To flatten the world

Issue 24 - Mar 2009

Prashant Kumar Singh

A WORLD Bank report  from 2007, titled “Connecting to Compete: Trade Logistics in the Global Economy” compared 150 countries and ranked India at 39th position in the logistics performance index, below Malaysia, Slovenia and the Czech Republic. Singapore was ranked first followed by some West European countries and the United States. The landlocked countries of Africa trailed in the list, with Afghanistan, landlocked and strife torn, ranked last. The report reinforces the truism that countries with a better trade logistics infrastructure, either due to historical reasons or due to a coherent development strategy, are economically advanced.
In today’s globalised world, where supply chains compete and ‘supply chaining’ has been arguably one of the flatteners, it makes sense to view the processes holistically and through the right lens—the lens of trade logistics. To gain sustainable competitive advantage in trade, the elements of trade logistics need to work synergistically to ensure efficient flow of goods, funds and information. These elements together form the physical and virtual infrastructure of the country, which underpin connectivity.
Trade competitiveness of economically advanced countries stems from their ability to reduce logistics costs without compromising reliability and predictability, while at the same time reaping the benefits of specialisation. Conversely, the gains from a competitive advantage in manufacturing or agriculture can be fully negated by high logistics costs. Logistics costs in India are about 13 percent of GDP as against 9 percent in developed countries like the United States. Apart from providing a competitive advantage in international trade, presence of an efficient trade logistics infrastructure will lead to domestic savings in the range of 4 percent of GDP. Prior to the economic reforms in the 1990s, India’s infrastructure was woefully inadequate and contributed to the lacklustre rate of growth. In the new millennium, it acts as a drag on the growth rate and will continue to remain so, if befuddled policy-making by the successive governments continues.
Myriad government departments and ministries, operating in their silos, claim ownership and frame policies for physical infrastructure comprising roads and highways, railways, airports, seaports, power, telecommunications, warehouses, customs, sales tax, border and state security. Infrastructure projects have been conceived, allocated and executed piecemeal by these agencies. Their geographical distribution and selection of the right infrastructure components have been skewed, mainly due to political considerations. It is commonplace in India for a minister to have a road or railway line terminate in his constituency, ignoring neighbouring industrial areas. Having several disjointed and uncoordinated projects, scattered randomly over the length and breadth of the country, completed after significant cost and time overruns, is no way to develop trade logistics infrastructure.
Even if the various elements of physical infrastructure are integrated, the swiftness of movement is heavily dependent on speedy clearance by various regulatory agencies. The paper-based system is slow and cannot keep pace with the expanding volumes of international and national trade. Therefore it is necessary to create a virtual infrastructure for implementation of an Electronic Trade Documentation System (ETDS), having a single point of transaction and linking multiple government bodies, private agencies and banks, throughout the trade process. Apart from reducing the cost and turnaround time of trade documentation, the seamless regulatory process—payment of port processing fees, customs fees, processing import and export permits, and issuing certificates of origin—will be transparent, simplified and predictable.
Infrastructure development has become part of public discourse and the government has increased spending on infrastructure as a fiscal measure to stimulate demand in the economy. As opposed to the earlier approach of the government being a mere provider of infrastructure, what is now needed is co-ordinated infrastructure development with seamless integration of ports, roads, railways, public agencies—customs, border security, police—and private service providers with the virtual highway.
This approach demands a new transport ministry formed by merging the existing ministries of Railways, Surface Transport, Shipping and Aviation. The Planning Commission should be designated as the nodal entity that will co-ordinate with other central ministries, state governments and private bodies for these projects. It will also have to reinvent itself as a think-tank for interactive policy-making by moving beyond its traditional role of an arbiter of resource allocation and policy formulation on investment models for infrastructure projects.
Most infrastructure projects have a long gestation period. As an immediate measure, the critical gaps in the physical infrastructure—such as an under-construction sea port lacking rail connectivity to the hinterland and co-located customs facilities—have to be identified and plugged. Spearheaded by the Planning Commission, the newly created transport ministry, the Commerce and the IT ministries have to act in tandem for creation, ownership and subsequent maintenance of virtual infrastructure alongside the existing physical infrastructure.
The creation of physical and virtual infrastructure in border areas has a bearing on India’s national security. Such a strategic development of Indian trade logistics infrastructure will also pose challenges regarding its own security; its vulnerabilities will be exploited by hostile governments and other adversaries by terrorist acts and cyber warfare. An integrated approach that incorporates security during planning stages of infrastructure development is a sine qua non for winning the asymmetric, information-centric wars of the future.
This integrated approach—of planning, coordinating, creating and maintaining trade logistics infrastructure—will entail a root-and-branch reform and restructuring of various government ministries and agencies, including their work culture. The political will needed to undertake such an exercise is visibly lacking now. However, the government can still be pressed by various stakeholders—entrepreneurs, the business community, public policy experts, the media and most importantly, the average voter—to attain these goals, as the recent decisions on internal security have demonstrated.
Trade logistics infrastructure is the key that will unlock the trade flow to fully realise India’s economic potential. India must build faster and stronger but above all, with a purpose. Otherwise, high logistics costs will deny connectivity to a flat world and India may realise to its peril that the world is not so flat after all.