Impact of Government Policies on FDI in Indian Port Sector

Girish Gujar1, Hong Yan

1, Rachna Gangwar

2 and Mukul Jain

3

1The Hong Kong Polytechnic University, Hong Kong

2Institute of Management Technology

Ghaziabad

3Rail Vikas Nigam Limited

New Delhi

Abstract

All developing countries are keen to attract foreign direct investment (FDI). Large FDI inflows are an affirmation

of the liberal economic policies that the country is implementing as well as a confirmation of the economic health

of that particular country. According to the World Bank,since 1990s, India has emerged as one of the attractive

destinations for FDI globally,particularly in the infrastructure sector. However this does not indicate that all

infrastructure development projects are equally successful in attracting FDI neither are all sectors open for foreign

investments for a variety of reasons. Having said this, Indian port sector is an exception and has been able to

attract a reasonable amount of FDI in the past decade. However, it is far from adequate as the sector is not

considered to be attractive enough when compared to the port sector in other countries, notably China and

Australia, due to the market distortions caused by the heavy presence of government owned and operated ports

and allied infrastructure. The dominance of public sector and the „service‟ oriented business model of Indian ports

create conflicts of interest and unfair competition. This paper analyzes the impact of such unfair competition on

the port sector as a whole and how it influences the flow of FDI by using a modified Solow model. The results

reveal that the total factor productivity of the sector might be adversely affected due to the heavy market presence

of the government thus causing the FDI inflows into this sector to slow down further. The paper concludes by

making certain recommendations to resolve the conundrum.

Keywords: Market distortion, unfair competition, FDI, Ports, Solow model and India.

1 Introduction

FDI plays an important role in the economic development of emerging economies. Various papers have been

dealing with measuring the impact of FDI on economic growth (Borensztein, De Gregorio & Lee, 1998; Alfaro,

Chanda, Kalemli-Ozcan and Sayek, 2004; Bengoa and Sanchez Robles, 2003). A clear rising trend of FDI inflows

during the last decades has been observed most of it being directed towards developing countries. The logic

behind inviting FDI was that it would trigger productivity gains by sharing technology, managerial skills or

facilitating market access. It is debatable whether the increasing share of FDI in emerging countries can crowd

out local incentives to set up similar investments (Singh,K., 2005) or whether domestic investment (both public

and private) act as an entry barrier for FDI.

Borensztein (1998) stressed in his paper that the success of FDI to a great extent also leads to improvement of

human resources by way of skills, knowledge and managerial ability. Thus, FDI seems to be an important vehicle

when it comes to the transfer of knowledge. Bengoa and Sanchez-Robles (2003) emphasize the relevance of

economic freedom and macro-economic stability in the process of economic expansion. Their empirical model

analyzes the interaction between economic freedom, FDI and economic growth based on a sample of Latin

American countries for the time span of 30 years. They concluded that economic freedom is an important

determinant for FDI inflows. Intuitively, this makes sense as easier access to markets enables foreign investors to

make crucial investments e.g. in communication, transport networks and allied infrastructure.

In the early nineties, due to several policy related reasons, India was left with no option but to adopt an economic

reform program aimed at transforming its inward looking economy into a market driven one based on export-led

growth and opening of certain sectors either fully or partially to FDI. Since then its economic performance has

improved markedly. Some of the key indicators showing India‟s economic performance after economic reform

are given in Table 1. The country‟s external trade, currently in excess of 900 million tons of cargo (exports and

imports), is projected to double by the year 2020. This confronts the port sector, already operating beyond

capacity, with the challenge to sustain this growth in a seamless, cost effective and efficient way. Undoubtedly,

this pre condition to future economic development will require significant efforts towards further port

modernization and coordinated port development.

