Department of Economics, Delhi School of Economics, University of Delhi

Impact of Infrastructure on Productivity: Case of Indian Registered Manufacturing Author(s): DEEPIKA GOEL Reviewed work(s): Source: Indian Economic Review, New Series, Vol. 38, No. 1 (January-June 2003), pp. 95-113 Published by: Department of Economics, Delhi School of Economics, University of Delhi Stable URL: http://www.jstor.org/stable/29793779 . Accessed: 02/02/2013 02:52
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Indian Economic

Review,

Vol. XXXVIII,

No.

1, 2003, pp. 95-113

Impact of Infrastructure on Productivity: Indian Registered Manufacturing

Case

of

DEEPIKA GOEL*
Ram Lai Anand College (Evening), Benito Juarez Road, New Delhi-110021, India

Abstract This on the productivity of infrastructure study is primarily focussed impacts of the provision on the registered manufacturing sector in India. This the cost elasticity is analyzed by estimating a variable of infrastructure cost function model for the inputs. For this purpose we postulate

sector with cost as a function of the prices of the variable manufacturing inputs, levels of output and intermediate infrastructure stocks. Variable labour and include input. capital, inputs is is assumed to be a quasi-fixed Infrastructure since done its by the mainly input provision in the short-run. The cost function model public sector and it cannot be instantaneously adjusted for the of the variable translog cost function and the cost share equations 1965-1999. We have for the used the time data and it series inputs. pertains period are aggregated are used infrastructure variables in this study which, using the Twenty-three estimated consists variable principal explored. infrastructure. also Three component methodology. are economic The alternatives Estimated results alternative aggregate the productivity enhances suggest that infrastructure provision to lower the costs sector and it helps in the sector. Apart from this it effects with respect to the variable inputs. specifications social infrastructure, of the quasi-fixed and infrastructure inputs are

in the manufacturing has several bias

JEL Classification Number: C32, H54

Keywords : Infrastructure; Quasi-fixed; Translog; Productivity

1. INTRODUCTION
after half a century of policy focussed on liberalization and import substituting industrialization, the global trend towards greater new of standards price and product openness has forced the industrial sector to confront As India has entered the new millennium competition. * This
of Delhi.

was done as part ofmy M.Phil dissertationat theDelhi School of Economics, University study
thank Prof. K.L.Krishna, Dr. T.C.A Anant, Dr. Arup Mitra (IEG), Dr. Deb Kusum

(Ramjas College) and Prof. Pulin Nayak for their invaluable guidance and support.

I sincerely

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96 By

Dt

EPIK A G?hl

implementation of economic reforms in 1991, such as, deregulation of domestic industry, liberalizing rules for foreign investment and reducing tariff and non-tariff barriers on imports, the government focussed on an outward looking development strategy. Apart from the focus on external sector, policy changes were also initiated in the industrial sector in July 1991, which may have contributed to restructuring and growth. an upward trend in growth rates in 90fs. After being relatively sluggish in 1993-94, growth in industrial production reached about 12% in 1995 96 as compared to 5.5% in 1993-94. However themore recent performance of the economy Manufacturing sector has witnessed in 1996-97 Since indicates a slowdown in industrial production and decline

in the level of exports.

of GDP

recovery in industrial growth has been an important factor behind the resumption a growth, slowdown in industrial growth raised concerns about the feasibility of high target for annual GDP growth. The slowdown in industrial production and exports may indicate that Indian industry is being constrained both by capacity bottlenecks and by institutional obstacles: Capacity World Development Report (1994, bottlenecks could arise from lacking core infrastructure. infrastructure have identified and others Ahluwalia 1996), problems as a main factor (1991), create significant Such bottlenecks economic the of recovery. sustainability threatening

impediments to the expansion of industrial output. They considerably weaken the supply-side response and the export capacity of the Indian industry.Moreover weak social infrastructure, leading to a lack of skilled labor may be another factor limiting growth and productivity for Indian manufacturing. Improving productivity inmanufacturing is an important challenge in India because without an adequate level of productivity, the country could remain a supplier of cheap-labor goods in global markets. This would hamper advances in living standards and could slow down progress inpoverty alleviation. Moreover an adequate level of manufacturing increase domestic productivity is needed both to attract foreign direct investment and to inmore backward areas. This will ensure a investment so that industrymay be developed more balanced growth pattern in the economy. Infrastructure is generally defined as the physical framework of facilities through which are multiple and goods and services are provided to the public. Its linkages to the economy creates it and affects positive and consumption directly, production complex, because negative spillover effects and involves large inflow of expenditure. standpoint consists of large water as such highways, other transportation facilities, capital intensive natural monopolies and sewer lines and communications system. An alternative version that focuses on the public sector. ownership defines infrastructure, as the tangible capital stock owned by or infrastructure stock into economic World Development (1994) divides Report as electricity, physical infrastructure and social infrastructure. Former includes services such includes latter while water etc, irrigation system, communications, transport, roads, Infrastructure thatmakes more sense from an economics education and health facilities. Other forms of infrastructure may be identified as institutional infrastructure as banking and civil administration. is dominated by the public sector. Because Infrastructure provision investments are lumpy, it is difficult for planners to match the availability

infrastructure of supply of

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Impact of Infrastructure on Productivity

