Sunday, October 31, 2010

Economic impact of Railways in India

In an earlier post, I had outlined the dramatic impact of investments in all-weather connecting roads in improving the economic prospects of any area. In fact, it is possible to argue that big-ticket investments in transportation infrastructure offer the biggest bang for the buck among any public investments. And more remote and backward the area connected, the higher the benefits.

In this context, a new NBER working paper by Dave Donaldson assesses the economic benefits of large transportation infrastructure by examining the development of the vast railway network in colonial India. He uses archival data from the times and compares the impact on areas where these lines were built and those where, though sanctioned, it was never built, and found that

"railroads reduced the cost of trading, reduced inter-regional price gaps, and increased trade volumes..., when the railroad network was extended to the average district, real agricultural income in that district rose by approximately 16%."

The economic impact apart, there are several social and political consequences of enabling physical transport connectivity. It immediately opens up the area, thereby potentially weakening political insurgency (through both economic development and reducing the cover offered by inaccessibility). The resultant opening up has the potential to create a powerful force of modernization that can erode regressive social and political traits, and empower the residents of the area. It also increases the efficiency of labor markets - the Bihar worker who was getting Rs 35 per day working in his village in Motihari now finds it convenient to migrate to work for Rs 200 a day in Mumbai - and promotes economic growth.

As an afterthought, and with reference to SR's SMS, the impact of light-rail networks could be even more dramatic. For a peek into the benefits, just look north of the border to China, which has already developed 7431 km of light-rail network. An ambitious 1,318-km high-speed rail line linking the country's two most important cities — Beijing and Shanghai - at a cost of $33-billion line will open in 2012, and reduce travel time in half, to just five hours.


Jayan said...

Agree. Our focus was more on upgrading existing lines to new facilities - like electrification, broadguage and double lines. While this is very important, railway did not do enough in creating new lines.

Given economic values, a road or rail is probably better than MNREGA.

gulzar said...

Would have been great if somebody could find out the multipliers of NREGA and railway or roadways!!

Sai Prasad said...

I think simply the multiplier effect need not determine the direction of our spending.

In the case of NREGA like programs the speed of trickle down is the key determinant.

I think a balance, as per the requirement of each government, needs to be arrived at.