Should India go on an infrastructure spree like China?
Should India go on an infrastructure spree like China?
Whether government should spend more on capex in a bid to drive the economy. This is what China did. Should India do it?
The question is whether the government should spend more on capex to drive the economy.
The genesis of this question is flawed. The question comes from the capex-driven boom that China experienced. China ploughed capital into creating infrastructure, building cities and dams etc. The investment-to-GDP ratio for China has hovered around 40% for quite some time. The resulting boost to Chinese GDP is enviable. Yet, I do not believe this broad set of numbers explains what boosts GDP in general rather than what did boost GDP in China.
India’s hard infrastructure roadmap is, more or less, in place.
Since independence, India lacked hard infrastructure. The gap and continued neglect meant we are still in catchup mode on hard infrastructure. We have a fair idea of the demand for roads, ports, airports, power plants, alternate energy sources, power grid infrastructure, potable water infrastructure etc. Yes, there are roadblocks, but these are known-knowns.
The critical soft infrastructure contains many known-unknowns and unknown-unknowns. What kind of soft infrastructure does India need to build? Law and Order institutions are a big part of this challenge and how to fix them remains elusive. Developing markets and contract enforcement systems is also part of the law-and-order system. It is also known and understood that information and data infrastructure is essential. The nature of such infrastructure and how to build it is not fully known.
The Indian government has, with reasonable success, grappled with some of the elements of this soft infrastructure. The Aadhar identity system, Unified Payment Interface, Digi Locker and digitization of records and developments associated with India Stack, in general, deserve recognition. The upcoming Open Network for Digital Commerce (ONDC) is promising.
So, what other infrastructure should be built?
While we cannot directly answer that question, we can appreciate what infrastructure works best. We can draw from history - the development of road networks 2500-year-old Grand Trunk Road and Indus/Saraswati/Gangetic/Brahmaputra River navigation in ancient India, Silk Road, sea trade infrastructure in 13th to 17th century Europe, build out of railways in 19th and 20th century Europe, development of highway networks in the US, telegraph across Eurasia and the Atlantic, development and expansion of electricity and gas grids and finally the fibre network buildout globally etc.
In general, infrastructure that improves productivity, access to market, access to ideas, eases living, eases business activity and eases exports works.
Infrastructure must pay for itself. And it does so through improved productivity of the overall economy. It is no surprise that western economies have seen sustained productivity growth since the 1950s. Good and improving infrastructure always boosts the GDP through improved productivity freeing up resources that can be directed to more income-earning opportunities.
The corollary is equally important.
Wasteful infrastructure is wasteful. It imposes costs on the rest of the economy. This is a bit complicated.
Capital expenditure involves costs in the short term; stimulative benefits accrue in the medium term, and the repayment burden accrues over the long term.
Democratic policymakers are hobbled by initial costs; communist policymakers can extend into the medium term. Therefore, democratic countries tend to be behind infrastructure demand, and proactive communists tend to be ahead of infrastructure demand. While it does make the communist policymaker look good in the medium term, in the longer term, we cannot be so sure.
In Sum
Spending on ANY random Infrastructure project just for boosting GDP is a bad idea. Spending on the RIGHT Infrastructure is better approach. And what is RIGHT is the billion dollar question.
You are correct in the distinction that you make. Many decisions by governments and businesses seem to be based on their competitive advantage in the global marketplace. As many businesses did here in the US, they sent factories to developing nations pursuing cheap labor. Now, open border policies have the same intention. These macro views lend a sense of importance to the leaders of these organizations. In so doing, they fail to understand the holistic nature of human society.
As a consultant for over a quarter century, I've seen this problematic thinking. It is a short-term, insecure mindset. How can we mimic our competitors? And if our competitors are wrong, then we lose too. As I saw this, I realized that another reality was breaking through. I describe as the Two Global Forces. There is "the global force of centralized institutions of governance and finance and the global force of decentralized networks of relationships." The centralized force exists more as a simulated reality that requires the kind of media infrastructure that consistently cancels and declares alternative perspectives as misinformation. The decentralized force, on the other hand, is a local, grassroots phenomenon. It is born in the relationships of the people within a locale. I believe this is what you are pointing to, especially if you look at this through the lens of networks. As I have tracked this framework over the years, I see the centralized force having already reached it apex, and is now declining. The decentralized force of networks of relationships is ascending in its capacity.
Building the infrastructure between towns, cities, states, and within regions, allows for competitiveness to grow at a smaller, less consequential level. I interviewed the town manager of a rural county here in North Carolina several years ago. The dominant industry there is agriculture. He told me that the town council had voted to expand the utilities infrastructure in hopes of attracting new businesses. It didn't happen. The town was then stuck with how to find the tax receipts to pay for their improved infrastructure. They decided to build a shell of an industrial building whose tenant would be able to design and build the interior to their needs. This worked for them. Not only did they get a business that would created tax revenue, but also new residents who needed homes to live in.
So, in many respects the infrastructure question is many questions related to infrastructure, tax code, education, property development, and the support and preservation of local traditions and cultures. From what I see, the future, the global future, is a local one.