Table 1: INDIA’S KEY ECONOMIC INDICATORS

2007-08 2008-09 2009-10 2010-11

GNP (bln. IRP) 128711.22 157,377.78 180,290.84 190,028.8

Average Exchange Rate (IRP/USD) 40.26 45.99 47.42 45.68

GNP (bln. USD) 3197 3422 3802 4160

GNP Growth (IRP basis, %) 22.27 14.56 5.40

GNP Growth (USD basis, %) 7.04 11.10 9.42

Population (millions) 1154 1170 1186

Income per Capita (USD) 40,605 46,492 54,527

Wholesale Price Inflation (%) 8.0 3.6 9.4

External Debt (% of GNI) 18.73 18.21 16.9

Reserves (bln. USD, excluding gold) 252 279.1 297.3

Foreign Investment (mil. USD) 43.41 35.60 24.16

Source: Economic Survey, 2011; World Bank, 2012

The following sections of the paper describe the port sector, current policy from an economic perspective,

challenges faced by the foreign investors and the theoretical framework using a Solow model. The paper

concludes by making policy recommendations in the 5th section.

2 Indian Port Sector

India‟s coastline of approximately 7500kms enfolds 12 major and 187 minor ports. Of these, Kolkata, Paradip,

Vishakhapatnam, Chennai, Tuticorin, Cochin, New Mangalore, Mormugoa, Mumbai, JNPT and Kandla are

categorized as major ports accounting for over 60% of the country‟s total port traffic. Six of them are located in

the west coast of India, handling trade mainly with Europe, America, Africa and the Middle East and 6 are east

coast ports, involved in trade with mainly Asia and the Pacific. Table 2 gives the information on throughput,

growth and market share of major ports in 2010-11. Major ports fall under the direct jurisdiction of the Ministry

of Shipping and are governed by the Major Ports Trust Act 1908 (MPTA) and the Indian Ports Act 1963. Port

Trusts are administered by a Board of Trustees of wide representation comprising members from government,

labor and industry.

Table 2: THROUGHPUT OF MAJOR PORTS

Port 2009-2010

(x1000 tons)

2010-2011

(x1000 tons)

Growth

(%)

Market Share in

2010-11 (%)

Kolkata/ Haldia 46,423 47,432 2.2 8.3

Paradip 57,011 56,030 -1.7 9.8

Visakhapatnam 65,501 68,041 3.9 11.9

Ennore 10,703 11,009 2.9 1.9

Chennai 61,057 61,460 0.7 10.8

Tuticorin 23,787 25,727 8.2 4.5

Cochin 17,429 17,873 2.5 3.1

New Mangalore 35,528 31,550 -11.2 5.5

Mormugao 48,847 50,022 2.4 8.8

Mumbai 54,541 54,585 0.1 9.6

JNPT 60,763 64,299 5.8 11.3

Kandla 79,500 81,880 3.0 14.4

TOTAL 561,090 569,908 1.6 100.0

(Source: Indian Ports Association, Operation Details 2011)

Additional 187non-major ports are governed by the Indian ports Act (IPA) of 1908 and come under the

jurisdiction of the different State governments. The cargo turnover from non-major ports account for

approximately 40% of total seaborne trade. This mainly consists of fertilizers, fertilizer raw materials, food grains,

salt, building materials, iron ores and other ores.

All major ports handle significant volumes of liquid cargo, with the predominance of Mumbai and Kandla which

together handle more than half of the country‟s POL trade, currently at 315 million tons (2011). Other important

ports for liquid cargo operations are Kolkatta/Haldia (12.8%), Chennai (11.5%) and Cochin (11%). The majority

of POL and other liquid bulk is carried by Indian ships (54%) mainly due to the government‟s cargo guarantees in

favor of national shipping.

Dry bulk cargo movements consist mainly of iron ore, coal and fertilizers. Iron ore is India‟s major export 142

million tons in 2011 bought by Japan, South Korea, China and the EU. Coal the main input of electricity

generation, is both imported and exported in large quantities and it is the major product shipped under cabotage

arrangements. Haldia, Paradip, Vishakhapatnam, and Mormugoa are the principal dry bulk ports handling both

commodities.

Container cargo handled by major ports was 7.5 million TEUs in 2011. JNPT, the largest container port in India,

handles more than 50% of the total containerized cargo from major ports, followed by Chennai which handles

around 20%. With new terminals planned at JNPT, Mumbai, Chennai, Ennore, and New Mangalore, the container

volumes are bound to grow.

Table 3 gives the details of liquid, dry bulk and containerized cargo handled from major ports in 2010-

11.

