure on social infrastructure, such as health and education – also contributes to
economic growth.
Since the empirical literature on the nexus between growth and infrastructure develop-
ment has been debatable, we look at the direction of feedback by using the Granger causality
(Engle and Granger 1987) methodology. Since GDP and infrastructure index are I(1), we
use the Vector Error Correction Method (VECM) to find causality between the two. It is
found that the causality runs from infrastructure stocks to GDP. The error correction term
is negative and significant at the 1% level, indicating long-run causality from infrastructure
to GDP. However, we do not find a reverse causality running from GDP to infrastructure
(see Table 4). On the other hand, Granger causality between expenditure on health and
education, as the ratio of GDP and growth rate, indicates that causality runs from social
infrastructure to growth.7
 Journal of Economic Policy Reform 381

Table 4. Granger causality between infrastructure and growth.

No. of Θ =0: t-statistic (ECM term) Σβi =0: F-statistic
Direction of Causality Lags (P-value) (P-value)
Infrastructure Development →GDP 1 −2.89** 0.42
(0.00) (0.51)
GDP → Infrastructure Development 1 −1.35 0.76
(0.18) (0.39)
Granger causality between health and educational expenditure (% GDP) and growth
EXPHE →Growth 3 3.78**
(0.01)
Growth →EXPHE 3 0.63
(0.64)
Notes: * denotes significant at 5% level
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6. Concluding remarks and policy implications

In this study, we investigate the role of infrastructure (both social and economic) in
economic growth in India after controlling for other important variables such as investment,
labour force, and trade using the Two Stage Least Square and Dynamic OLS techniques for
the period 1970 to 2006. Unlike other studies, the present analysis develops a composite
index for infrastructure stocks to examine the impact of physical infrastructure on growth
and includes human capital proxied by expenditure on health and education and infant
mortality rate. Overall, the results reveal that investment, infrastructure stock, export and
human capital indicators such as infant mortality rate and public expenditure on health and
education play an important role in economic growth in India. More importantly, we find
that infrastructure development in India has a significant positive contribution to growth.
From a policy prospective, India should place greater emphasis on both economic and social
infrastructure development. In addition, the study also emphasizes on the role of investment
and trade openness for sustaining the high growth momentum in India.
The results are further substantiated by causality analysis. We find unidirectional causal-
ity from both physical and social infrastructure to output growth in India. These results have
serious policy implications, suggesting that there should be utmost importance on infra-
structure development in India to sustain the high growth rate, to improve the standard of
living and eradicate poverty. The development of physical and human capital also needs
attention to improve the ability of workmanship and productivity.

Acknowledgements
The authors thank the anonymous referee and the editor of the journal for useful comments.
However, the usual disclaimer applies. An appendix detailing the measurement of variables is avail-
able from the authors.

Notes
1. According to the India infrastructure Report (IIR), currently around 5% of the GDP is invested in
the infrastructure sector, which needs to be increased to 7% with immediate effect and further to
10% by 2010 to meet the infrastructure demand.
2. Since it is difficult to get compatible and reliable time series data on social indicators, we consider
public expenditure on health and education.
 382 R.K. Dash and P. Sahoo

3. It is important to note that this strategy has been widely used by researchers as it is difficult to
estimate the total stock of capital. Moreover, investment is the addition to the capital stock.
4. We use a composite index of leading physical infrastructure indicators instead of individual infra-
structure indicators as they are highly correlated. For example, the correlation coefficient between
road density and per capita energy use is 0.94, while the correlation between telecom density and
road density is 0.74. Similarly, the correlation between air transport and per capita electricity
power consumption is 0.84. Given the high correlation among different infrastructure stocks, it is
difficult to obtain reliable estimates of the individual coefficients of infrastructure stocks in a
linear regression framework.
5. For details of the analysis on 2SLS, see Wooldridge (2002) and on DOLS see Stock and Watson
(1993).
6. As expected, the level of infrastructure index is positively affected by the level of infrastructure
index in the previous year. Similarly, the lagged value of labour force is positively and signifi-
cantly related to infrastructure stock. On the other hand, lagged value of infant mortality rate is
negatively related to infrastructure stock.
7. We follow Ganger Causality framework (1969) to examine the nexus between government
expenditure on health and education as a percentage of GDP and output growth as both the vari-
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ables are stationary at levels.

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Appendix

Table A1. Infrastructure facilities in India vis-a-vis other developing countries.

Electric power Energy use Paved Total rail Air Air pass. Total
consum. (kg of oil roads route freight transport telphones
(kwh per equi. per (% of Total (’000 sq. trans.(m.t. (’000 (Per ’000
capita) capita) Roads) km) for K.M.) Pop.) persons)
Countries 2005 2005 2005 2005 2006 2006 2006
India 480.5 490.9 62.6 21.5 842.6 40.3 186
Bangladesh 135.5 157.8 9.5 20.22 190.8 17.2 129
Sri Lanka 377.7 476.6 81 14.5 325.4 31.9 366
Pakistan 456.22 490.91 64.7 10.1 426.7 57.14 249
Nepal 69.53 338.45 56.8 0.41 7.21 23.23 592
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China 1780.52 1316.3 81.6 6.84 7692 112.41 631.37

Korea 7778.6 4426.5 76.82 33.69 7751 784.4 1385
Singapore 8358.25 6932.5 100.00 – 7981.8 4578.4 1481.4
Indonesia 509.31 813.8 59.00 – 469.2 143.10 352.5
Malayasia 3262.4 2388.72 78.9 5.07 2597.22 713.98 911
Thailand 1988.1 1587.9 99.17 7.89 2106.5 363.82 754
Source: World Development Indicators, various years.

Table A2. Infrastructure and Business Indictors of India, South, East and Southeast Asia (2007).
Overall Rail road Port Air transport Time required Hiring and
infrastructure infrastructure infrastructure infrastructure to start a firing
quality development development development business* practices
India 3.1 4.5 3.5 4.8 35 3.1
Bangladesh 2.2 2.3 2.4 3 37 4.5
Sri Lanka 3.3 2.8 4.1 4.5 50 3.3
Pakistan 3.4 3.2 3.7 4.2 24 4.7
Nepal 1.9 1.3 3 3.4 31 3.1
PRC 3.6 3.9 4 4.1 35 4.3
Republic of 5.6 5.2 5.5 5.7 22 4.7
Korea
Singapore 6.6 5.6 6.8 6.9 6 5.8
Malaysia 5.7 5.1 5.7 6 30 4.3
Thailand 5.1 3.5 4.7 5.7 33 4.2
Philippines 2.6 1.7 2.8 4.1 48 3.5
Note: Overall infrastructure quality is (1= poorly developed and inefficient and 7= among the best in the world).
The same applies to rail, port and air transport infrastructure. Hiring and firing practices (1= impeded by
regulations, 7= flexibility determined by employers) * No of days required to register a business.
Source: Global Competitiveness Report, 2007–08.
 Journal of Economic Policy Reform 385

Table A3. Eigen values and variance explained by principal components.

Principal components Eigen values % of variance Cumulative variance
1 5.2165 0.869 0.869
2 0.5363 0.089 0.958
3 0.2204 0.036 0.995
4 0.0178 0.003 0.998
5 0.0076 0.001 0.999
6 0.0015 0.0003 1.00
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Table A4. Factor loadings of original values.

Infrastructure variables Factor loadings
Electricity power consumption (per capita) 0.429
Energy use (kg of oil equivalent per capita) 0.431
Telephone 0.334
Rail density (population) 0.428
Air transport, freight 0.383
Paved road as% of total road 0.432