97

infrastructure with demand at all times. Moreover they are usually non-rival and non? in nature, which implies that consumption of a service by one consumer does not exclude other from consuming it and nor does this consumption invokes rivalry on the basis of purchasing power or any other feature. The consumers do not voluntarily pay for these excludable services and these necessarily become an "unpaid input". However government steps in and provides these services through the budget. But quite recently it is argued that government investment in infrastructure has been inadequate, uncertain and inefficient and hence commercialization of infrastructure is important for developing economies to compete with the developed world.

Nevertheless, infrastructure provision enhances the production and distribution network of key sectors in the economy and promotes overall economic growth. In the process they also tend to affect the cost structure and productivity in these sectors, thereby promoting in each of these sectors. growth and development Substantial research on interrelationships and dynamics of production and infrastructure in national and regional economies has been made. Most of this research is based on neo? and Constant Elasticity of classical production function making use of Cobb-Douglas

(CES) production functions. A substantial number of studies have also utilized cost function specifications tomeasure productivity effects of total or specific infrastructure capital on industry and output growth. These approaches come under the econometric modeling methods of measuring productivity growth at firm, industry and aggregate Aschauer economy level.

Substitution

(1989) who examined the relationship between infrastructure and aggregate in the U.S. economy initiated the interest in the key aspects of infrastructure productivity this many studies have been undertaken which either used the development. Following or cost function specification to study this relationship. Some of the function the production (1994), Holtz-Eakin important and the recent studies are by Munnel (1992), Holtz-Eakin Schwartz (1995), Shah (1992), Canning (1993), Nadiri and Mamuneas (1994) etc. Studies for the Indian economic and

economy concentrate upon the link of infrastructure with and the performance of infrastructure at the national and the state level. growth The studies also point out the inter-state disparities in infrastructure in India. Some of the (1991, 1995), Anant et. AI (1994, 1999), Mitra important studies are Joshi (1990), Ahulwalia et. AI (1998), Das & Barua (1998) et. of studies for India, which explore a quantitative in India, with special reference to industrial infrastructure link between productivity and (1988) make an attempt in this direction but they productivity. Elhance and Lakshmanan of dynamic adjustment of infrastructure towards the follow a complicated methodology However there has been an absence equilibrium level. and Mamuneas (1994), this paper tries to assess the impact of Following Nadiri infrastructure provision on the productivity of organized manufacturing sector in India. It makes use of the data for the period 1965-66 to 1998-99. variables In order to carry out this analysis, this study makes use of twenty-three infrastructure indicators of infrastructure using Principal component and develops composite

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98 analysis. These 1. Economic 2. Social infrastructure indices are grouped infrastructure infrastructure into two broad categories:

Deepika

G?hl

Economic infrastructure includes five sectors namely electricity,, banking, irrigation, Social infrastructure includes two sectors education and transport and communications. to construct an health. Both economic and social infrastructure indices are combined aggregate index of infrastructure. of aggregation of infrastructure we By using the Principal Component methodology calculate theweights of individual components of infrastructures in each of the sectors such as electricity, banking, transport, communications etc. (1994), we postulate a variable cost function model for Following Nadiri and Mamuneas themanufacturing sector with cost as a function of the prices of the variable inputs, levels of output and infrastructure stocks. Infrastructure is assumed to be a quasi-fixed input since its provision is done mainly by the public sector and it cannot be instantaneously adjusted in the short-run. The cost function model estimated consists of the variable trans log cost function and the cost share equations for the variable inputs. Three alternative specifications of the quasi-fixed inputs are explored. The alternatives are economic infrastructure, social infrastructure is an aggregate of infrastructure and aggregate infrastructure. Aggregate economic infrastructure and social infrastructure. Impact of infrastructure on the productivity of manufacturing sector in India is analysed we also by calculating the cost elasticity with respect to infrastructure inputs. In addition calculate the factor bias effect and the total effect of infrastructure inputs. is organised as follows: Section 2 provides a survey of literature of infrastructure and productivity in countries to study the impact of infrastructure other than India and the Indian economy. Methodology on productivity is presented in section 3. Section 4 outlines the definitions of the variables used in the study and their data sources. Productivity effects of infrastructure are discussed This paper in section 5. Finally section 6 consolidates the main findings of the study.

