TCS Daily

The Enemy Within

By Nikhil Bhat - August 10, 2006 12:00 AM

Earlier this year, Indian Prime Minister Manmohan Singh and President George W. Bush talked trade in addition to their higher-profile nuclear discussions -- and both seem keen to continue lowering trade barriers between the two nations. But as with many other developing nations, the progress made by India's network of bilateral trade agreements is frequently undermined by massive barriers to trade within India's own borders.

Some of the internal barriers to trade are constructs of the central government. For example, the 1955 Essential Commodities Act introduced a "public interest" litmus test in interstate regulation, establishing barriers to the free flow of goods, particularly in regards to minerals and natural resources. The Food Corporation of India -- set up to prevent the localized food shortages that resulted in famines under colonial rule -- added a layer of inefficiency and corruption to the transport of food.

But it's state-level regulations on transport and interstate commerce that are often the biggest obstacles. A 2005 working paper from the Australia South Asia Research Centre on the integration of rice markets showed that the average grains trader, once licensed (a difficult task in and of itself), faces over four hundred laws governing interstate trade. The regulations were designed to protect the producer and consumer against the alleged evils of arbitrage, but have instead steamrolled over the very players who enable goods to reach the markets most efficiently.

India's sheer size magnifies the problems. In 2004, Japanese Foreign Minister Yoriko Kawaguchi complained that while economic reforms and technology have cut the transport time for Japanese goods entering India to mere hours, it can take weeks for goods to reach destinations within India once they have arrived. The nation is bursting at the seams with economic potential, but the Byzantine network of internal checkpoints on dilapidated roads is hampering economic growth.

What's more, the high cost of transporting goods by the nationalized rail system forces producers to transport goods by road. In June, the Economist gave a glimpse into the horrific world of interstate road transport. A truck bound from Kolkata in the East to Mumbai in the West takes eight days at an average of seven miles (eleven kilometers) per hour.

The hours-long delays for each truck add up. A 2003 paper by Arindam Das-Gupta found that the waiting times at state borders alone cost Indians approximately 0.98% of GDP annually ($4.75 billion in 2002). The states that most often erect such checkpoints are also the most impoverished states.

Regionalism remains a key factor in Indian politics, as states pass confusing, archaic, and xenophobic laws to protect their respective identities. In much of western India, the explosion of industry since Independence brought with it a flow of labor from the de-industrializing East. Nativist cries that would make an Arizona Minuteman blush have led to severe clashes over the decades. Even elements of culture are not immune, as a ban on non-Kannada-language films in the state of Karnataka showed. These regional hostilities harm attempts at reform as well as create extra hurdles for individual producers.

New Delhi has done a commendable job of dismantling the erstwhile protectionist state at the national level, but internal trade remains a nightmare. If India really wants to realize her bright economic future, then she must address her internal trade barriers today.

Nikhil Bhat is a writer living in the Washington, DC area.


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