Human Capital and Infrastructure: Twin pillars of Economy

Economic expansion in a technological age requires continuous investment in public infrastructure, in generic R&D, and in training and education. A strong case can be made that we should now be spending more on public investment, not less, if we do not want to undermine the prospects for growth. - Barry Bluestone and Bennett Harrison The level of output produced in an economy in any given time period is affected by the quantity and quality of available resources, the level of technology, and the economic incentives facing individual firms, investors, savers, and workers. Economic growth, therefore, must be affected by changes in the quantity or quality of resources, technological innovations, and changes in the incentive structure in society. The relationship between the economy and infrastructure is evidently critical to promoting inclusive growth and sustainable development. In fact, high cost of transport, energy and internet access is a major economic growth deflator. Investments in roads reduce transport costs while ports and other logistics infrastructure reduce the cost associated with trade, all of which improve the competitiveness of firms. Conceptually, infrastructure may affect aggregate output in two main ways: (i) directly, considering the sector contribution to GDP formation and as an additional input in the production process of other sectors; and (ii) indirectly, raising total factor productivity by reducing transaction and other costs thus allowing a more efficient use of conventional productive inputs. Infrastructure can be considered as a complementary factor for economic growth. How big is the contribution of infrastructure to aggregate economic performance? The answer is critical for many policy decisions for example, to gauge the growth effects of fiscal interventions in the form of public investment changes, or to assess if public infrastructure investments can be selffinancing. The empirical literature is far from unanimous, but a majority of studies report a significant positive effect of infrastructure on output, productivity, or long-term growth rates. Infrastructure investment is complementary to other investment in the sense that insufficient infrastructure investment constrains other investment, while excessive infrastructure investment has no added value. To the extent that suboptimal infrastructure investment constrains other investment, it constrains growth. The Changing Role of Infrastructure It is necessary to realign the nations infrastructure to the changing world economy. A countrys infrastructure must be secure, flexible, and well inter-connected in order to support its long term economic growth. Infrastructure security and stability concerns the quantity of spare capacity or we can say security of supply. Instead of acting on the efficiency frontier, infrastructure projects must operate with spare capacity to contribute to economic growth through ensuring reliable service provision in energy and transport. Spare capacity is a necessary condition for a properly functioning system. To assure the

level of spare capacity in the absence of storage and demand, the system needs to have excess supply. However, no rational profit-seeking company will deliberately create conditions of excess supply, since it would produce a marginal cost lower than the average cost). Given this market failure, the Government needs to create the right incentives to ensure security of energy supply, since the social and economic costs of a black-out or trains crash (due to insufficient supply) are much higher than the companys losses. Greater flexibility in infrastructure systems is necessary to respond to changing economic needs. Short-term and long-term goals are need to be balanced in a way that economy have a smooth transition from one phase to the other. Interconnection and complementarities across different infrastructure sectors are key elements for increasing service efficiency, supporting the adoption of innovative technologies and supporting growth. Good connection between cities and airports, via rail, roads and underground, decrease the travel time and costs and increase airports appeal for both airlines companies and passengers. IGI-New Delhi Metro line is a great example of it. The role of Human Capital Human capital is widely accepted as an important determinant of economic growth and the importance of human capital accumulation is unconditionally acknowledged in the existing exogenous and endogenous growth theories. Human capital is a key factor in explaining the economic growth, as it increases the output through various known empirically tractable and intractable channels. Human capital enables a worker to produce more output. As human

capital increases the productivity of labor, demand for labor and hence employment and output rises. Moreover, human capital is necessary for optimum utilization of physical capital. Increase in the stock of human capital in any economy attracts investment in the physical capital which in turn increases the output. Education which is probably the most important determinant of human capital affects the output through various channels. It increases knowledge which helps to produce more output in relatively smaller time and also it is intuitionally suggested that an educated person could learn much faster. Increase in the level of education also leads towards better health due to an increase in the awareness of the benefits of healthy living, which in turn increases the output. Moreover, education also enhances the labor force participation in an economy particularly in the case of female participation and output increases further, due to the higher labor force participation rate. Along with education, the role of experiences also very important in productivity growth. Experience generally reduces the chances of errors and increases the output in a given time period. Health and nutrition are also important elements of human capital. A healthier worker can contribute more in the production process than his unhealthy counterpart. There are several channels that define the contribution of health in production and output. Like a healthier worker can produce more output than an unhealthy worker because of his higher physical and mental capabilities, vigor and stamina. In the same way, for a given level of all other factors, the economy can produce higher output if it has higher level of healthy workers. Health is an important factor for determining the level of returns from education because a healthier person can learn more than an unhealthy one from a given level of education. In this way, improvement in health increases output due