2. REVIEW OF LITERATURE: IMPACT OF INFRASTRUCTURE ON PRODUCTIVITY

attempt a review of the studies dealing with the productivity impact of infrastructure and of the studies, which link infrastructure to economic growth with the estimated help of review conducted by Anant et al (2000). Most of the studies have the ascertain these from derived estimates the functions and impact. elasticity production Some recent studies have used the cost function approach to analyse whether the provision of infrastructure helps in reducing the costs in industrial sector or not. The growing interest in infrastructurewas triggered by Aschauer (1989a, 1989 (b)) who and stock and flow of between has considered the relationship aggregate productivity His results 1949-85. in the US economy for the period government spending variables In this section we

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Impact of Infrastructure on Productivity

99

suggest that there is a strong positive relationship between output per unit of capital input, the private labour capital ratio and the ratio of the public capital stock to the private capital
stock.

attempt to assess the empirical contribution of infrastructurecapital to productivity using an explicit model of economic growth and a panel of state level data for forty eight contiguous states in theU.S. economy for the period 1971 Holtz-Eakin and Schwartz (1995) 1986. The authors conclude that the link between infrastructure and productivity growth
remains controversial.

Shah (1992) has utilized a restricted equilibrium framework to analyse the contribution of public investment in infrastructure to private sector profitability. A restricted cost function in translog form is estimated, which treats labour and materials as variable inputs and private capital and public sector as quasi-fixed inputs. Results indicate that public infrastructure has a weak complimentarity with

infrastructure in both short and long run with degree of being higher in short run as compared to the long run. Public infrastructure complimentary is observed to have a small but positive effect on output.

US manufacturing industries. The result suggests that there are significant productive effects from these two types of capital as shown by cost elasticity estimates. Their effects on the cost structure vary across industries. Not only is the cost function shifted downward in each industry, generating productive effects but factor demand by two types of public capital suggesting bias effect. Demetriades in each industry is also affected

Nadiri and Mamuneas (1994) have examined the effects of publicly financed infrastructure on and R&D the cost structure and productivity performance of twelve two-digit capitals

and Mamuneas (2000) utilise an intertemporal optimisation framework to in the of infrastructure effects study capital on output supply and input demands public twelve OECD countries. They find that in all the twelve countries, public capital has positive long run effects on both output supply and input demands and infrastructure has been sub optimally provided inmost countries examined. Both in the short-run and long run private capital was found to be more productive than the public capital. There are a considerable number of studies that have been conducted for the Indian economy regarding the impact of infrastructural development on overall economic growth. Joshi (1990) provides a comprehensive account of the development of infrastructure in India. He shows that interstate disparities in level of development did not decline between 1960-61 and 1985-86. Joshi finds a clear and strong association between the level of

infrastructure and the level of development. Anant et. al (1994) has constructed indices of infrastructure availability for twenty-five Indian states for the year 1985-90. They consider twenty-four infrastructure variables into eight sectors namely, agriculture, banking, electricity, communications, classified The first five sectors constitute transport, education, health and civil-administration. economic infrastructure and the next two constitute social aggregated using principal component analysis. The infrastructure. social infrastructure exceeds that in economic

infrastructure,which have been indices show that interstate variability in

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100

DEEPIKA

Goi;l

Mitra et. al (1998) has used annual data for the period 1976-1992 for seventeen industries in fifteen Indian states. Using that social long-run elasticities, they conclude on infrastructuremeasured total factor by education and health shows greatest impact productivity in Indian manufacturing. and De (1998) study the impact of public investment and physical infrastructure in Indian states over the plan period using OLS regional economic development regression. The results indicate that regional disparity has been rising in the recent period and plan outlay has not played a major role in this context. on attempts to test the efficiency of public infrastructure investments in development pattern of Indian states. Results suggest that social infrastructure has a positive these and significant impact on output while economic infrastructure does not. However results seem implausible in the light of other studies. Lall (1999) of Solow growth model (1999) tests various propositions of the neo-classical to ascertain the role of infrastructure and power shortages on the rate of growth of per capita income using cross-section data on Indian states for the period 1970-90. Results confirm that absolute convergence of per capita income across states is not consistent, while conditional convergence hypothesis is consistent. Krishna Rao Akkina and Swan (2002) brings out the factors that determine micro level context of a developing economy that had undertaken policy firm level productivity in the reforms towards a freer market. Results suggest that firm level outward orientation of exports and imports contribute significantly and positively to firm level productivity. Murali Patibandla, B V Phani In this paper we attempt to study the linkages between infrastructure and productivity for the registered manufacturing sector in India for the period 1965-66 to 1998-99 Ghosh