Table 3: THROUGHPUT BY TYPE OF CARGO (2010-2011)

Port Liquid Cargo

(x1000 tons)

Dry Bulk

(x1000 tons)

Container Other cargo

(x1000 tons)

Total

(x1000 tons) (x1000 TEUs) (x1000tons)

Kolkata/ Haldia 10,532 14,768 9,055 526 13,190 47,545

Paradip 12,846 37,768 61 4 5,355 56,930

Visakhapatnam 19,267 34,891 2,572 145 11,311 68,041

Ennore 509 9,769 - - 731 11,009

Chennai 13,991 5,107 29,422 1,524 12,940 61,460

Tuticorin 742 7,314 8,168 468 9,502 25,727

Cochin 12,101 469 4,419 312 884 17,873

New Mangalore 21,551 7,388 568 40 2,043 31,550

Mormugao 938 47,433 182 18 1,469 50,022

Mumbai 33,229 4,363 653 72 16,341 54,586

JNPT 5,035 - 56,426 4,270 2,848 64,309

Kandla 48,427 10,508 2,568 160 20,359 81,880

TOTAL 179,168 179,778 114,113 7,539 96,973 570,032

(Source: Indian Ports Association, Operation Details 2011)

2.1 Need for FDI

Currently, most Indian ports are characterized by obsolete and poorly maintained equipment,

hierarchical and bureaucratic management structures, and excessive labor and, in general, an

institutional framework that is considerably in variance with the government‟s overall economic

objectives. Government of India has yet to earmark the required resources critical to port development.

Greater participation of the private sector (both domestic and foreign) is thus sought together with the

accompanying institutional reforms, but in the altered poor global economic circumstances it is doubtful

whether the private sector will rise up to the occasion. The government also needs to clearly define the

parameters of port restructuring in a way that makes port investment in India an attractive business

alternative to both national and international capital. However at present the government continues to

dominate the port sector by way of ownership, archaic labor laws and as a tariff and competition

regulator, thus distorting the markets and providing unfair competition.

The 10th

five year plan working group has estimated the traffic through major ports to grow to 1 billion

tons by the year 2020. This would still leave a capacity shortage of 400 million tons that will have to be

created through projects in the present 12th

five year plan. The plan envisages USD 100 billion worth of

projects in the port sector in the nextfive years. It thus becomes evident that, mainly due to lack of

capital resources and other pressing national priorities, the government of India has ignored port

development for long. As a result Indian ports are currently faced with severe capacity limitations,

leading to long turnaround times of ships poor port performance. This situation has discouraged bigger

main line vessels from calling at Indian ports resulting in the Indian exporters resorting to expensive

transshipment at Singapore or Dubai and subsequent loss of competitive advantage.

2.2 Policy Environment for Investors

To attract foreign investors in port sector, the government has permitted 100% FDI through automatic

route. Automatic route implies that it does not require any prior approval from the government or

Reserve Bank of India. 100% income tax exemption to investors for a period of 10 years is also

provided. Joint venture formations between a major port and a foreign port, between major port and

minor port(s) without tender, as well as between major port and company(ies) following tender route are

permitted by the Government. The measure is aimed at facilitating port trusts to attract new technology,

introduce better managerial process, expedite implementation of schemes, foster strategic alliance with

minor ports for creation of optimal port infrastructure and enhance confidence of private sector in

funding ports.

In terms of revenue streams for operators, the tariff that the port operators can charge is regulated by the

Tariff Authority for Major Ports (TAMP). However, TAMP has jurisdiction only on major ports,

creating unhealthy competition between major and non-major ports. Investors would be apprehensive of

investing in terminals at major ports due to TAMP regulation which would have to compete with a

nearby non-major port such as Kanda (major port) and Mundra (non-major port) which are just 60 km

apart. TAMP initially adopted a cost plus approach with a maximum permissible rate of return of 20%

on equity employed. It has now been changed to a reference tariff or each service or category of service

along with the performance standards to TAMP. The reference tariff has been linked to inflation and

will remain the maximum fixed tariff at the concerned major port trust. Its primary function is the

protection of the customer from any monopolistic pricing of the Major Port Trusts and the private

operators located therein. This was particularly necessary as tariff is considered most vulnerable to

creation of market monopolies and predatory pricing. As a result TAMP was set up which formulated

guidelines developed through a consensual process involving all stakeholders. The guidelines were

modified subsequently in response to new issues which emerged over the times.

