Is infrastructure the gap between India and China?

Business Standard, 3 May 2006

India aspires to Chinese-style exports in labour-intensive manufacturing. Four things hold India back: labour law, small-scale sector reservation, indirect tax structure, and infrastructure. New evidence on Chinese ports shows that they are roughly as bad as ours. Hence, explanations other than infrastructure might be more important.

Considerable resources are being deployed in improving infrastructure. Is it working? There is a need to measure how we are faring. What do we measure? The ultimate bottom line is that better transportation infrastructure must yield lower costs of transportation. The best way to measure the impact of the new national highway from Bombay to Delhi is by measuring the reduction in the cost of shipping goods from Bombay to Delhi.

In the area of ports, the standard statistics which are disseminated pertain to delays at ports and the turnaround time. These are, indeed, important measures, and the sharp reduction in delays over the last decade represents an important achievement. However, lower delay is only a means to an end. The end is low cost of transportation. Many elements affect the cost of transportation, over and beyond delays.

Cost measures associated with alternative Indian ports, and their international competitors, are not available. However, some fascinating new evidence has surfaced in a recent NBER paper by Blonigen and Wilson. BW have harnessed comprehensive data about import charges associated with all ships coming into the US. This is defined as ... the aggregate cost of all freight, insurance and other charges (excluding US import duties) incurred in bringing the merchandise from alongside the carrier at the port of exportation ... and placing it alongside the carrier at the first port of entry in the US.

This cost contains three components:

  1. Costs of loading the freight and leaving the foreign port,
  2. Costs of moving between ports and
  3. Costs of arriving at the US port and unloading the freight.

Using an econometric model, BW control for the second and third parts. The residual can then be attributed to the costs associated with the foreign port. Their data size is huge, and the econometric model is remarkably successful, explaining 90 per cent of the variation in import charges.

This methodology allows them to isolate a measure of cost associated with each foreign port that sends ships to the US. It can be applied year by year, thus yielding a time-series of the efficiency of the foreign port.

The results they show are restricted to the 100 ports that send the most traffic into the US. Only one Indian port (Bombay) makes it to this list. All results are expressed as an offset when compared with Rotterdam. The result for Bombay shows that the cost associated with Bombay port is 25.3% worse than Rotterdam. The BW results have three interesting features:

  1. Bombay figures at near the bottom of the list. By international standards, we are among the worst.
  2. A comparison between 1991-1993 and 2001-2003 shows that things have actually worsened over this decade. While the functioning of the port may have improved in some ways, simultaneously, the volume of traffic has also risen dramatically. The bottom line is cost, and the BW results suggest that the gap between Bombay and Rotterdam worsened over this decade.
  3. The most interesting feature of these results is a comparison with our peers. Bombay, at 25.3%, is worse than Hong Kong (11.3%). We are also worse than Karachi (17.1%) and Colombo (22.5%). But remarkably enough, we are not that much worse than other Chinese ports, which stand at 27% (Dalian), 26.8% (Dagu/Tanggu), 26.7% (Shanghai), 25.5% (Ching Tao), 24.2% (Yantian) and 23.4% (all other Chinese ports).

The high costs of Chinese ports raise questions about the popular belief that China has succeeded in building world-class infrastructure, and that this world-class infrastructure is central to the Chinese manufacturing growth miracle. The BW results show that Chinese ports, barring Hong Kong, are, actually, as bad as ours. But Chinese manufacturing exports dwarf Indian manufacturing exports. How can this be explained?

One explanation is Hong Kong port, which has inherited British institutions, is hence only 11.3% costlier than Rotterdam, while we are at 25.3%. Our goal in India should be to match the cost numbers of Hong Kong, and not of Shanghai. However, this does not explain the puzzle. The volume of goods that flow into the US from Chinese ports other than Hong Kong is roughly 16 times bigger than the volume of traffic from Bombay.

One explanation could lie in distance. The total transactions costs for shipping goods from India to the US reflect costs at ports plus costs of traversing the high seas. Even though the port in Shanghai is roughly as bad as the port in Bombay, the distance from Shanghai to the US west coast is smaller than ours. However, on the other hand, the ride to Europe up the Red Sea through the Suez Canal is much shorter for India. Hence, while geography gives China an edge in exporting to the US, we have the identical edge in exporting to Europe. Given that Europe is roughly as big as the US, these two effects should cancel out.

In summary, the measurement of costs at ports makes one uneasy about the claim that Chinese infrastructure quality is central to the Chinese manufacturing exports growth story. While we should continue to endeavour to make Bombay match the Hong Kong numbers, we should perhaps recognise that matching Chinese infrastructure quality is not central to replicating the Chinese export miracle.

If not infrastructure, what else separates India and China on manufacturing exports? There are three bottlenecks left: small-scale sector reservations, labour law, and indirect taxes. It may, hence, be time for policy makers to shift their prime focus to these other issues.

The indirect tax front is basically about the GST: achieving near-zero customs, zero-rating of exports, and free movements of goods within the country. The recurring theme is economies of scale -- China has perfected gigantic labour-intensive factories. Barriers to the movement of goods, SSI reservation, and Indian-style labour laws all hold back Indian firms from achieving scale. These three constraints differ fundamentally from (say) bad electricity, because when faced with Indian labour laws, there is no coping strategy like buying a generator.

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