8.2.1 Infrastructure is understood as an important input for industrial and overall economic development. While this is certainly true, there is no clear definition of infrastructure according to the current usage of the term in India. The Economic Survey does not define the term, but still devotes an entire chapter to this. While the Report of the Committee on Infrastructure made a significant contribution towards examining this sector, it did not offer a clear-cut definition of infrastructure nor did indicate crucial characteristics that serve to differentiate an Infrastructure Sector from other Sectors.
8.2.2 As stated above, there exists neither a clear-cut definition nor a listing of the crucial characteristics of infrastructure in the Indian data sources. The Economic Survey, while it includes an entire chapter on Infrastructure (see Chapter 9, Economic Survey 2000-2001) does not indicate why the industries listed therein are to be treated differently from other industries. In fact, there is sufficient reason to believe that some of the sectors listed in the relevant chapter of the Economic Survey do not have the crucial characteristics as per the current theoretical understanding of the concept.
8.2.3 As per the Economic Survey, the following sectors constitute infrastructure (Economic Survey 2000-2001, p. 171):
Power: Electricity generation;
Petroleum production: crude oil and refinery throughput;
Railways: Revenue-earning goods traffic and passenger kilometres;
Ports: Cargo handled at major ports;
Civil Aviation: Cargo and passengers handled at Airports Authority of India (AAI) airports;
Roads: Length of roads and length of National Highways; and
Telecommunications: New telephone connections approved (direct exchange lines).
8.2.4 Besides the Economic Survey, the Index of Industrial Production (IIP) also includes some of the above-mentioned infrastructure sub-sectors. Statistical information on these is available and frequently a subset of the IIP is labeled as the index of infrastructure activity. However, even in this case there is no clear-cut rationale for treating these sectors as infrastructure. Hence, the current status in India regarding this sector consists of an inadequate conceptualisation of the characteristics of the Infrastructure Sector.
Proposed Change in the Notion of Infrastructure
8.2.5 The standpoint taken by the Commission is that the notion of infrastructure that is used in the reporting of data in India is not theoretically sound. The proposed methodology will mark a clean break with past practice with respect to reporting of infrastructure data. The reporting of data in India, so far, seems to equate basic industry with infrastructure; besides what is basic and non-basic industry seems like a relic from the planning era. The approach proposed here, in the first instance, seeks to theoretically set out what constitutes infrastructure and then identifies specific facilities, which provide infrastructure services.
What is Infrastructure?
8.2.6 Infrastructure activities, such as power, transport, telecommunications, provision of water, and sanitation and safe disposal of waste, are central to the activities of the household and to economic production. Without any of these either economic production will suffer or the quality of life will deteriorate. One could thus view these activities as essential inputs to the economic system.
8.2.7 Many infrastructure activities have the characteristics that they are not use-specific or user-specific: the same telephone system may be used in numerous productive activities, either (a) simultaneously if sufficient capacity is available, or (b) sequentially if there is crowding or congestion.
8.2.8 Infrastructure generally consists of long-lived engineered structures and may be one of the following:
Public utility: power, piped gas, telecommunications, water supply, etc.;
Public works: major dam and canal works for irrigation, roads;
Other transport sectors such as railways, ports, waterways.
Natural Monopoly Character of Infrastructure
8.2.9 The most general economic characteristic of modern infrastructure is the supply of services through a networked delivery system designed to serve a multitude of users. This is especially true for piped water, electric power, telecommunications, sewerage, and rail services. As these examples show, the delivery system in each case is dedicated: water pipes cannot be used for any other purpose except to carry water. Investment in such delivery systems is said to be sunk, i.e. the investment may not be converted to other uses.
8.2.10 The scope for competitive supply of infrastructure also varies greatly across sectors, within sectors and between technologies. Many infrastructure facilities are characterised by declining costs, leading to what is known as a natural monopoly situation. It is important to remember that natural monopoly arises out of technological factors and not due to policy.
8.2.11 It may also be pointed out that the services of infrastructure will be non-tradable. To give an example: should there be insufficient demand for electricity in place A, its supply may be diverted to place B; however, one will not be able to do that for the transmission system that brings electricity to place A. Hence the transmission system is non-tradable even though electric power itself may be tradable.
Public Goods Character of Infrastructure
8.2.12 The demand for infrastructure services arises from both industry and individuals. However, since it is not possible to create infrastructure facilities in an incremental fashion – investments are lumpy – such facilities have to be built complete for a particular size. Hence, in the initial stage supply will be greater than the demand for such facilities while the reverse may occur over a period of time.
8.2.13 This characteristic of infrastructure services that is generally, supply greater than demand, indicates that consumption of its services is non-rival. Such non-rival is a characteristic of "public goods". The characteristic of non-rival implies zero marginal cost of providing benefits of a public good (infrastructure in this case) to an additional consumer. In this sense infrastructure creates external benefits or positive externalities. However, infrastructure services have one characteristic that is absent in the case of pure public goods namely, price exclusion, whereby enjoyment of benefits is contingent on payment of charges. Price exclusion is a characteristic of "private goods". Thus infrastructure services share characteristics of both public and private goods. In the case of pure public goods there is complete failure of the market: since use cannot be monitored, no price can be charged for the good and no private individual will be willing to provide such goods. Since this characteristic of a public good is not to be found in infrastructure, it need not necessarily be provided by the Government. However, given its technological characteristic, i.e. being a natural monopoly, its provision will have to be regulated.
