Role of Transportation Projects on Economics

Anindya Bandyopadhyay (203122004)

Submitted on 18/11/2022
CE615 – Transportation Economics
Role of Transportation projects on Economic growth:
• From the historic era the transportation has played an important role in increase in
trade and commerce between different parts of the world thereby influencing and
contributing towards their economic growth. The Industrial revolution would not
have been possible without the development of transportation. The various
contributions of transportation towards economy of a country are discussed here –

Contribution of Transportation towards

overall development of an Economy

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Role of Transportation projects on Economic growth:
PRODUCTION
• Optimized production
locations
• Lower production cost
• Lower inventory levels

Improved
Transportation Economic benefits
• More product variety
Infrastructure • lower prices
• Greater speed
•
• Economic growth and
More reliability
• Lower transportation cost efficiency

Distribution
• Optimized distribution
network
• Lower inventory levels
• Lower distribution cost

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Economic Importance of Transportation :
1. Industrialization – New Industries grows only at place where development of
transportation is significant. This ensures that they can easily access the raw
materials and distribute the products.

2. Exchange of commodities and wealth - As different industries grow in the

different parts of the world, it facilitates exchange and thus, promotes economic
activities.

3. Market Stabilization - With availability of appropriate transport facility, the

produce can be evenly distributed over space, and consequently, the local market
prices can be maintained steady, and price spiral in the deficit areas can also avoided.

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4. Territorial Division of Labour - Transport facilitates the territorial division of

labour or regional specialisation. It promotes division of labour based on skills, as

transport can facilitate widening the market for a commodity.

5. Employment Generation – Transportation projects are a massive employment

generator directly and indirectly. A project requires a huge workforce for its

actualization on the other hand various allied employments, such as roadside

shops, new industries, commercial hubs, recreational hubs, etc. grows up centring

newly developed transportation facilities.

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6. Growth in Agriculture – Agriculture is a major contributor towards a country's
economy. As a result of transport services, the productivity of agricultural lands has
increased through the application of improved manure and fertilizers. Transport
again helps in the marketing of agricultural produce.

7. Increase in consumption – Transportation helps in increase in demand for goods.

It enables the consumer to enjoy benefits of goods not produced locally. This
increases the standard of living, an essential factor for further development of
marketing and economy.

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Importance of Transportation at various levels of Economy :
• At the Macroeconomic level, transportation and mobility can be linked to the ‘level
of output’, ‘employment’ which can be linked to ‘National Income’. In many
developed countries, transportation accounts between 6% and 12% of their GDP.
• At the Microeconomic level, transportation can be linked to producer, consumer and
production costs. The importance of specific transportation activities and
infrastructure can thus be assessed for each sector of economy.
• Transportation accounts on an average between 10% and 15% of household
expenditures. While, it accounts around 4% of the cost of each unit of output in
manufacturing.

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Contribution of Transportation towards India’s GDP :

• India’s transportation sector is large and diverse; it caters to the need of 1.4 billion
people directly or indirectly.
• Transportation sector accounts for a share of 6.4% in India’s Gross Domestic
Product(GDP). Road transport has emerged as the dominant segment in India’s
transportation sector with a share of 5.4 % in India’s GDP.

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Share of different modes of Transport in India’s GDP :

Sector 2008-09 2009-10 2010-11 2011-12 2012-13 2013-14

Overall Transport 5.7 5.8 5.9 6.2 6.2 6.4

Sector
Road Transport 3.8 3.9 3.9 4.1 4.3 4.5

Rail Transport 1.1 1.1 1.1 1.1 1.2 1.2

Water Transport 0.2 0.2 0.3 0.3 0.2 0.2

Air Transport 0.2 0.2 0.2 0.3 0.3 0.2

Services 0.4 0.4 0.4 0.4 0.3 0.3

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Growth in Indian Economy with Growth in Highway Network in India:

Indian
Economy

Length of
Highway,
Km

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Interdependency of Transport and Economy:
• Transportation shapes, sustains and enhances the economy of a country. On the
other hand, the Transportation sector of a country is influenced by its economy. More
the country is economically effluent, more sound will it be in the Transportation
sector. So, Transport and economy are closely inter-related, the one depending on the
other.
• The rate at which the country’s economy grows closely determines the rate at which
transport grows. Generally, the rate of growth of transport is higher than the rate of
growth of economy. The ratio between the rate of growth transport and the rate of
growth of the economy can be marginally above 1.0 in the case of highly developed
countries but can be as high as 2.0 in the case of low income and middle-income
economies.
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Transportation and Logistics :
• Logistics is a major contributor towards a countries economy. The
products can be only consumed by the customers only if it reaches the
market in time and in its original quality. The major cost of logistics is
transportation cost. Here is a representative division of various costs
involved in logistics.
Constituents of total logistics cost % of Total cost

Transportation 35%
Warehouse and handling 9%
Inventory 25%
packaging 11%
Customers and shopping 6%
Transit losses 14%
Technology cost <1%

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Comparative study of ‘Growth of a Country’ and its ‘Transportation’:

• For this study two types of rankings based on two indices have been considered.

