The Great North Indian Plains And Economic Convergence - Part 1: The Railroad Revolution

No matter who the Prime Minister is from June 2019 onwards – though I do think Modi’s Bharatiya Janata Party (BJP) is likely to win, a couple of years may not be enough to change the trajectory of the country materially (the last few years have been an exception). Hence we can have reasonable estimates, with balanced upside and downside risks, for say, five years from now. Of course, I have written about how large I think India’s economy will be in 2030, so 2021-2022 is furthermore reasonable territory.

My hypothesis is that economic convergence among large Indian states will be visible in the data in the next five years – so far we have been seeing divergence in the post-liberalisation period. Congress politician Praveen Chakravarty has described India’s divergence as the 3-3-3 problem: "The richest three (states) are (approximately) three times richer than the poorest three large states.” But that may be about to change.

The reason for my hypothesis is twofold: infrastructure and technology. In this article, I want to focus on infrastructure.

No matter who takes the credit for cutting the ribbons, India is likely to see a railroad explosion in the next few years of the relative scale that the United Kingdom witnessed in the middle of the nineteenth century, the United States did slightly later (where it facilitated economic convergence within America), and that China witnessed in the two decades straddling the heralding of the new millennium.

To understand this better, let us have a look at India's population density (credit for map here) and then compare that with China below. More than half of India's population (by the 2011 census) lives in the following dozen states: Uttar Pradesh, Bihar, Madhya Pradesh, Rajasthan, Jharkhand, Assam, Punjab, Chhattisgarh, Haryana, Jammu and Kashmir, Uttaranchal, and Himachal. None of these big states have direct sea access – indeed other north-eastern states and Telangana also do not have sea access, but I am not even counting them.

Moreover, the above dozen mostly northern states do not have, on average, good railroad infrastructure compared to the rest of the country (and the absolute level nation-wide has been terrible, though improving), hence logistics costs are high. This means that India’s poorest so far could not be engaged in low-value-add manufacturing exports. (Labour laws are often blamed and correctly, but their impact is overstated due to the use of contract labour.) I have tried to explain this argument in a piece in which I called for massive expressway investments – and also approached the backwardness of eastern India from a different angle in this piece.

China, though, is very different (credit for map here). A majority of the Chinese people live in a province that has a sea border, or given the quality of Chinese hard infrastructure they live near enough. This has, along with other helpful factors, allowed a globally unprecedented manufacturing export boom as logistics cost got lower, even as labour became more expensive, though we may be on the final legs of that cycle. (Along with railroads, good ports have also played a key role in the Chinese boom.) Also notice, no large Chinese province is close to the density of population in Bihar or Bengal (which shows that India could have further urbanisation upside if we play our infrastructure and other cards right).

So what is going to change in India infrastructure-wise now that we understand that unless the Great North Indian Plains (from Punjab to Bengal) are not inter-connected and connected with the oceans, no meaningful boom can take place?

For starters, the Dedicated Freight Corridors are on the verge of completion. By around the end of 2020, both the Eastern (Ludhiana-Kolkata) and the Western (Delhi-Mumbai) corridors should be completed – the projects started in 2006, and we had delayed execution, but now land acquisition and other teething issues seem to be under control. This will in some cases treble rail freight speed (often passenger trains are given preference not just in terms of subsidies but also in terms of punctuality, such as it exists).

The cost of transferring goods from North India to the coast should fall significantly and we can also add opportunity cost of time saved (though thanks to the goods and services tax (GST) and better roads, both should improve for highways/expressways somewhat also). Moreover, toll monetisation by the government has taken off, which allows for new expressways to be built without major worries about funds, thanks to “asset recycling”. The government is targeting Delhi to Patna in 11 hours, and Delhi to Mumbai in 12 hours in the next few years. (Currently it takes around 18 hours and 24 hours respectively for those routes, so even if we adjust for some exaggerations, significant improvements lie ahead.)

All this will change the face of the so-called BIMARU states (Bihar, Madhya Pradesh, Rajasthan, and Uttar Pradesh) completely: remember, if one can sell a commodity trinket for say $10 in the global market, as opposed to say, $11, that is often enough of a difference for many importers to jump ship (then the virtuous cycle of scale further kicks in). Furthermore, we are also seeing big improvements in ports, waterways, metros, and airports. The Lucknow-to-Kolkata belt is especially populated (upwards of 1,000 people per sq km) with an approximately 50 per cent higher density than New York metropolitan area. Finally, Bihar and half of Uttar Pradesh together have a land area which is almost 20 times larger than the New York metropolitan area. This shows us how even incremental hard infrastructure can cause a significant positive impact in India and especially so in the densely populated parts of central-eastern India.

Finally, as infrastructure expands – it is not just ‘Make In India’ that benefits, but also the sector of affordable housing because more land becomes accessible. The government has further been giving aggressive incentives to the sector, and as the adjustment pains of RERA (The Real Estate (Regulation and Development) Act, 2016) and GST wear off, we should see a massive boom in the sector (REITs’ listing will also help free up/recycle capital). Cheap housing in turn will help raise take-home salaries, consumption, savings, and, through increasing financialisation, formal equity/ETF-like investments.

Meanwhile, southern and western India will of course continue to progress partially due to path-dependent agglomeration benefits. However, as labour mobility prima facie increases in India (due to easier travel, better technology, more inter-mingling, and a de facto acceptance of ‘Hinglish’ in urban India, etc), the pressures of so-called neoclassical economics should kick in and cause intra-India convergence (as indeed, global economic convergence further strengthens – a trend going back to around the start of this millennium). That should, to some extent, calm the somewhat genuine, somewhat contrived north-south resources debate.

A fiscal union necessarily involves horizontal transfers – the extent can be debated – even if the central government reduces its to-do list simply because of “progressive” taxes and means-tested benefits at the individual citizen-level (thankfully, India is not the European Union). We will further explore that debate, the hypothesis of intra-India economic convergence and related points in the next part, where we see the effects of technology on the economic destiny of the Great North Indian Plains.

This piece was first published on the author’s LinkedIn page and has been republished here with permission.