3. METHODOLOGY
In order

FOR THE PRESENT EXERCISE

infrastructure and productivity in the to study the interlinkages between use of twenty-three infrastructure variables. Each manufacturing sector, this study makes infrastructure variable was first standardized with the help of a suitable deflator. In some cases the choice of the deflator was governed by natural deflators such as number of villages or where such natural deflators were not available we have used either population on the consideration that both distance geographical area as deflators. The choice is based and congestion are access costs. (Anant, Krishna and Choudhury (1994)). Various shown components in table 3.1. of economic and social infrastructure and the weights used are

The table suggests that economic infrastructure enters the aggregate infrastructure index with a weight of 70% and social infrastructurewith a weight of 30%. In the aggregate index 5% and 7% respectively. The irrigation and banking infrastructures have low weights of infrastructure are 12% and 19% weights of electricity infrastructure and communications for the largest share of 27%. Within social respectively. Transport infrastructure accounts 12% and 18% weight respectively in the account for health and education infrastructure, aggregate index.

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frastructure on Productivity Impact of In

Table 3.1

101

WEIGHTS SUB SECTORS OF ECONOMIC IRRIGATION

Net

USED

IN INFRASTRUCTURE WEIGHTS

INDICES

INFRASTRUCTURE 0.70

INFRASTRUCTURE 0.05
as % of net sown

irrigated area

area

BANKING
Commercial Co-operative

0.07
bank bank offices offices per per 1000 1000 0.41 sq. km of area sq. km of the area 0.59

COMMUNICATION

0.12 0.62 0.38

Telephones per 100,000 population Post offices per 100,000 population ELECTRICITY 0.19 0.24
lines per

Installed capacity per capita

Transmission and distribution

unit area

0.26

Consumption of electricityper capita % of villages electrifiedto totalvillages TRANSPORT 0.27

0.20 0.29

Total road lengthper 1000 sq. km of area 0.20

Surfaced $6gistered Rail route road ,length per vehicles 1000 sq. km of area 0.23 0.16 0.21

per unit area 1000

length per

sq. km of area

Number of ships 0.16

Gross registered tonnage per lakh of population 0.04

SOCIAL

INFRASTRUCTURE 0.12
ratio per in primary 1000 sq.

0.30

EDUCATION
Teacher Primary pupil schools

schools km of area

0.22 0.49

All educational institutions per 1000 sq. km of area 0.29 HEALTH Hospitals per 1000 sq. km of area 0.19 Beds per 100, 000 population 0.09 0.14 Doctors per 100, 000 population
Infant mortality rate 0.58

0.18

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102

DhKPIKA

( ioi l

In this section we present the econometric methodology for analysing the impact of infrastructure on productivity. Following Nadiri and Mamuneas (1994) we make use of a multi-equation framework. This comprises of a variable cost function and the corresponding share equations for variable inputs. This system of equations spillover effects of infrastructure on the industrial sector. For helps us in estimating

the

this study we specify a functional form of the cost function and derive the be the cost function. productivity effects of infrastructure. Let C=C (PK, PL, Pp Sk, Y) Thus cost is assumed to be a function of prices of three variable inputs, capital (?'), labour (L) and intermediate inputs (7), and the quantity of quasi-fixed mput(s), that is the infrastructure input(s)

and output (Y). (Sk), Motive behind using infrastructure as a quasi-fixed input is that since these are public goods and are provided mostly by the government, theremight be time lag involved in their sector. Industrial sector cannot make provision and their use by the manufacturing instantaneous adjustments to the requirements of infrastructure inputs and thus there are implications for the productivity of this sector. The Translog variable cost function with input, used for estimation is as follows: = infrastructure stock assumed as quasi-fixed

In VC

aft u+ S

? (In Sk)2+ InSk + I ? /

where VC= i, j

In p. + / 1 ' a.

v In y

+ I a. In S k

k+

2 *i
kI i

ZZ

/?.. " (In p.y'

2 * *

II

?,

?yy (Inyf

+ 11 ?.. Inp. Inp. + I

i2 J k

InS, + I Z ?ik Inp. ?kl In5,

l} Inp. 1Iny

+ I

In Iny (T ) Sk

P. La/ *L+P*K+Pr*I = variable inputs (K, L, I) or S4

= fixed k, I inputs (Sv S2) or S} y = level of output

one in input prices, that Applying the symmetry restrictions and homogeneity of degree of intermediate labour and the of is, dividing input and dropping input by price capital prices the share equation with respect to the intermediate input. Share equations are obtained by is outlined applying the Shepherd's lemma. The procedure for obtaining the share equations in Greene (1993). The Regression cost function and model. (SURE) the set of share equations provide a Seemingly Unrelated likelihood technique. The system can be estimated by maximum

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Impact of Infrastructure on Productivity To reduce

103

the problem of multi-collinearity, and to use additional information without new cost the is estimated jointly with the cost share function parameters, introducing for each variable and Greene (1976)). equations input (Christensen The share equation alongwith the cost function constitutes a multiequation framework likelihood and it is, estimated using SURE to obtain the maximum and iterated technique
estimates.