When TAMP was formed in 1997, non-major ports collectively handled less than 10 % of port traffic. In

2012-13 they handled 42 % of total traffic indicating a shift in traffic to non-regulated operators. The

emerging trends in this market in India suggest intense competition between the major and non-major

ports that is expected to deepen and broaden further with the induction of greater FDI and entry of more

international players. The public-private partnership model has created a highly competitive port

services market where market forces themselves are expected to play the role of an effective regulator.

In such a scenario subjecting the major ports to the regulatory control of the TAMP and allowing the

non-major ports the freedom to fix and revise their tariff structure appears to be unfair. Hence Ministry

of Shipping has issued new Guidelines in July 2013 those impart greater autonomy to the Major Ports in

determination of tariff in conformity with the international practice. However it should be noted that

tariff setting is a minor, though crucial, aspect of port competition.

Tariff was also considered to be an important element of the privatization process where the key bid

criteria for awarding a terminal contract to a private port operator was the royalty per TEU that the

private terminal operator had to pay to the port. In addition the operator also had to assure a minimum

annual throughput.

On gaining experiences from several privatization projects, the criteria in subsequent bids was altered to

minimum revenue share rather than royalty per TEU as there was some confusion regarding the

methodology of computation of royalty which left the operator with no incentive to pay more than the

minimum guaranteed sum. Under the new guidelines, the TAs insisted that the terminals use a cost

based approach, computed by taking into consideration the total capital and operating costs and a

minimum allowable return on equity capital deployed for the designed terminal capacity.

2.3 FDI in Port Infrastructure

Driven by India‟s export import growth of over 20% per annum, the Ministry of Shipping is

aggressively trying to pursue port development in India. The government, in order to facilitate FDI, in

certain aspects of port development, has permitted 100% FDI. Various areas of port functioning, such as

leasing out existing assets of the port, construction/ creation of additional assets, construction of cargo

handling berths, container terminals and warehousing facilities, installation of cargo handling

equipments, construction of dry docks and ship-repair facilities, leasing of floating crafts, pilotage and

captive facilities for port based industries, etc have been opened to private participation including

multinational companies. Accordingly, 100% FDI has been allowed to supplement domestic capital,

technology and skills, for accelerated economic growth.

The ports sector has received US$ 1635 million during the period 2000-2013. But as can be seen from

the figure below, it has all but dried up since the financial tsunami in 2008 when there was a gush of

investments as a result of quantitative easing and easing of norms by the government. Till March 2009,

there were six approved port projects which were to be developed in collaboration with foreign terminal

operators. These included terminals Container Terminal project at Jawaharlal Nehru Port developed on

BOT basis by Maersk A/S and CONCOR and International Container Transshipment Terminal at

Cochin Port developed on BOT basis by M/s Dubai Ports International (DPI).

(Source: Department of Industrial Policy and Promotion)

The World Bank has projected that the future economic growth in India would be in the manufacturing

sector and the subsequent international trade would lead to rapid growth in the port throughput. In order

to exploit the opportunity, various foreign institutional investors such as Standard Chartered Bank and

General Insurance Corporation have invested in several ports and terminals in India. In addition global

port operators such as DP World (DPW), Port of Singapore Authority (PSA) and APM Terminals

(Maersk) have also leased terminals at JNPT, Chennai, Kochi and Vizagapatam.

The major port operators of today such as APM Terminals, DPW, PSA, HWL and PoR have cast their

net far and wide in search of revenue and profits. In their earlier manifestation they viewed the shipping

lines as their prime customers. Subsequently they shifted their gaze to the big shippers, consignees and

freight forwarders. In the next phase they started providing value added services such as warehousing,

inventory control and rail transportation.

2.4 FDI in Port Connectivity

Port connectivity has a major role to play in development of ports. Currently the hinterland traffic in

India is almost entirely carried by Rail (30%) or Road (65%) with an insignificant quantity being ferried

by inland waterways and coastal shipping. Pipelines are used to transport some amount of liquid

petroleum products. The present port traffic mode share and optimal share is shown in table 4 below.

