In the 1950s, long-distance travel across the United States was severely hindered by fragmented road networks, poor maintenance, and inconsistent driving conditions, impeding both economic activity and labour mobility. The situation changed dramatically with the Federal-Aid Highway Act of 1956, which authorised the construction of the U.S. Interstate Highway System, an infrastructure project costing approximately $500 billion (in today's dollars). Spanning over 47,000 miles, the network connected remote regions to major markets, facilitating the efficient movement of goods and services. This infrastructure expansion reduced transportation costs by as much as 30% and also catalysed a surge in industrial production and suburbanisation. Labour mobility increased significantly as regions became more accessible, leading to shifts in demographic patterns. Studies estimate that the highway system contributed up to 25% of US productivity growth between 1950 and 1990, underscoring its role as a critical driver of economic expansion and structural transformation in the post-war era.
Infrastructure As A Growth Driver
This reflects a well-established principle in economic theory: infrastructure is a key engine of growth. Paul Romer's 'endogenous growth theory' posits that investments in public infrastructure don't alleviate short-term constraints and that they also enhance the productivity of entire economies by fostering innovation and efficiency. Infrastructure, in this view, creates a "spillover effect"-improved transportation networks, for example, not only reduce costs for businesses but also increase opportunities for trade and collaboration, leading to a compounding effect on growth.
David Aschauer's work further reinforces this. His research in the late 1980s showed that periods of low infrastructure investment correlate with sluggish economic productivity, suggesting that infrastructure serves as a fundamental component of public capital. Aschauer argued that the U.S.'s economic slowdown in the 1970s was partly due to declining public infrastructure investment, pointing to a direct link between public works and the overall health of the economy.
The Multiplier Effect
In the case of India, as per the estimates by Sukanya Bose and N.R. Bhanumurthy (2015) in their NIPFP Working Paper, capital expenditure in India has a significantly higher fiscal multiplier of 2.45, compared to transfer payments and other revenue expenditures, which have multipliers of 0.98 and 0.99, respectively. The fiscal multiplier measures the change in economic output resulting from a change in government spending or taxation. A multiplier of 2.45 for capital expenditure means that every rupee invested in infrastructure generates 2.45 rupees in economic output, amplifying the initial spending. This multiplier effect occurs as increased government spending leads to higher demand for goods and services, which, in turn, stimulates further economic activity through increased consumption and investment. In contrast, tax multipliers are around -1, indicating a contractionary effect where tax increases reduce economic output. Even in scenarios where fiscal consolidation is targeted, capital expenditure continues to demonstrate its strong multiplier effect, underscoring the need for prioritising such spending to promote long-term growth. Given India's developmental goals, focusing on capital expenditure is a prudent strategy to enhance productivity and output while maintaining fiscal sustainability.
Over the last decade, the government has made capital expenditure a top priority, recognising its crucial role in driving economic growth and development. A key element of this spending has been the PM Gati Shakti initiative, which has just completed three years. The programme is rooted in India's historical struggle with infrastructure bottlenecks and inefficiencies. Before the launch of PM Gati Shakti on October 13, 2021, infrastructure projects frequently suffered from delays, cost overruns, and mismanagement due to poor coordination across various ministries and departments. A World Bank report highlighted these issues, citing inefficient governance structures and a lack of inter-agency collaboration as major obstacles to timely project completion. The PM Gati Shakti initiative was designed to address these challenges by fostering a more integrated and coordinated approach to infrastructure development, streamlining processes, and improving efficiency across sectors.
How GIS Tech Improves Decision-Making
PM Gati Shakti aims to solve these issues by integrating 44 central ministries and 36 states/Union Territories onto a single platform with over 1,600 data layers. This platform leverages advanced Geographical Information System (GIS) technology, which provides an accurate, real-time, data-driven basis for infrastructure planning and execution. The use of GIS allows stakeholders to visualise geographic data across various sectors-transport, energy, communication, and social infrastructure-enabling more efficient allocation of resources and reducing redundancies. Studies like those conducted by Stewart Fotheringham and Meghan Cope (2019) highlight how GIS-based systems improve decision-making by optimising spatial planning, reducing environmental impact, and enhancing coordination across sectors.
A McKinsey Global Institute (2020) report on infrastructure modernisation has emphasized the potential of advanced technologies such as Big Data Analytics and the Internet of Things (IoT) to revolutionise infrastructure development by providing real-time monitoring and predictive analytics. IoT-enabled systems, as deployed through PM Gati Shakti, can streamline infrastructure projects by enabling predictive maintenance and improving decision-making processes. In one concrete example, the Ministry of Petroleum and Natural Gas drastically reduced the time required for Detail Route Surveys (DRS) from six months to just one day using IoT-based technology.
A primary objective of Gati Shakti is to address India's high logistics costs, which have historically ranged between 13-14% of GDP, significantly above the global average of 8-9%. This inefficiency in logistics is a well-known barrier to trade competitiveness and industrial productivity, as highlighted by theories of comparative advantage and trade facilitation. High logistics costs distort market access and impose additional burdens on firms operating in global value chains (GVCs). By combining physical infrastructure development with digital integration and multimodal connectivity, Gati Shakti seeks to optimise resource allocation and supply chain coordination, which is in line with the principles of multimodal transport theory.
Decline In Logistics Cost
The initiative complements the National Logistics Policy (NLP) by focusing on reducing bottlenecks across different modes of transport, thereby promoting intermodal synergy. The recent findings from an NCAER study indicate that logistics costs have already declined to 7.8-8.9% of GDP, signalling substantial progress. This reduction can be attributed to policy-induced efficiencies and infrastructure development, supported by the institutional framework of Gati Shakti.
Theoretically, the program aligns with the notion of dynamic comparative advantage, where countries enhance their competitiveness through infrastructure-led productivity gains. Moreover, as India improves its standing in the Logistics Performance Index, the gains will likely translate into reduced trade friction and enhanced export competitiveness. However, the success of this initiative hinges on overcoming coordination failures at the regional level and addressing bureaucratic inertia, which, according to institutional economics, are critical impediments to effective policy implementation.
Additionally, the whole-of-government approach that PM Gati Shakti represents is unique in that it breaks down traditional silos between ministries and departments. This integration is not just about physical infrastructure but also social infrastructure. For instance, the Ministry of Health has used Gati Shakti to map underserved areas for new healthcare facilities, and the Ministry of Education has utilised the platform to identify regions lacking adequate schools through the Pahunch Portal. This reflects the plan's broader ambition of creating a more connected, equitable infrastructure ecosystem that benefits all sectors of society.
To further enhance Gati Shakti's effectiveness, it is crucial to strengthen inter-agency coordination through a centralised digital platform that integrates real-time data across ministries and state governments, reducing information asymmetries and facilitating faster decision-making. Streamlining regulatory frameworks at both the central and state levels is essential to minimise delays in project clearances and reduce transaction costs. Additionally, enhancing interoperability between different modes of transport through standardised protocols and adopting advanced technologies such as AI-driven logistics optimisation tools can help address systemic inefficiencies. Addressing bureaucratic inertia by implementing performance-based incentives and capacity-building programmes for regional authorities will also be key to sustaining long-term gains and driving down logistics costs further. These steps will enable India to better integrate into global value chains and strengthen its comparative advantage in trade.
(Bibek Debroy is Chairman, Economic Advisory Council to the Prime Minister, and Aditya Sinha is OSD, Research, Economic Advisory Council to the Prime Minister)
Disclaimer: These are the personal opinions of the author