Thoughts on the Indian Economy

Thinking about assorted economic issues in India.

Thursday, March 23, 2006

India Post & Better Roads

Without better infrastructure, Indian growth will come to a grinding halt. Not that anyone should need anymore convincing about this but as I was reading an article in the recent Economist ("India Post: Rogue Mail") the idea was reinforced. Before I get to the connection to infrastructure, here is some background.

The issue centers around the possibility of amending an 1898 law that established the Indian postal service, India Post, as a government entity. The proposed amendment would increase regulation of private couriers like DHL. Due to the general unreliability of the postal service, private courier companies are doing very well. As the Economist quotes, "of the 11 billion items of post in India, private firms handle 7 billion." Wow, that's huge number. The government wants to curb the revenue power of private couriers (thereby diverting funds to its own coffers) by implementing 3 main rules. They are: 1) setting up a regulator for private couriers, 2) a levy on the private firms that would help finance the postal system's own expenses and 3) having the sole rights to deliver all letters upto 500 grams or 1.1. lbs.

The fundamental principle behind the motivation to change the status quo is good. I believe that postal services fall into the realm of basic services like health or education that all citizens must have cheap and reliable access to. Also, there are security issues associated with post that make it better suited to be under government jurisdiction. The fact that over 60% of mail delivery is in private hand is a sad testament to the government failing its duty. However, privatizing post completely or being a heavy-handed regulator is not the solution. All three of the proposed amendments reflect paranoia and "License Raj" type thinking rather than searching for progressive and innovative solutions. India Post needs to take advantage of its government status like subsidized land and being a government employer to offer the cheapest (and reliable) basic services to Indians. Mandating that private couriers cannot deliver a simple letter will not necessarily remedy any of India Posts's revenue woes. It does not create any incentive for them to fix their reliability issues. Due to economies of scale, India Post can have the cheapest rates, so even if DHL can deliver a simple letter but at a higher cost, people will go with the India Post given that quality of service is the same. Private courier firms may still have an advantage on more higher-end services like express mail but a factory worker in urban India should be able to send his rural family money cheaply and quickly via India Post.

Now to infrastructure. A major reason India Post is not able to maximize its revenue is because its costs are inflated due to poor infrastructure like roads. Transportation is the major cost to postal delivery. Bad roads lengthen delivery time and increase fuel costs. As the Economist states, "in a normal rural post office, revenues cover 34% of costs, in hilly areas just 15%." And in fact 89% of India Post's branches serve rural areas. Why would a private firm want to take on delivery through crumbling roads to a far-flung rural area when they can just concentrate on fast, cost-efficient delivery in the cities?

A better, more accessible and universal postal system is another socio-economic benefit that hinges on the success of the Bharat Nirman project. Given the enormous financial gains associated with a successful postal system, this should be another fat carrot being dangled in front of the government to hurry up on infrastructure development.


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