We

of infrastructure,which I. Measure measures

now comment on themethodology involved in calculating is outlined as follows: of cost

the productivity effects

and social infrastructure elasticity with respect to economic the ''productivity effect" of these public sector capital services. They can be calculated by differentiating the translog cost function with respect to economic and social infrastructure variable as follows:

d where

In Sv, K

IK K

i = variable k = quasi

input - fixed input

II.

Further the "factor bias effect" is also calculated which shows the bias of the quasi fixed inputs for the variable inputs. This is calculated by differentiating the share equations with respect to the infrastructure input as follows:

dSl k
where i = variable k = quasi input - fixed input

if the factor share Sign of these coefficient suggests the direction of the bias, that is, infrastructure financed or not then does decreases capital is increases, publicly change, or neutral respectively. private input using, saving III. The "total effect" shows the combination of the quasi-fixed inputs with the variable sector also including the bias inputs in improving the productivity in the industrial of the quasi-fixed input for the variable input. as the sum of "productivity effect" and "factor bias effect". infrastructure input and zthprivate Sign of the coefficients suggest that whether or neutral if the sign is positive, negative or zero input are complements, substitutes, as: respectively. It is calculated

This effect is calculated

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104

Deepika

Gohi

nsK

icsK

+-

IV. We

of the marginal also calculate benefit and social rate of return (SRR) infrastructure input, that is at margin how much benefit is derived from the use of a particular public sector capital and rate of return derived for employing an additional unit of public sector capital. They are calculated as follows: benefit: bSL - - ?? Qs

Marginal

dC
k

-where r/cs
k

k = quasi-fixed

input

SRR:

rSk

where

qs

pK

(r + d) according

to Jorgen's model

V.

Finally we test the hypothesis that industry chooses the public capital services to the point where theirmarginal benefits are zero. For thiswe also estimate the cost share equation with respect to fixed inputs as:

4rV~ SK
o ln This

+ 1 4* ln ak+ 1 Wp, > ^ k /

ln Sk+ s ?KylnY

test is carried out by estimating the system of equations including cost function and share equations with respect to variable inputs and then estimating system of equations including cost function and share equations with respect to variable inputs and also with respect to quasi-fixed factors. Then the test statistic is calculated as:

where ? = parameter estimate obtained by estimating cost function and share equations with respect to variable inputs. = parameter estimate obtained by estimating cost function and share equations ? - fixed factors. with respect to variable inputs and quasi This is asymptotically the number of parameters distributed as chi-square (jf2)with degrees of the imposed conditions. of freedom equal to

M = (? -?) {([cov (?) - cov (?)]y] (? -?) A

4. DATA SOURCES AND MEASUREMENT OF QUANTITIES AND PRICES

This section outlines the definition of data and sources derived, for the three variable they have been inputs, that is, capital," labour and intermediate inputs and the from which

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Impact of Infrastructure on Productivity

105

infrastructure stock for the purpose of model estimation. This also describes the method of constructing the price indices of various variable inputs. 1. Capital stock: There is no universally accepted method of measuring capital stock. Ahluwalia (1991) estimates gross fixed capital stock at constant prices using the perpetual inventory accumulation method. Since her method attempts to resolve computational problems, we capital stock is estimated by thismethod only. the gross net ratios for land, buildings and construction, plant and machinery and other equipment. Source for this is "RBI 1975. Since these ratios were not Bulletin", Reserve Bank of India, September was available for two-digit industries, therefore available for all industries level and it is a weighted calculated for all these industries. The procedure average was described as follows: In this method, first obtained Data on gross fixed assets and net fixed assets including land, buildings and for 19 and other equipment was available construction, plant and machinery industries and for each gross net ratio was calculated. To calculate the weighted average, the weights used were calculated as: where GFA. ZGFA. and HGFA. = summation of gross fixed assets of all industries. Then book value of fixed capital stock at purchase prices for the benchmark year is where data for NFKS 1973-74 is calculated as A=NFKS73_74*(GFA/NFA), is the gross net ratio. Gross collected from "ASI", various issues and GFA/NFA fixed capital stock at constant prices for the benchmark year is calculated as For successive years gross fixed capital stock at constant Z = (A*100)/PriceK. = = Z + where , , that prices NFKSr ^Depreciation IT (NFKST [(/^lOOyPrice^] is gross investment at current prices. The main limitation of thismethod is that thismethod will automatically overstate is gross fixed assets for industry i and = /' 1... 19

