Creating jobs with infrastructure investment

Union Finance Minister Nirmala Sitharaman's recent announcement of a Rs 100 trillion to infrastructure development heads down a well-worn path. Like past attempts to address India's infrastructure deficit and provide a fiscal push to a slowing economy, it will have to reckon with a crucial question: where and how is the money best spent?

At the height of India's central planning excesses in the 1960s, Milton Friedman, as the apocryphal story goes, visited a canal construction site. On being told that the workers were using shovels instead of modern machinery because the canal was a jobs programme, Friedman pointed out that in that case, the government should have given the workers spoons instead of shovels. Much has changed since then. 

A convincing body of work has challenged the Chicago School's stern views on government investment. Economist David Aschauer's work highlights the role of infrastructure investment in a country's economic growth and development, for instance. And over the past two decades or so, the Centre and state governments have directed their infrastructure investment more effectively. A recent report by IDFC Institute Infrastructure Priorities for Job Creation in India provides the tools to further refine investment strategy. 

Factoring in economic geographies is key to capturing the far-reaching effects of infrastructure spending. Infrastructure needs differ depending on the dominant economic base in a region - industry, services or agro-allied. Additionally, focusing on areas that are poised for economic growth will give the greatest bang for the buck when it comes to helping firms scale up via infrastructure investment.

Using night lights data, we narrowed down our investigation for infrastructure priorities to 18 peri-urban districts across the country, that is, those that border a rural and an urban district. There was a specific reason for this: Such areas benefit from their proximity to the agglomeration economies of a large urban centre but are far away enough to not be affected by the urban core's congestion effects.  

The report surveyed 2,500 firms in these districts to understand how the government should prioritise infrastructure. Firms with varied types of economic activity were asked to rank major infrastructure bottlenecks they face in their operations. Unsurprisingly, in all three regions, a number of issues related to roads were the biggest impediments. Starting with Atal Bihari Vajpayee's Golden Quadrilateral to Pradhan Mantri Gram Sadak Yojana projects, successive governments have recognised the economic importance of connectivity. However, connectivity by itself is not enough. We identified specific problems with roads. In services districts, 66 per cent of firms reported traffic jams as a major hindrance. Poor quality of roads stood out in industrial districts, with 70 per cent of firms rating it highest. Such findings are instrumental in having problem-specific solutions. For instance, in agro-allied districts, only 32 per cent of the firms said narrow roads were a problem but 77.5 per cent identified traffic jams as being an issue. Thus, the government could focus on building flyovers rather than widening roads in such districts to boost growth and hence jobs. 

But we have identified more granular, region-specific constraints too: For industrial clusters, wastewater and effluent treatment facilities; for services, a lack of electricity; and for agro-allied, inadequate water supply. Electricity is particularly important as an infrastructure impediment — the most important overall after roads, in fact. And just like roads, the specific issues to do with electricity vary across regions. Contrary to popular perception, power cuts are secondary constraints for agro-allied and services firms. They suffer more due to high prices. This insight is crucial for directing electricity infrastructure provisioning and price reforms.

The direct effects of providing such infrastructure would be quite visible — better connectivity, more efficient firms and increased direct employment for people building it, among others. The indirect and induced effects on the economy — such as increased productivity, changes in gross value added and induced employment creation - are more difficult to quantify as the causal effects are difficult to isolate from each other. 

That said, we have devised a model for the data collected from the survey and found a substantial change in induced employment when the same infrastructure is built in different economic regions. Firms were asked to estimate the cost savings that arose from solving the infrastructure constraints. These figures were then compared to the current labour investment of the firms (captured in the survey) to determine the increased investments in employment. For every 10 per cent increase in savings due to improvement of roads, there is a varied impact on employment in different regions — 1.9 per cent increase in agro-allied regions, 3.7 per cent in industrial and 5.6 per cent — in services regions. 

Within the regions, too, infrastructure has a varied impact. In industrial clusters, for instance, a 10 per cent increase in the costs saved by firms due to better roads would lead to a 3.7 per cent increase in employment. However, the same 10 per cent increase in costs saved due to upgraded wastewater treatment infrastructure would lead to a 2.9 per cent change in employment. Thus, it is important to estimate the diverse impact of infrastructure before provisioning for it. 

India's jobs scenario seems to perpetually teeter on the edge of a crisis, with one million people entering the job market every month and not enough employment opportunities to absorb them. At such a time, a directed approach for prioritising infrastructure investments that will induce wide-ranging employment growth is essential. And on the growth front, the current slowdown makes it all the more important that the planned fiscal push is well directed.

The right infrastructure, after all, can drastically change the way businesses function and labour moves for the better. In the coming months and years, the Centre and states would do well to keep this need for strategic infrastructure provisioning in mind.

Writers are associates at IDFC Institute, Mumbai.