to increased strength and also due to more learning from a given level of education. Nutrition has a strong link with productivity, output and economic growth. A person who intakes nutritious food is likely to be more productive due to high vigor and strength. In this way providing good nutrition is considered as an investment in human capital. Especially in the case of economic growth, education and health reinforce each other; being healthy is as important for economic growth as being educated. Progress of East Indian countries like China in last 3-4 decades have shown the worth of investing in infrastructure and human capital. Where does India stands? The Indian economy in recent years has placed increasing stress on physical infrastructure such as electricity, railways , roads, ports, airports, irrigation, urban and rural water supply and sanitation, all of which already suffer from a substantial deficit. Infrastructure development will help create a better investment climate. The goals of inclusive growth and 9% GDP growth can be achieved only if this infrastructure deficit is overcome. Infrastructure development has been accorded key priority in the 11th Five Year Plan for the years 2007-2012 and the 12th Five Year Plan period of 2012-2017, with projected investment requirement of $500 billion and $1.5 trillion, respectively , by the Prime Minister's Committee on Infrastructure. These initiatives pale when compared to China that spends about 11% of its GDP on infrastructure development, as compared to 6% of the GDP spent in India . This indicates that infrastructure development in India needs to be scaled up to match global standards. The rapid development of Chennai City over the last decade is an example of how good

infrastructure can propel industrial, economic and social development. Chennai, the fourth most populous metropolitan area and the fifth most populous city in India, has the distinction of having the highest level of urbanization (47%) in the country today. Global companies including all the majors in the IT Industry, automotive and engineering companies have made Chennai their destination of choice for setting up their operations. Some of the notable names include BMW, Dell, Ford, Hyundai, Saint Gobain, Nokia, Renault - Nissan, Samsung, World Bank, etc. The favourable investment climate in the State today can be attributed to the proinvestment policies of the Government and the quality of infrastructure that the State has to offer. Right from creating business cities in a Public Private Partnership (PPP) format to building elevated road corridors that enable faster movement of heavy commercial traffic, the Government and its partners, have been creating infrastructure that has, in turn, been driving industrialisation and investments into the State. The level of investments into India is rising and so is the disposable income of the salaried/business classes. The customer becomes the central element around which all the development activity is based. Sustainable, long-term and well-planned development in balance with nature is the key to attracting the best into the country. The key objective of developing infrastructure, both physical and social is to attract investors. There is a long list of prerequisites that will have to put together to help us get where we want to be in terms of quality human capital formation. Apart from the degradation of politics and institutions, the criminal political bureaucratic and entrepreneur nexus, which allows for continued oppression of the underprivileged that sustains Naxalism and degradation of the environment. It is this lack of political cohesion and decline of values which will affect the well being of the future generations.

When we look at the problems and advantages of the youth bulge of our population we find that we are going to have a young potentially employable and socially productive population which could be a boon to our growth story. Cold statistics however tell their own story. Dedicated and qualified teachers are difficult to find in India, especially in the rural areas, 25 per cent of primary school teachers are absent according to World bank figures, and 90 per cent of children in villages work mostly in agriculture. Our starting blocks in other aspects are weak too given our standards of illiteracy and malnutrition. By 2030 there will be 1.53 billion of us, with 962 million employable in the age group of 15-59 years and of which 423 million will be unemployed.

A demographic dividend from this will be available only if there is no mismatch between labour skills required and jobs available in the market. And to judge how far behind we are in providing quality education is that we have only 348 universities for a billion plus population as compared to 4,000 in Japan for its population of 127 million and 3,650 in the US for its population of 301 million. Education from primary to doctoral and everything in between is far too important to be left to quotas and road side fly-by-night operations. Instead, we need a gigantic, national, all inclusive effort by the government and the corporate sector who are stake holders too. Unless this happens with political cohesion and a vision that looks beyond survival politics, our dreams will sour.

Any economy requires fine and smooth running wheels of infrastructure and human capital to move forward. References: London School of Economics: Infrastructure and Growth- Novella Bottini, Miguel Coelho, and Jennifer Kao Economic Development, Growth of Human Capital, and the Dynamics of the Wage Structure :Jacob Mincer, Columbia University