the size of capital stock as a consequence of failing to account properly for discards of old technology capital induced by technical changes embodied in new capital. m the process" as a measure of the II. Labour input: We use "total persons engaged is Number of labour input. persons engaged computed by taking the total attendance on all days during the year and dividing itby the number of persons in all the shifts of days worked. Statistical Abstract of India (SAI), CSO, Ministry of Planning, Government of India, various issues. Source: III. Materials

have been input: this includes both energy and material inputs. They index. Tornquist index is a measure of the growth combined using the Tomquist rate of the aggregate. It is defined as the weighted sum of log differences in the variables of the consecutive periods with arithmetic average of value shares over the

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Deepika

Goi-i

two periods as the weight. We

materials as:

first calculate

the average

share of both energy and

+ (Slv/(t) Sm (M))/2
where Then

I = energy, material as:

growth rate of each one of them is calculated (M)

In W. (t) - In W. Then Z * =

growth of the aggregate of energy and materials

is calculated

as:

* + average Average share of energy growth rate of energy rate of materials. growth index is then calculated as INDEX = INDEX

share of materials

Tomquist (0)- 1.0 Data Government IV. Prices

[7+Z]

with

INDEX

for both energy and materials is collected of India, various issues.

from "ASI", Ministry

of Industry,

machine

by total persons engaged. The series for total emoluments is obtained of Industry, from various issues of "Annual Survey of Industries" Ministry as a weighted is constructed Government of India. The series for price of materials average of the price indices of various material inputs used by the manufacturing emoluments sector by suitable weights derived from Input-Output table 1991. V.

of machinery and of variable inputs: Price of capital is proxied by WPI tools as suggested by Goldar (1986) and Ahluwalia (1991). The series has been extracted from various issues of "Statistical Abstract of India", CSO, Ministry of Planning, Government of India. The price of labour is obtained by dividing total

Infrastructure input (s): Data for economic infrastructure ismainly collected from "Centre forMonitoring Indian Economy", various issues on agriculture, energy and infrastructure. The main limitation of the data from this source is that CMIE does not describe the methodology involved in compilation of various sets of variables. it does not describe whether the data is based on complete enumeration Moreover or on sample surveys. For this reason the reliability of the data is in doubt. Data on as length of transmission and distribution lines and number of villages electrified components of the electricity sector, is obtained from the "Public Electricity Supply, All India Statistics", General review, 1997. Data on the banking sector is obtained from RBI publications namely, "Report on Currency and Finance" and "Statistical Tables Relating to Banks in India". In case of social

infrastructure, for education themain source of data was "Selected the Educational Statistics", GOI, various issues. This source does not mention method of data collection, whether it is a survey or is itbased on census population Information of projections. Main source of data for Health infrastructure is "Health issues. various Health of and India", Ministry Family Welfare,

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Impact of Infrastructure on Productivity VI.

107

Output: This ismeasured by gross output at constant prices, which is obtained by adding material inputs, depreciation and value added. Output in current prices is deflated by the 'Wholesale Price Index'. Data of India', CSO, Government of India. is obtained from 'Statistical Abstract

VII.

Variable-cost:

labour and intermediate). VIII.

It is defined as the sum of expenditures on variable

inputs (capital,

User cost of infrastructure: In order to derive the user cost of infrastructure we can use the Jorgenson's method. It is derived as:

C =

PK (r+d)
C = user cost of capital rrate of interest rate

Where

d = depreciation PK =

price per unit of capital

This gives the cost per unit of capital. In order to derive the user cost of total capital we do the following: * C = actual level of infrastructure calculated as per Principal Component PK (r+d) Methodology, Data Statistics", Government of India, various issues. Rate of interest is proxied by Redemption Yield on Government of India -securities (long term) and information is collected from "Report on Currency and Finance", Reserve Bank of India, various issues. Data on depreciation is again is obtained from "National Accounts
collected from "National Accounts Statistics", Government of India, various issues.

on P

5. PRODUCTIVITY EFFECTS OF INFRASTRUCTURE

estimation as well as present the results for the model in section-4 above. "productivity effects" of infrastructure as mentioned The results for system estimation for cost function and two share equations presented in Table 5.1: In this section we Estimates the are

of the translog cost function parameters are all highly significant except that of intermediate input and all coefficients enter with a plausible sign. The coefficients of infrastructure inputs are also statistically significant and hence they suggest negative cost elasticities with respect to infrastructure capital stock. The regularity conditions of the variable cost function required that cost function should be increasing in output and should be non-increasing in fixed input. It should be concave in variable input prices and convex in fixed inputs. Cost function should also be monotonically increasing in variable input prices is positive and it implies that the cost in fixed input. Coefficient of ? and decreasing

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108
Table 5.