Currently road transport is the most popular mode as it is cost effective, especially over shorter distances

and also accords flexibility. However poor quality of roads results in higher costs, both in terms of time

as well as money. On the other hand the railways are cost and time efficient, especially over longer

distances. However the railways face severe capacity constraints particularly on the Delhi-Mumbai

sector where capacity utilization is in excess of 130% resulting in delays and congestion at the ports.The

government has planned to construct two Dedicated Freight Corridors (DFCs) to provide additional

track capacity but that would be completed only after 2017 or later.

Table 4: PORT TRAFFIC MODE SHARE (% of Tons Handled)

Present Mode Share % 2012 Optimal Mode Share %

Railways 24 34

Roads 36 22

Pipeline 30 44

Other including inland

waterways, conveyers etc.

10 -

Source: World Bank Report 2007

During the British rule the Indian Railways (IR) were assigned the task to provide rail connectivity to

the ports. There was a PPP element to this policy, with the government providing free land and a

guaranteed rate of interest, thus minimizing the operational risk. Since independence in 1947, all railway

projects were solely developed and managed by Ministry of Railways (MoR).

With the opening of Indian economy since 1990s, port sector was also opened for private investments.

Considerable private sector investment was directed into the development of new green field ports, as

well as into expansion and modernization of older major ports. IR by then had already constructed rail

connectivity to various major ports; thus the old ports were spared the cost of providing the rail

connectivity.

Subsequently in 2008, the Government of India, with a view to upgrade the port sector, stipulated that

every major port must be connected by a double railway line and four lane highway. For the IR, the port

connectivity had low priority. As the government lacked the finances for achieving these goals, the ports

were required to provide the finance for this enhanced last mile connectivity, both by road and rail. At

present, road connectivity projects are implemented through Joint Ventures (JVs) where Major Ports and

National Highway Authority of India (NHAI) contribute up to 30 % each of the cost of the projects. In

contrast, the rail infrastructure remains a government monopoly.

Major Ports suffer from obsolete, inadequate and poor infrastructure including the poor and inadequate

connectivity, On the other hand, the green field ports have no option but to fund the green-field rail

connectivity projects all by them. As per the policy for attracting private investment in rail connectivity

projects, the real options for the ports are:

a) Build a private line on privately acquired non-railway land and connect the same to the railway‟s

network. This is termed as the Non-Government Railway Model (NGR)

b) To form a JV with IR or one of its subsidiary companies. The JV would then lease back the land

acquired by IR with the funds provided by the JV and then construct the rail line and maintain it

with the funds provided by the JV once again.

At present 7 ports connectivity projects have been or are being implemented via the JV model. On the

other hand Adani Port in Gujarat, which is one of the largest privately owned ports in India, initiated the

concept of private investment in rail port connectivity that evolved as NGR model in due course. Adani

Port constructed the rail line on land acquired by them. They also maintain the line at their own cost.

As a result of this arrangement, the capital cost of the private port projects increases.. As the rail/road

connectivity is vital to the port, incurring the additional cost is inescapable, even though connectivity

costs deter fresh investments in port sector and would ultimately be counterproductive for the national

economy. If the private port waits for the Indian Railway to provide the connectivity, as it had done for

the older ports, inadequate resources would delay the new lines by several years, if not several decades.

By investing their own funds, the private port developers can expedite the connectivity and use the port

facilities. Without a proper rail line, the port cannot be optimally used.

A major hurdle in providing connectivity is land acquisition. The process of land acquisition is slow,

uncertain and prone to litigation. Port developers are therefore keen on forming JVs with IR (or with one

of the companies promoted by IR) for developing the rail corridor to the port. (This is because IR, as a

government entity, could compulsorily acquire public land and also has expertise in constructing railway

lines.) It is easier for a JV with IR as a partner to acquire land and obtain approvals from IR and other

government agencies in constructing the line, compared to the developer doing the same on his own.

Furthermore, due to the involvement of IR the risk perception of such projects in the eyes of the lenders

improves to a certain extent. However the price that a private investor has to pay for entering into such

joint ventures is by way of bureaucratic and procedural hurdles that are inevitable in partnering any

government organization and varies from project to project. This aspect causes certain amount of

ambiguity. On the other hand the NGR model will find its takers wherever land is available or the

developer is confident of acquiring land without the assistance of the heavy hand of the state.

