On the highway to a better trade regime

Along with GST, India needs infrastructure for easy movement of goods 

The opening of the Suez Canal in 1869 helped India participate in an expanding world economy. An industrial boom followed, albeit under conditions of unequal colonial trade. The broader lesson is clear. Interlinked trade routes—be it the Suez Canal or the Silk Route—have always been essential to the spread of economic prosperity.

The creation of a seamless internal market that promotes economic growth is an unfinished job in India. One part of the task is removing barriers to interstate trade through the goods and services tax (GST). The other task is to provide physical infrastructure that will allow goods to move across the country comfortably.

The Indian government plans to build a network of 27 road corridors that will bring various parts of the country together. The blueprint for the grid is reportedly ready. Such a proposal needs to be welcomed. It may seem ambitious to some, but it is useful to remember that the Golden Quadrilateral and the North-South corridor projects were met with a lot of scepticism when they were first announced by then prime minister Atal Bihari Vajpayee at the turn of the century.

The proposed national highway grid will connect 12 major ports and cities with populations of more than 45 million and 26 state capitals, and ensure that highways are linked every 250km, conforming to the ambitions of Bharatmala—the government’s flagship project to “connect India like never before”.

Roads form vital links between markets that are not connected. They link producers to distant markets, promote economic specialization, provide linkages to other parts of the economy and generate positive externalities. But the greatest benefit of the proposed national highway grid would be for interstate trade. Interstate trade for India is less than 15% of gross domestic product, whereas the corresponding figures for the US and China are 40% and 35%, respectively. High transaction costs, which include physical and legal infrastructure problems, are among the primary reasons for the low level of such trade in the country.

In India and elsewhere, travel—both passenger and freight—involves costs in terms of money and time. The reduction of these costs requires the expansion of roadways as well as the simultaneous deployment of resources on alternative means of transport such as rails, inland waterways and air.

Though India has the second largest road transport network in the world, the growth rate of road development is slow compared to the growth of road freight and vehicle volume. The disproportionate burden of freight on roads does not help either. The current road to rail ratio of 70:30 is inadequate and inefficient for economic as well as environmental reasons.

If roadways form the physical foundation for uniting India’s markets into an integrated whole, reducing transaction costs and facilitating interstate trade, GST—now with the backing of most states—will form the legal and fiscal foundation. It will address the cascading effect of the present tax regime, broaden the tax base, increase compliance and reduce inter-state variations in taxes. The current tax regime also imposes significant time costs on interstate road freight via interstate checkpoints, and that translates to lower freight volumes moved.

India has one of the lowest average speeds for trucks and about 60% of their time is taken up at these checkpoints and tollgates. A joint study report by Transport Corporation of India and Indian Institute of Management Calcutta released last week estimates that India incurs costs of $14.7 billion and $6.6 billion annually due to additional fuel consumption costs and transportation delays, respectively. This makes producers less competitive despite having competitive input prices. According to a McKinsey estimate, around 13% of GDP is compromised by these logistical lacunae in India compared to 7-8% in developed economies.

Freight transport depends on the volume of goods produced, location of suppliers and consumers and efficient use of resources. But in India, infrastructure problems and red tape have compromised the manner in which these factors are balanced—and consequently, the demand-supply equation. The highway grid will not set it right by itself. But it could be a good start.

In what other ways can India resolve its logistics issues?