Representation of Infrastructure in National Accounts
8.2.14 From the national accounts point of view, infrastructure would form part of the capital stock of the nation. However, in the year it is created the infrastructure facility would be part of production for that accounting period. Where the production spills over numerous periods it may be necessary to recognise that output is being produced continuously and record it as “work-in-progress”. This would be in keeping with the recommendations of SNA 1993 (see United Nations: System of National Accounts 1993, p. 127).
8.2.15 Once the infrastructure is completed, its contribution is in terms of the services it provides by its usage. Thus the output of transportation would be measured by the value of the amount receivable for transporting goods and persons. The volume of transport services would be measured by indicators such as tonne-kilometres or passenger-kilometres (see United Nations: System of National Accounts 1993, p.136).
8.2.16 Essentially, what this approach to infrastructure does is to separate the infrastructure facility from the service provided by the facility. For some areas of infrastructure this is not a problem since the owner of the facility and provider of services flowing from the facility is one and the same entity. For example, railways own the infrastructure facility – tracks, signaling system, etc. – and operate services on it for passengers and freight. However, in the case of roads the situation will be different. For a long time the facility was provided by the Government, though now there is private provision as well. However, services on roads are provided by different entities, both public and private.
Distinction between Physical and Social Infrastructure
8.2.17 Even though Social Infrastructure is not considered here, it will be appropriate to extend the notion of infrastructure proposed here to the Social Sector as well. Thus, a hospital or a school would constitute the infrastructure facility, which will provide services in the form of health care and education over a period of time. However, one will have to be careful not to attribute all the characteristics of infrastructure listed above to the Social Sector. For instance, it cannot be argued that a hospital facility is a natural monopoly even though a substantial amount of sunk costs may be involved. Further, as far as bestowing externalities is concerned, this is more likely to be true for basic health care, possibly preventive health care, while externalities may diminish in the case of higher-end health and possibly curative health care.
Conclusions and Recommendations
8.2.18 The discussion regarding the exact characteristics leads to the conclusion that the existing notion of infrastructure that is followed in statistical reporting in the country is not in keeping with the theoretical notion of infrastructure. Based on the characteristics of infrastructure discussed above a list of infrastructure activities is being proposed for implementation.
A Proposed List of Infrastructure Services
8.2.19 For the identification of an infrastructure service the following characteristics are pertinent:
High-sunk costs or asset specificity;
Non-tradability of output;
non-rival (up to congestion limits) in consumption;
Possibility of price exclusion; and
Bestowing externalities on society.
8.2.20 If all six characteristics are considered simultaneously, then the following areas will constitute infrastructure:
Railway tracks, signaling system, stations
Runaways and other airport facilities
Transmission and distribution of electricity
Telephone lines, telecommunications network
Pipelines for water, crude oil, slurry, etc.
Waterways, port facilities
Canal networks for irrigation
Sanitation or sewerage.
8.2.21 Initially, the above-listed infrastructure facilities may be taken up for data collection. Thereafter, considering characteristics (b) (High-sunk costs or asset specificity), (d) (non-rival in consumption), and (e) (Possibility of price exclusion) only, the above list of infrastructure facilities may be extended to include the following in an extended list closely corresponding with existing notions of infrastructure:
Rolling stock on railways
Power generating plants
Production of crude oil, purification of water
Ships and other vessels.
8.2.22 Data collection on the above activities should be commenced immediately. It may be pointed out that data on many of the activities listed above will not have to be collected de novo. Such data are already being collected by statistical agencies. However, data are available only in a dispersed fashion. Data on all infrastructure activities should be compiled together and be published in one document. Thus even though railway data or power sector data are published by the respective sectors, these must be published in a document, which may be called, Annual Infrastructure Statistics, even if it involves duplication. This will improve the accessibility of such data to policy makers and other data users.
8.2.23 The Commission recommends the following:
The list of infrastructure activities should be finalised by the Ministry of Statistics and Programme Implementation (MoS&PI) on the basis of the characteristics recommended for identification of infrastructure.
Data gaps have been identified for many infrastructure sub-sectors. Steps to bridge this gap should be taken by the respective authorities namely, Railway Board (Railways); Ministry of Road Transport and Highways (Roads); Director General, Civil Aviation (Airways); Ministry of Shipping (Waterways); Department of Telecommunications (Telecommunications); Central Electricity Authority (Electricity); National Sample Survey Organisation, National Buildings Organisation, and Office of the Registrar General and Census Commissioner (Housing Services); Department of Post (Postal Services); Ministry of Urban Development and Poverty Alleviation (Urban Infrastructure); Ministry of Rural Development (Rural Infrastructure); Planning Commission (Energy Sector excluding Electricity); and MoS&PI (Infrastructure Indices).
A mechanism to collect reliable data on the infrastructure activities should be evolved immediately by the respective authorities in consultation with the MoS&PI.
Considering that Infrastructure Statistics are generated in different sub-sectors, for the benefit of the users, data on all infrastructure activities should be published in one document by the MoS&PI so as to improve the accessibility of such data to policy-makers and other data users.