Business Analyst Journal

Being one of the fastest growing economies, India has not only withstood the recent crisis and recovered fast, but also has emerged with brighter prospects amidst the global uncertainties. The growth in Indian economy has been fueled predominantly by the service sector. With recent initiatives by the Government, the manufacturing sector is expected to play a vital role in the growth story of India in coming years. One of the impediments for industrial growth in India has been considered to be lack of world-class infrastructure. To maintain high growth and take other diversified stakeholders of an emerging economy like India, it is indispensable to invest more for infrastructure development. In this paper, we have created a physical infrastructure index for the economy, to track the infrastructure status and pace of improvement in the infrastructure. We analyze whether infrastructure has a role in increasing GDP and manufacturing sector output, using data for the period 1981-2011. Using Vector Error Correction Model (VECM), we delineate that infrastructure has both long term and short term positive impacts on output of Indian economy. On the other hand, infrastructure has no short run impact on manufacturing output but has a significant long term positive impact on manufacturing output. This affirms that infrastructure plays significant role in stimulating growth in the economy.