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Financing Rural Infrastructure in Developing Countries: the case of India

  • Rajaraman, I.
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    Motivated by the robust empirical evidence on the positive growth and poverty eradication outcomes of public investment in rural infrastructure, this paper investigates variations in utilization by subnational state governments in India of a recent non-concessional lending facility for financing rural infrastructure projects. Contrary to prior expectations that only states in a robust fiscal situation would voluntarily approach a non-concessional window, a fixed effects panel regression establishes that the scheme was accessed in years of fiscal stress. A second exercise on irrigation funding in a low rainfall state shows allocations to high rainfall rather than low rainfall districts within the state. This is not an efficient allocation, in the light of empirical findings for India and China of higher returns to rural infrastructure in low-potential rainfed areas. Together, the results point to the need for fiscal conditionalities on the borrowing government, going beyond default guarantees. Lending has to be made conditional on upfront evidence of sectoral or general fiscal recovery mechanisms, linked to the sectoral pattern of use, with the time-pattern of disbursement dictated purely by project considerations. Poorer states, and less endowed regions within states, will need technical assistance to identify financially viable projects, since projects readily available off the shelf are typically available for better endowed regions, where the demands in terms of technical complexity and community involvement are lower.

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    Article provided by Euro-American Association of Economic Development in its journal Applied Econometrics and International Development.

    Volume (Year): 5 (2005)
    Issue (Month): 2 ()
    Pages:

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    Handle: RePEc:eaa:aeinde:v:5:y:2005:i:2_3
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    1. Rajaraman, Indira, 2004. "Fiscal developments and outlook in India," Working Papers 04/15, National Institute of Public Finance and Policy.
    2. Shenggen Fan & Peter Hazell, 2001. "Returns to Public Investments in the Less-Favored Areas of India and China," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 83(5), pages 1217-1222.
    3. Ahmed, Raisuddin & Hossain, Mahabub, 1990. "Developmental impact of rural infrastructure in Bangladesh:," Research reports 83, International Food Policy Research Institute (IFPRI).
    4. Peter Pedroni & David Canning, 2004. "The Effect of Infrastructure on Long Run Economic Growth," Department of Economics Working Papers 2004-04, Department of Economics, Williams College.
    5. repec:ind:nipfwp:15 is not listed on IDEAS
    6. Devarajan, Shantayanan & Swaroop, Vinaya & Heng-fu, Zou, 1996. "The composition of public expenditure and economic growth," Journal of Monetary Economics, Elsevier, vol. 37(2-3), pages 313-344, April.
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