9/6/2015

CouldrailwayshavedonemoretoaideconomicdevelopmentinIndia?

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CouldrailwayshavedonemoretoaideconomicdevelopmentinIndia?

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Indian Railways celebrated its 160th

anniversary last month. This column
argues that while railways played a
large economic role in British India, it
islikelytheycouldhavedonemoreto
aideconomicgrowthanddevelopment
inthecountry.
Between
1850
and
Indias
independence in 1947, railways were
the most important infrastructure
developmentinthecountry.Interms
of the economy, railways played a
major role in integrating markets and
DanBogart
LatikaChaudhury
increasing trade. In terms of politics,
UniversityofCalifornia
NavalPostgraduateSchool
railways shaped the finances of the
dbogart@uci.edu
latika.chaudhary@scrippscolle
colonial government and the Princely
ge.edu
States. Indian political institutions
influenced railway ownership and
policy,whichinturninfluencedrailwayperformance.Asthe20thcenturyprogressed,railwaysbecameaforce
forindependenceanddemocracy.
WhiletheGovernmentofIndiahadastronginfluenceonrailwaysfromthebeginning,thegovernmentsrole
increasedovertime.Railwayswerepartiallynationalisedbetween1880and1908astheGovernmentofIndia
assumed a majority ownership stake in most of the main trunk lines. Complete nationalisation occurred
between1924and1947asthecolonialgovernmentassumedfullcontroloveroperations.

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ThisMonth

PostedOn:29May2013
Section:Columns
Topics:Infrastructure

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ChartingacoursefortheIndian
economy
KarthikMuralidharan,Arvind
Subramanian
Thepoliticaleconomyofdata
FlorianBlum,RohiniPande
Movingbeyondthegrowthversus
redistributiondebate
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WhydidtheIndianeconomy
stagnateunderthecolonialrule?
AniruddhaBagchi

Populartags
publicfinance UID
environmentalregulation China

malnutrition righttofood
manufacturing PDS
democracy RBI ruralIndia IT
credit MNREGA inflation

WestBengal Bihar cashtransfers

Bangladesh AndhraPradesh

schooling RTE
landacquisition healthcare
training genderdiscrimination
southAsia
inclusivegrowth

Dividend guarantees were a key feature of the early era of private ownership before 1880. The British
companies that built and operated the early railways were guaranteed a 5% return on their capital

affirmativeaction exchangerates
crimeagainstwomen
financialinclusion US

investment1.Guaranteeswerecostlybecausetheydulledincentivestoloweroperationalcosts,butitislikely
theyencouragedrapidrailwaydevelopment.Theonlyalternativewaslargescalegovernmentownershipand
investment,whichwasunlikelygivenIndiasfiscaldevelopmentaroundthattime.

waterandsanitation GDP

EconomicroleinBritishIndia
TheperformanceofIndianrailwayscanbeclassifiedintotwoperiods:pre1920andpost1920.Therewasa
trendtohigheroutput,productivity,andprofitsbetween1850and1919.Therateoftotalfactorproductivity
growth, which is the difference between output growth and average of input growth, was similar to more
advancedcountries.Butafter1920therewasalevelingoffinproductivity,andanincreaseinfares.Thelow
productivityoftenassociatedwithIndianrailwaysbeganinthesecondquarterofthe20thcentury.
Traffic developed slowly in the first decade of railway operations, but the subsequent increase in traffic was
large,surprisingevenofficialestimates.Intheabsenceofcomparablealternatives,Indiansusedrailwaysto
transport goods and people. The key questions are whether the introduction of railways increased market
integrationandpriceconvergence,andalsowhetherrailwayssubstantiallyincreasedincome.

publicservicedelivery

Indianstates

cities

currentaccountdeficit energy
electricity childhealth
foodsecurity Gujarat
fiscalpolicy services FDI
PlanningCommission

monetarypolicy

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Railwaysandprices
Alargebodyofresearchhasexaminedtheeffectsofrailwaysonpriceconvergence.Hurd(1975)compared
averagepricesandvariationinpricesacrossrailwayandnonrailwaysdistricts.Inrailwaydistricts,priceswere
lessdispersedandclosertotheaverageascomparedtononrailwaydistricts.McAlpin(1974)foundthatprices
of both food and nonfood crops converged as railway development expanded. However, Andrabi and
Kuehlwein(2010)implythatrailwayscanexplainonly20%oftheoverall60%decreaseincrossdistrictprice
dispersionbetweenthe1860sand1900s.Theyconcludethattheeffectsofrailwaysonmarketintegration
are overstated. Meanwhile, in an innovative study, Donaldson (2012) shows that interdistrict price
differencesinsaltareequaltotradecostsbecausesaltisproducedinonlyonedistrictandconsumedinmany
otherdistricts.Hethenmeasurestradecostsandfindsthearrivalofrailwayssignificantlyreducedtradecosts,
andthatrailroadssignificantlyincreasedtradeflows.
The different conclusions partly stem from the commodity being studied. Grain was a more important good
thansaltintermsoftotalvalue,butitwasnotalwaystradedbetweenregionsevenafterrailwaysentered.
Theconclusionsmayalsodifferbecausethereisamissingvariableinbothanalyses,whichisthefreightrate
charged by railways in each market. Data from the Administration Reports show that freight rates differed
acrosscommodities,withspecialratessometimesbeingofferedongrainorcoal.Moreresearchisneededto
understand how railways influenced markets, incorporating the role of freight rates and different goods and

