Ask any economist about the relationship between the elasticity of demand for freight traffic and the gross domestic product (GDP) and they will tell you it is near unity, if not slightly higher, a sentence that is likely to leave you completely stumped. Dig a little deeper and you realise what they mean is that there exists a one-on-one or slightly higher co-relation between a country’s economic growth represented in terms of GDP and increased freight traffic. And that one cannot grow at the expense of the other.
If, for instance, a country’s economy grows at 7% in a single year, the goods carried by railways, trucks, ships, etc should also grow at 7% or more. Hence, corresponding investments will have to be made in laying down new railway tracks, setting up new road networks and more ports. However, if an economy grows even faster, as it happened in India during the go-go years of 2003-12, the demand for freight traffic could go up even higher.
The argument rests on the simple fact that freight traffic is by itself an economic growth driver. Growth in trade cannot happen without corresponding investments in ports; coal-based power production cannot grow without the availability of rail-based transport system to carry coal from the mines or ports to the power stations. As former deputy governor of the Reserve Bank of India and chairman of National Transport Development Policy Committee (NTDPC) Rakesh Mohan argues: “The current Make in India campaign is unlikely to make much headway even in the medium term if focussed attention is not given to making coordinated investments in transport infrastructure, and particularly for efficient freight traffic in railways.”
So what kind of investments will be needed to pump in freight traffic to ensure that the economy grows at these higher levels in the next five years? And what should the new government do to ensure that funds are readily available? The new government can take some learning from the rule of the earlier United Progressive Alliance government, which recorded nearly 8.5% GDP growth between 2003-12. During those years the gross domestic capital formation (GDFC)—investments made by the public and private sectors in new assets-- was between 35% to 38%, helped no doubt by higher savings by households, public and private sector and the government. “It was achieved in the presence of broad macroeconomic stability: falling fiscal deficits, low inflation, financial stability, and modest and stable current account deficits,’’ says Mohan. Moreover, corporate savings and investments were fuelled by reduced borrowing by the public sector, low interest rate and higher profitability for both the public and private sector.
Hence, the country needs to achieve similar macroeconomic conditions on a constant basis over the next couple of decades to ensure adequate funding and necessary growth. “We cannot have domestic savings fall to around 33% and GDFC to less than 35% as it happened during 2013-15,’’ says Mohan, which is down to 32.5% currently.
The NTDPC projection on freight traffic suggests that in order to grow at 8% to 9% every year, India’s GDFC needs to increase from the current 32% to 40% by the late 2020s and early 2030s. Correspondingly, the total infrastructure spend will need to increase from 5.8 % of the GDP achieved in the Eleventh Five Year Plan (2007-12) to 8% over the next 15 to 20 years. It also means that investments needs to go up from ₹25 lakh crore between 2007-12 and (₹60 lakh crore in nine years between 2008-2017, according to the rating agency CRISIL) to ₹70 trillion in the years 2017-22 and ₹100 lakh crore in the next five years ending 2027. “The corresponding investment in transport is envisaged to about 3.7% of the GDP, 45 % of the total infrastructure spending—up from 2.7% in the Eleventh Five Year Plan. To achieve this there will be a need to increase both public and private sector investment in transport,’’ adds Mohan.
But the former deputy governor of RBI is quick to add that given the poor record of public-private partnership model in the country, it is highly unlikely that the private sector would invest as much as they did in the past years. Hence, total public investment in the transportation sector needs to increase from 1.8% of the GDP in the Eleventh Five Year Plan to 2% to 2.2% over the next couple of decades, while private investment will need to go up from 1% to 1.3 to 1.6% of the GDP. “Given the public investments in railways, and reduced private sector expectations in roads, the total public investment may need to be in the range of 2.2% to 2.5% of the GDP. Such an increase in public investments can only be done if there is a corresponding increase in revenues and a reduction in unnecessary current expenditures, particularly on non-merit subsidies,’’ says Mohan. And to attract the private sector in the road sector, the government will have to levy user charges in the form of tolls, fees and like and the ability to exclude those who do not pay, or are not able to pay.
Where should the government invest if and when it does have the money? According to Mohan, primacy should be given to the dedicated freight corridors (DFCs) and their continued expansions. Completion of the eastern and western DFCs, and the three new ones; North-South from Delhi to Chennai, East- West from Kharagpur to Mumbai and along the East- Coast from Kharagpur to Vijaywada, will transform the transportation map of India, he says.
The reason is simple enough. As the freight traffic route on the main trunk route gets diverted to these freight corridors, the capacity of the passenger traffic in railways will increase manifold and make it a profitable enterprise.