Dri-pika

Goi-.i

TRANSLOG

MODEL ESTIMATES WITH ECONOMIC AND INFRASTRUCTURE AS QUASI-FIXED INPUTS ESTIMATE

-33.6 0.999 0.007

SOCIAL

PARAMETER 4> Pk ?L ?, ?r ?, ?s ?KK ?LL ?n ?*e ?ss ?yy

STANDARD
36.58 0.002 0.002 0.0003 9.73 13.54 3.28 0.0002 0.0001

ERROR

T-RATIO
-0.918 615.749 4.338 0.182 1.197 -2.26 -3.48 4.704 4.493 3.163 -1.096 0.647 -1.184 -4.216 -2.345 -0.884 -1.509 2.100 -2.074 -0.534 -2.449 2.408 0.679 -3.269 3.506 -0.393 1.330 0.783

0.00006
11.65 -30.59 -11.41 0.0008 0.0007 0.0002 -7.93 -3.20 -1.53 -0.0006

0.00008
7.23 4.95 1.29

0.0001 0.00009
0.00004 5.37 0.0002 0.0002

Pki ?u

-0.0002 -0.00003 -8.10 0.0004 -0.0004 -0.00002 -0.001 0.001

?ES
?KE

?LE ?,E ?,s ?LS ?,s ?KV ?Lr ?n ?,y

?sv

0.00004 0.0005 0.0005

0.0001

0.00007
-0.001 0.001 -0.00003 4.01 1.64

0.0004 0.0004 0.00008

3.02 2.09

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Impact of Infrastructure on Productivity function is non-decreasing infrastructure input, which in output. Moreover, the cost function is decreasing For this cost is shown by the negative sign of and ?E ?s. input prices the Hessian matrix / L / tyPj of

109 in

function to be concave order derivatives with However

* ?

r / in

Ju

second

respect to variable input prices should be negative semi-definite. the Hessian matrix of this cost function is positive definite. Moreover, for the cost in fixed input -^?

function to be convex

d2C
k

- 0- ^ut ^is

condition

is also not satisfied input prices and

here. For the cost function to be monotonically

dC

decreasing

dSK increasing in variable input prices and decreasing in fixed input. On the basis of this estimated model we analyzed the spillover effects of infrastructure in respect of the organized manufacturing sector of India for the period 1965-66 to 1998 99. Our discussion of the productivity effects of the infrastructure is based on Nadiri and outlined in Mamuneas of the results is based on the methodology (1994). Discussion that it is monotonically
section 3.

in fixed inputs,dp.

> 0 and-

dC

increasing in variable

<. 0. For this cost function, it is observed

The estimates of the cost elasticity, factor bias effect, total effect etc, their standard errors and the corresponding t-ratio are given in Table 5.2 below. Results suggest that both economic infrastructure and social infrastructure significantly affect the cost and productivity of the registered manufacturing sector in India. Since the elasticities have a negative sign it implies that provision of infrastructure capital in the manufacturing sector helps in reducing the costs in this sector. The estimates suggest that infrastructure is higher than that for social infrastructure and the elasticity for economic estimates are also Results statistically significant. effect shows that economic infrastructure is capital using but labour and intermediate inputs saving. Also factor bias effect is statistically significant with respect to capital and labour and is insignificant with respect to intermediate input, infrastructure is capital saving but is labour and suggesting a neutral effect. Social intermediate input using. This effect is significant with respect to capital and labour, but is for factor bias

insignificant with respect to intermediate input suggesting a neutral effect. Also the total effect suggests that economic infrastructure is a substitute to all the three infrastructure is /significant with variable inputs. Total effect with respect to economic respect to capital and labour and is insignificant with respect to intermediate input thereby infrastructure suggesting a neutral effect,which further implies that an increase in economic leads to a decline in demand for all variable inputs. social infrastructure is a substitute for capital while it is complementary to However, labour and intermediate input. The effect is again significant with respect to only capital and is insignificant with respect to labour and intermediate input.