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9/6/2015

CouldrailwayshavedonemoretoaideconomicdevelopmentinIndia?

inputsusedinproduction.
Railwaysandincomes
Historians have long argued that national income would have been far smaller in most countries if railways
hadneverbeenintroduced.Hurd(1983)wasthefirsttomakeasocialsavingscalculationforIndianrailways.
Heassumedthatwithoutrailways,freightrateswouldhavebeenbetween80and90%higher,basedonthe
observeddifferencesbetweenrailfreightratesandthoseforbullockcartsduringthemid19thcentury.Using
thevolumeoffreighttrafficin1900,HurdestimatedthesocialsavingstobeRs.1.2billionor9%ofnational
income.TheestimatedsocialsavingsofrailwaysarelargeconsideringrealGDPincreasedbyaround50%from
1870to1913.
WhydidrailwayshavearelativelylargeimpactinIndia?
Wethinktherearetworeasons.First,railwayswerefarsuperiortotheexistingtransporttechnologyinIndia.
Bullock carts were not an effective alternative to railways and India did not have an extensive inland
waterway network. Second, Indian railways experienced high levels of totalfactor productivity growth after
they were constructed. The social savings of any technological innovation is partly due to improvements in
efficiency after the original breakthrough. According to our estimates the high level of railway productivity
growth accounts for over 13% of all national income per capita growth from 1874 to 1912 (Bogart and
Chaudhary,2013).
Thesocialsavingsmethodologyprovidesapowerfulandsimpletool,butithassomeproblems.First,itisnot
clearwhatthepriceofroadorwatertransportwouldhavebeenintheabsenceofrailways.Congestionwould
haveincreasedonroadsandriverswiththeincreasedtrafficvolume.Thecostofusingalternativetransport
modes is arguably underestimated in most cases as a result. Second, the social savings calculation omits
spillovers or indirect effects. In theory, railways should increase demand for iron and steel and increase
competitioninmanufacturing.Theyalsocontributetoagglomerationofeconomicactivity,liketheemergence
ofcities.
Inspiteofthesecritiques,therearereasonstodoubttheimportanceofspilloversintheIndiancase.Mostiron
andsteelimportscamefromBritainandthustherewaslimitedscopeforincreaseindemandduetorailways.
The manufacturing sector was small as well, so the effect of railways on competition in manufacturing was
relativelyweak.Indiancitiesalsoremainedquitesmallwellintothe20thcentury.
IndianRailwayscouldhavedonemore
It appears that railways primary impact in the Indian economy was to increase interregional and
internationaltrade.Butthisraisesadifferentquestion.Whydidntrailwaysdomore,suchasspurringahigher
rateofeconomicgrowth?Somescholarsblamecolonialpolicy.TheIndiangovernmentpaidalotofattention
to profits, and freight rates were perhaps not set at the socially optimal level. There is also criticism that
passengerservicesweregiveninsufficientattention.FareswerequitehighconsideringincomelevelsinIndia.
Forexample,ThomasRobertson,acontemporarycriticofIndianrailways,arguedin1903thatIndianfares
and rates should be onesixth of English fares, when in fact they averaged between onethird to twothird.
Ultimately, it seems the railways could have done more to aid Indian economic development by setting
developmentalfaresandfreightcharges.

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ThiscolumnhasbeenreprintedwithpermissionfromIndiaatLSE(http://blogs.lse.ac.uk/indiaatlse/)
Notes:
1. Private British companies constructed the initial railway lines in India and a majority of the capital was
raisedinBritain.
FurtherReading
Bogart,DanandChaudhary,Latika,RailwaysinColonialIndia:AnEconomicAchievement?(May1,2012).
AvailableatSSRN:http://ssrn.com/abstract=2073256
Andrabi,TahirandMichaelKuehlwein.2010.RailwaysandPriceConvergenceinBritishIndia.Journalof
EconomicHistory,70(2):351377.
Bogart,DanandChaudhary,LatikaRegulation,OwnershipandCosts:AHistoricalPerspectivefromIndian
Railways,AmericanEconomicJournal:EconomicPolicy4(2011),2857.
Bogart,DanandChaudhary,LatikaEnginesofGrowth,theProductivityAdvanceofIndianRailways,1874
1913.Forthcoming,JournalofEconomicHistory,2013.
Donaldson, Dave. 2012. Railways of the Raj: Estimating the Impact of Transportation Infrastructure,
Workingpaper.
Hurd, John II. 1975. Railways and the Expansion of Markets in India 18611921. Explorations in
EconomicHistory,12(3):263288.
Hurd,JohnII.1983.Railwaysinch.8oftheCambridgeEconomicHistoryofIndia,vol.2:17571970.
Eds.D.KumarandM.Desai.London:CambridgeUniversityPress.
McAlpin,MichelleBurge.1974.Railroads,PricesandPeasantRationality:India,
18601900.JournalofEconomicHistory,34(3):66284.

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