Can India’s east coast corridor project succeed?

The East Coast Economic Corridor (ECEC) is India’s first coastal corridor and an example of what economists sometimes call “an integrated economic development initiative”. The key idea behind this corridor is to have port-based industrial development along the eastern coastal belt of India.

For a long time, the national government in Delhi has been keen to exploit India’s 7,500 km-long coastline, along with the 14,500km of potentially navigable waterways.

The ECEC’s development program starts with the launch of the Vizag–Chennai Industrial Corridor. The VCIC is ambitious, covering approximately 800km and including several port clusters, as well as major industrial zones.

India’s national government is attaching great importance to both the ECEC and VCIC and the overall objective is simple – to improve shipping and air connectivity in ECEC and VCIC. However, this will require something that is hard to do inside India, namely develop an enabling environment for efficient logistics support businesses. In short, it means establishing businesses that play a critical role in the management of global supply chains.

Clearing Obstacles

A number of obstacles inside the national and state-level governments and private sector enterprises, currently inhibit the growth of connectivity and investment in logistics services, rather than only physical infrastructure for individual ports and airports.

Specific proposals have been made to clear away obstacles, including items such as policy reforms to support development of a major hub port on the eastern coast of India and a major air cargo hub at Chennai, the streamlining of customs procedures and removal of protective measures in road freight markets and the establishment of Free Trade and Warehousing Zones.

ECEC has certain distinct advantages for the development of ports, including India’s eastern coast offering relatively deeper drafts that can support the new breed of larger container ships and supertankers. It also offers an existing rail and road spine that is relatively better developed than its western counterpart.

However, India’s historical focus on trade with partners to its west—and the trajectory of industrialisation that has put most of the traded goods that require containerisation (as opposed to bulk) in the natural hinterland of its western coast ports—means that ports on the eastern coast handle very little container cargo.

Industrial orientation

The ECEC’s industrial orientation, which includes VCIC, is focused on sectors that require breakbulk and other forms of non-containerised shipping solutions.

The presence of mineral producing areas in this region has led to significant investment in metallurgical and nonmetallic mineral-based industries over the past five decades, which is a trend that is continuing.

Existing data for 2008–2013 shows that three of the top six most important industrial sectors in terms of investment and industrial growth were resource-based activities that require break-bulk solutions both for inputs and outbound final products.

These industries are chemicals and petrochemicals, metallurgy, and nonmetallic mineral industries. The other three include information technology, which has limited shipping and logistical requirements, textiles and automobiles and automotive parts.

While textiles and automobiles and automotive parts require containerised solutions, these industries are clustered around Chennai, which is the only port in ECEC that handles any significant volume of containers.

The logical outcome of such an industrial orientation is that, with the exception of Chennai and Kattupalli, the main focus of ECEC ports is break-bulk and raw materials, such as petroleum, oil and lubricants, coal, iron ore, fertiliser and agricultural raw materials.

For VCIC ports, coal and iron ore collectively account for about 57% of total throughput, with liquids and petroleum, oil, and lubricants comprising 12, general cargo a share of 26% and container traffic a mere 5%.

The newly developed ports of Gangavaram and Krishnapatnam are heavily dependent on coal, which accounts for 80% of all traffic. The four VCIC ports located in Andhra Pradesh, Vishakhapatnam, Gangavaram, Kakinada, and Krishnapatnam, account for just 3%–4% of India’s total container cargo volume.

Government Predictions of 3.0-7.5x Expansion

The government’s own VCIC analysis predicts an expansion in industrial output of approximately 3.0–7.5x over the next 25 years under different scenarios. Such growth will create significant additional demand for containerised cargo solutions in the corridor’s ports.

While a “business-as- usual” scenario would increase the share of VCIC ports in India’s total container traffic handling to about 6% by 2020, new investments in sectors that require container-based evacuation solutions could see this share increase more significantly.

However, relatively low container-based cargo volumes currently translate into a lack of business interest for developing regular liner connections originating from India’s eastern ports, especially VCIC ports.

Except for Chennai, none of the eastern coast’s ports have direct liner services to major economic nodes in Southeast Asia or East Asia. The focus of eastern coast ports on bulk is also reflected in the fact that most ECEC and VCIC ports are much better connected by bulk and petroleum, oil and lubricant routes with Southeast Asia and East Asia than with container liner shipping and feeder routes.

Need for Shipping Linkages

Integrating with global production networks cannot be achieved without establishing low-cost containerised shipping linkages with major global and (especially) regional industrial nodes in Southeast Asia and East Asia.

Regular, cost-effective connectivity with Southeast Asia and East Asia are an essential condition for the development of VCIC and the larger ECEC. This can be viewed as an example of the “chicken-and-the-egg” problem; that is, liner connections require that high trade volumes be present, yet (in some ways) having liner connections creates the enabling environment needed to establish such volumes.

Sagarmala Programme Goals

The ECEC aims to be in alignment with the goals of the Sagarmala Programme, which is focused on the integration of India’s industrial clusters with value chains extending to Southeast Asia and East Asia.

Sagarmala is an initiative of the national government of India which aims to enhance the performance of the country’s logistics sector through unlocking the potential of waterways and the coastline to minimise the infrastructure investments required to meet these targets.

In 2018 the government said that Sagarmala will require an investment of 8.5 trillion rupees. This spend will be used to set up new mega-ports, to modernize India’s existing ports, development of 14 “Coastal Economic Zones” and “Coastal Employment Units” while enhancing port connectivity via road, rail, multi-modal logistics parks, pipelines and waterways and, finally, promoting coastal community development.

This is a significant amount to invest and if undertaken the government estimates that it would boost merchandise exports by US$110 billion and generate approximately 10,000,000 new direct jobs, and indirect jobs.

Flagship Initiative

Sagarmala is the flagship initiative of India’s national Ministry of Shipping and designed to promote port-led development. It is focused on modernising India’s ports so that port-led development can be augmented, and coastlines can be developed in ways that contribute to India’s economic growth.

Sagarmala aims to accomplish two goals, namely transform existing ports into what can be defined as “modern world-class ports” while integrating future development of ports, industrial clusters and hinterlands through road, rail, inland and coastal waterways – with the ultimate outcome seeing ports becoming “the drivers of economic activity” in India’s coastal areas.

The successful development of ECEC is also critical to India’s Act East Policy, which focuses on connectivity agreements in South Asia and Southeast Asia such as the Bangladesh–Bhutan–India–Nepal Motor Vehicles Agreement, and the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation.

Golden Quadrilateral

ECEC will be integrated with existing infrastructure development and upgrading initiatives at its starting and end points of Kolkata and Tuticorin, respectively, which are already part of the Golden Quadrilateral highway development programme.

In the regional context of South Asia and the intra-regional role of South Asia–Southeast Asia (covering the Bay of Bengal-adjacent regions of southern and eastern India, Bangladesh, Nepal, Myanmar, and Thailand), relatively poor physical connectivity and the resulting high transaction costs have ensured that production network linkages remain weak.

The relatively low volumes of intra-South Asian trade, in turn, reduce the incentive for logistics firms to provide effective and low-cost connectivity and value-added services.

This has the effect of further increasing the transaction costs associated with developing effective production networks. The relatively well-connected nodes of Chennai, peninsular Malaysia, and Singapore have helped develop robust linkages between India and the Association of Southeast Asian Nations within wider Asian and global production networks, particularly for automobiles and automotive parts, chemicals, and textiles.