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110
Table 5.2

Deepika

Goel

RESULTS PRODUCTIVITY ECONOMIC -0.49 (0.08)

(-6.5)

ON PRODUCTIVITY

EFFECT

(Std Error and T-Ratio in parentheses) SOCIAL ^030 (0.09)

(-3.4)

INFRASTRUCTURE

INFRASTRUCTURE

FACTOR BIAS EFFECT W.R.T. ECONOMIC

parentheses)

INFRASTRUCTURE

(Std Error and T-Ratio in INTERMEDIATE

LABOR CAPITAL
0.0004 -0.0004 -0.0002

(0.0002) (0.0002) FACTOR BIAS EFFECT W.R.T.

parentheses) (2-1)_(r2A)_(-05)_

(0.00004) (Std Error and T-Ratio in INTERMEDIATE

SOCIAL

INFRASTRUCTURE

LABOR CAPITAL
-0.001 0.001 0.00007

(0.0001) (0.0005) (0.0005) (-2.45) (2.41) (0.68) TOTAL EFFECT W.R.T. ECONOMIC
-0.52

INFRASTRUCTURE
-3.42 -1.19

(Std Error and T-Ratio in parentheses) INTERMEDIATE

LABOR CAPITAL (0.0002)

(-2.1)

(0.22) (1.4)
(-15.5) (-0.85)

TOTAL -0.31

EFFECT W.R.T.

SOCIAL

CAPITAL (0.09) (-3.4)

MARGINAL ECONOMIC (1.2) (6-5)_(15)_ SOCIAL RATE OF RETURN ECONOMIC
_____

' INFRASTRUCTURE LABOR

0.41

(Std Error and T-Ratio in parentheses)

INTERMEDIATE
2.02

(0.45) (0.91)
BENEFIT(Std Error and T-Ratio in parentheses) SOCIAL _ (2.7) INFRASTRUCTURE

(3.42) (0.59)
INFRASTRUCTURE

(Std Error and T-Ratio in parentheses) SOCIAL

o.003

INFRASTRUCTURE (0.0008) (3.75)

INFRASTRUCTURE

(0.0004) (5.0)

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Impact of Infrastructure on Productivity

111

Value of marginal benefit of social infrastructure is higher than that for economic infrastructure.This may be due to the fact thatmagnitude of cost elasticity is very low and that of is very high. C/Sk Social rate of return on economic infrastructure is 0.2% and that on social infrastructure is 0.3%. These are also statistically significant. For this model 1. HQ H] we conduct three tests of static equilibrium: and social infrastructure are zero

: Jointly marginal : not H0

benefits of economic

Test statisticis : M = (? -?)

2. HQ H} :Marginal : not HQ

{[cov (?)

- cov

(?)]}~] {?

?)A ? ?

underHQ

benefits of economic

infrastructure is zero

Test statisticis : Z = (? -?)

3. HQ Hx :Marginal : not HQ benefits of social

{[cov (?)

- cow

(?)]}'1 (?

? ?)A ?

underH{)

infrastructure is zero

Te*ststatisticis :Q = (? -?)
Results are presented

{[cov (?)

- cov

? (?)]}-] {?- ?)A j2 underHQ

in table 5.3 below:

Table

5.3

RESULTS TEST M STATISTIC

FOR STATIC EQUILIBRIUM

OF FIXED FACTORS INFERENCE Reject the null thatjointly marginal benefitof both
economic social infrastructure infrastructure and is zero.

CALCULATED VALUE 617.83

CRITICAL VALUE = 32.7

^(21X0.95)

556.8

^(21X0.95)

= 32.7

marginal Reject the null that

benefit of economic is zero. infrastructure

540.2

^(21X0.95)

- 32.7

marginal Reject the null that benefitof social

infrastructure is zero.

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112

Dlil

PIKA

Cn

6. SUMMARY AND CONCLUSIONS

The present study provides an analysis of the impact of infrastructure development on economic development, through its spillover effect on the productivity in the registered sector in India. This study has been conducted for the national economy manufacturing annual time series data for the thirty-fouryear period 1965-99. In order to carry out using

this study we have made use of data for twenty-three infrastructure variables from the sectors are agriculture, banking, communications, various infrastructure sectors. These education and health. The first five sectors constitute economic electricity, transport, infrastructurewhile We the latter constitutes social infrastructure. aggregate using an aggregation method various items of infrastructure into economic and social infrastructure

called the Principal Component analysis. This study is organised along the lines of Nadiri and Mamuneas (1994). This study has on to the the cost function approach study productivity effects of primarily focussed infrastructure. For this we have assumed that the variable cost in the manufacturing sector is a function of the prices of variable inputs, capital, labour and intermediate inputs and levels of quasi-fixed infrastructure inputs. Our econometric model is based on the translog variable cost function. Estimated productivity effects of infrastructure suggest that both economic and social infrastructure significantly affects the cost and productivity of registered manufacturing sector in India. Moreover our results show that economic infrastructure is capital using but labour saving and intermediate input saving, while social infrastructure is capital saving and infrastructure is a substitute to labour and intermediate input using. Further, economic to and intermediate labour while inputs. Marginal benefit of social complementary capital, is and net rates of return are also infrastructure infrastructure higher than that of economic infrastructure, that infrastructure plays a positive and significant role in affecting in the industrial sector in India and thus contributes towards economic Hence we
growth.

higher for social the productivity

conclude

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