Transportation Cost and Trade Competitiveness: Empirical Evidence from India

Abstract: India has been witnessing a sharp rise in merchandise trade and showing greater trade interdependence on a large variety of goods, particularly in intermediate and capital goods. However, higher transportation costs continue to impede India’s trade. Costlier transportation prohibits trade in India and taxes the trade in the way tariff does. This paper provides sufficient evidence to ascertain that variations in ad-valorem transportation costs strongly influence trade flows in India. Another conclusion of this paper is that transportation cost is relatively more important than tariff in enhancing India’s merchandise trade. Reduction in transportation costs should therefore get utmost priority while formulating policy for India’s infrastructure development and trade facilitation since the fall in transportation costs, as an outcome of improved infrastructure, will stimulate trade. The challenge for India is thus to identify improvements in trade facilitation, logistics services and related infrastructure that can be achieved in the short-to-medium term and that would have a significant impact on trade competitiveness of India.