• (1) Human Development Index (HDI) – HDI is a statistics developed and compiled
by the United Nations to measure various countries’ levels of social and economic
development. The rankings based on HDI for the year 2018 has been used here.
• (2) Logistics performance Index (LPI) - The LPI is an interactive benchmarking
tool created by World Bank to represent how efficiently a country handles its trade

logistics. Which in turn reflect the development of its Transportation Sector. The

rankings based on LPI for the year 2018 has been used here to represent the

Transportation robustness of a country.

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HDI and LPI Rankings of few countries for the year 2018:

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Graphical representation of HDI vs. LPI study:

DEVELOPED

MEDIUM DEVELOPED

LOW DEVELOPED

*NOTE – Lower the Rank,

better the performance.

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Economic analysis of Transportation projects:
• Economic evaluation is the comparative analysis of alternative courses of action in
terms of both their costs and consequences in order to assist policy decisions. This is
very essential for the providing agencies in various aspects as given below –

I. To analyse the investment worthiness of the project.

II. To arrange the alternative projects in descending order of their priorities.

III. To select the most economic option out of the comparable projects.

IV. To assist in systematic evaluation and identify the best alternative over a time
period.

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Methods of Economic Evaluation:
• Various methods of economic evaluation of a transportation project are as follows-

I. Rate of Return Methods:

1. Benefit Cost (B/C) Ratio Method

2. First Year Rate of Return Method

II. Discounted Cash Flow (DCF) Methods:

3. Net Present Value (NPV) Method

4. Internal Rate of Return (IRR) Method

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Proposed Public Expenditure on Transport,12th plan (2012-17) :

S.NO SECTOR GBS IEBR TOTAL STATES TOTAL

OUTLAYS

1 ROADS AND 2713 648 3361 6524 9895

ROAD
TRANSPORT
2 RAILWAYS 1942 2250 4192 - 4192

3 PORTS AND 70 220 290 43 333

SHPPING

4 CIVIL AVIATION 170 162 332 51 383

TOTAL 4894 3280 8175 6618 14793

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Economic regulation :

• The transportation sector is often regulated in order to bring it in conformity

with economic priorities. Unless people and goods move from place to place,
economic activity cannot take place.
• There are basically four ingredients in economic regulation, viz. fair
regulation, entry regulation, quality of service regulation and tax regulation.
• Fare regulation- In order to ensure the even spread of transportation it is
necessary for the government to regulate fares so that passengers are not
exploited and at the same time economic viability of the operators is not
jeopardized.
• Entry regulation- regulation in choosing the most qualified candidate to enter
the transportation industry.

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• Quality of service regulation-To ensure an efficient, adequate and properly
coordinated transport service, it is essential to create a professionally
competent cadre of regulatory officials.
• Tax regulation- The tax structure should foster the development of
transportation by using the revenues to improve terminal facilities, evolving
safety and environmental standards and enable growth.
• Goals of regulation
• Protection of public interest.
• Transport as a viable business to attract better manufacturers and operators.
• Supporting national and strategic interests.

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Contributions :
Sl. No. Roll No. Name Slides Prepared Materials Studied and Gathered
1 203122004 Anindya Bandyopadhyay 2, 4, 5, 6, 10, • Human Development Indices and Indicators (
11, 13, 14, 15, https://hdr.undp.org/)
16, 17 • LPI Report 2018 (https://lpi.worldbank.org/)
• Lecture notes of Dr. Marisamynathan S.

2 203122021 Rehan Raza 1, 3, 7, 8, 9, 12, • Human Development Indices and Indicators (

18 , 19, 20, 21, https://hdr.undp.org/)
22 • (
https://transportgeography.org/contents/cha
pter3/transportation-and-economic-develop
ment/
)
• (https://www.transport.govt.nz/assets/
Uploads/Report/edt-Contribution-of-
transport-to-economic-development.pdf)

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 Thank you…

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