The government has passed a new actin 2013 governing the land acquisition process wherein the process

has become even more tortuous and expensive. As per the new act, the consent of 80% of the land losers

is required when a company for a private company wants to acquire land for a public purpose, whereas

this percentage is reduced to 70% in case of a JV with government. Thus formation of a JV with

government (or its companies) so that JV acquires land instead of the port developer will provide only

marginal easeunder the new Land Acquisition Act of 2013.

Since 2002 100% FDI is allowed in the ports sector in India. In October 2013, theMoR has also, for the

first time, decided to invite FDI in railway infrastructure projects, including for port connectivity

projects. A 74% FDI ceiling is proposed for such projects under the JV model. FDI in rail connectivity

projects is expected to help the government attract FDI in the port sector as well as encourage the

international players to invest in allied infrastructure projects such as dedicated freight corridors, logistic

parks etc. However, given the terms and conditions stipulated by the government for investing in such

projects in addition to the added uncertainty caused by the new land acquisition law, the port sector may

not be able to attract the targeted FDI in next few years.

3 Theoretical Framework

The Solow–Swan growth model is a popular model used for forecasting long-run economic growth. It

does so by looking at different factors such as productivity, capital ingress (both domestic and foreign),

population growth, labor output, technological progress etc. Subsequently labor was also added as a

factor of production. In this paper we modify the model by substituting capital accumulation with FDI

and population with port traffic. In Solow's model, new capital (FDI) is considered to be more valuable

than old capital (domestic) because it is commonly believed that FDI also stimulates technological

progress and hence it would be more productive. According to the model the steady state level of output

can also be affected by policy measures such as tax cuts or subsidies (overt and covert) but not the long

run rate of growth. The rate of growth would be essentially affected by capital ingress and the rate of

technological progress i.e. the speed at which old, obsolete and inefficient port equipment is replaced.

Thus the key assumption of this model is that capital is subject to diminishing rates of return in a closed

system considering all other things being equal.

In this paper the model discussed here captures not only the direct, but also the indirect effect of unfair

competition/market distortion on economic growth. Borensztein et al. (1998) concluded that FDI

contributes more to economic growth than domestic investment only when there is a certain threshold of

market freedom. Considering this fact we arrive at two conclusions; first, a higher level of market

distortion due to unfair competition lowers market freedom and second, this reduction in market

freedom reduces the possibility for FDI to effectively contribute to the domestic economic growth. As a

matter of fact it may even hamper economic growth. Based on the Solow model, an extension is

developed in this section that analyzes the impact of unfair competition on the FDI flows into the port

sector of the country.

The basic Solow model can be used to explain the growth path of global ports in different countries and

why certain ports experience a higher growth rate than others at a given time. This is subject to the

underlying assumptions that the capital input rate, technological progress and traffic growth are

exogenous and the port production function(Y) has a Cobb-Douglas form with three inputs:

capital(K)technology (A)and labor(L). This can be written at time t as follows:

𝑌 𝑡 = 𝐹 𝐾 𝑡 , 𝐴 𝑡 𝐿 𝑡 𝑌 𝑡 = 𝐾 𝑡 ∝𝐴 𝑡 𝐿 𝑡 1−∝ , 𝑤ℎ𝑒𝑟𝑒 0 <∝< 1

This production function displays positive and strictly diminishing returns of the marginal product of

labor and capital. Assuming that L (0) and A (0) be respectively the initial number of workers and level

of the technology we partially differentiate the log of each variable with respect to time to model the

dynamics of the growth rates

L t = L 0 ent

A t = A 0 egt

The evolution for capital, human capital and the technology is described by the following equations:

k t = skf k t , h t , g t − n + g + δk k(t)

h t = shf k t , h t , g t − n + g + δh h(t)

g t = sgf k t , h t , g t − n + g + δg g(t)

A steady state occurs when the endogenous determined variables in the model grow at a constant rate,

which occurs when (K), (A) and (L) are equal to zero, thus when the actual investment equals the break

even investment. The intensive form of the production function after taking the natural logarithms

results in the following equation

ln y t = ln A0 + g t − α + β + γ

1 − α − β − γ ln n + g + δ +

α

1 − α − β − γ ln sk +

β

1 − α − β − γ ln sh

+ γ

1 − α − β − γ ln sg

From this equation it could be concluded that the output per capita is positively affected by the initial

level of technology and its growth rate and by the investment rates of capital and public sector.

