Globally infrastructure has been found to play a significant role in promoting inclusiveness and growth through various channels. These include reducing the cost and improving the quality of intermediate inputs, enlarging the market size and allowing greater competition, and improving access to public services and economic opportunities. In this paper, we empirically investigate the role played by infrastructure development in improving living standards across major states in India. We explore the role of infrastructure development in four sectors, viz. electricity, roads, education and health, in enhancing income growth and facilitating poverty reduction. Instead of focusing on the commonly used infrastructure expenditure as a measure of infrastructure development, we construct infrastructure indexes for each sector using an array of physical indicators for that sector. This helps us overcome the inaccuracies that can arise due to inefficiency, leakage, corruption and weak government procurement policies. We find that infrastructure development across roads, electricity and education sectors, significantly bolster economic growth. On the other hand, infrastructure development across electricity, health and education sectors substantially assist in poverty reduction, even after accounting for the impact of major social welfare schemes. We conclude by highlighting some broad measures to enhance infrastructure investment.

 

JEL Classification: C3, I15, I25, O11.

Keywords: Infrastructure, Income growth, Poverty, Panel VAR, India.