Following Farida and Ahmadi-Esfahani (2007) a direct measure of unfair competition can be added to

the extended Solow model by making the labor-augmenting variable a function of such competition.

Such competition can also be defined as a function of government expenditures. A more general

adjustment would be accounting for the negative externality imposed by technological progress. The

main conclusion stays the same however: unfair competition not only influences FDI inflows but total

factor productivity.

ln y t = ln A0 + g t − α + β + γ

1 − α − β − γ ln n + g + δ +

α

1 − α − β − γ ln sk +

β

1 − α − β − γ ln sh

+ γ

1 − α − β − γ ln sg + nθ

In the Solow growth model, influences from outside the domestic market, like FDI, are not determined

within the model. If the home country opens up to trade, there will be a capital boost due to FDI. In the

above equation it is captured by Sk. Because the ratio of the productivity of capital to the effectiveness of

labor is assumed to be positive, the capital inflow results in a shift upwards of the actual investment

curve. This generates a temporarily higher growth until a new steady state level is reached. The FDI

inflow thus has a permanent level-effect, but only a temporarily growth effect. However if the ratio is

negative due to low productivity or faster depreciation of port assets and slower capital ingress the in

adequate FDI inflows will not lead to a sustainable steady state level. Thus it will not have a permanent

level effect which is one of the reasons why the sector remains unattractive to the foreign investors.

4 Conclusions

In the coming years the government proposes to invest US$ 20 Billion in the port sector of which 60%

has been earmarked for non-major ports and the rest for major ports. It plans to use most of the funds for

capacity expansion by way of construction of berths, terminals, rail connectivity and jetties. It expects

the private sector to provide bulk of the funds while it will provide some budgetary support mostly by

way of tax holidays etc.

Though favorable industry conditions exist at the moment, it is commonly believed that potential

investors are faced with numerous challenges which present a downside risk and managing project

execution risks in addition to the pressure onraising cheap and adequate and assuring attractive returns

would be necessary. The balance sheets of such companies could also come under stress in the event of

delays in project execution, cost overruns and insufficient cash flows. In such circumstances the private

sector ability to raise and service debt at cheap interest rates for long gestation periods could be severely

tested.

The main losers in the bargain are the Indian exporters and importers as poor port productivity raises

transport costs of exports and imports. High cost of imports also adversely affects the domestic

producers who use imported raw materials and equipment in their production processes thus rendering

them uncompetitive in the global markets.

Realization of this fact would allow India to be in a position to offer foreign investors terms of

privatization at least as attractive as they could secure in alternative investments outside the country,

while herself would benefit from the knock-on multiplicative impacts of foreign investment. Price

control is also exercised by many nations of Western Europe and North America not through

government regulations but through promotion of fair but intense port competition that does not allow

rent seeking behavior or collusion amongst the ports nor formation of cartels. Investment planning is

also carefully exercised to avoid wastage of resources.

While, owing to their “trust status”, the public sector ports do not pay taxes to the government yet they

do receive budgetary support which allows them to unfairly compete with the private sector ports. This

is exploitation by the public sector ports of their market dominant position. This aspect distorts the

market totally and yet the sector has managed to attract FDI which reveals the actual potential the sector

possesses. This untapped potential can only be realized if and only if the unfair competition provided by

the government itself is done away with and market forces are set free.

FDI is known to have a positive influence on a country‟s growth rate. Following the Solow growth

model a positive coefficient for FDI is hence desirable. Like any research this investigation about the

effect of unfair competition on growth in the port sector through the channel of FDI has its limitations.

Firstly, the impact of market distortions on the growth is not entirely observable and therefore hard to

measure. An objective measure of unfair competition would be reliable when it captures the frequency

and the depth of market distortions only when it is comparable over time and among countries. As such

further research in greater depth needs to be carried out by future researchers.

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