October 16, 2017
Ongoing investments in the Indian logistics sector will increase capacity
The investments come amid rising transaction and consumption activities
Dedicated freight corridors, new technologies will improve turnaround time
Reforms by the government such as GST will improve speed of transport
The logistics sector in India, which comprises of the transportation network, warehousing and value added services, is on the cusp of a radical change. Traditionally, it has been an inefficient sector, due to a combination of poor infrastructure, a fragmented industry, an inefficient tax structure and obsolete technology. This had led to high logistics costs, which were about 15-16 per cent of the value of goods, compared to 6-8 per cent for developed economies. Industry body ASSOCHAM estimates that around US$45 billion is lost each year due to inefficiencies in India’s logistics network. That dismal record is rapidly changing however.
Last year, India ranked 35th on the World Bank’s Logistics Performance Index, a big improvement from its 54th position in 2014. We’re still behind China, which ranks 27th, but there are several changes on the anvil which can further improve the situation dramatically. Infrastructure is set to improve drastically once the two dedicated freight corridors (DFCs) – the eastern and the western – are completed. The DFCs are expected to start operations in phases starting next year. Once completed, not only will railway freight times be radically reduced, but it will also free up capacity on the existing road and rail network. At an event organised by ASSOCHAM, Ram Kripal Yadav, the Minister of State for Drinking Water & Sanitation had said that goods transportation between Mumbai and Delhi will reduce from 60 hours to 18 hours once the DFC is completed. It will galvanise investments in the proposed Delhi-Mumbai industrial corridor.
Investments will also be spurred in support infrastructure, such as inland container depots, warehouses and multi-modal logistics parks along the route. Increased transportation of cargo by railways will lead to lower haulage costs, as transporting goods is cheaper by rail than by road. Furthermore, waterways are 50 per cent cheaper than road and nearly 30 per cent cheaper than rail. Hence, the Government is taking steps to revive coastal shipping, inland waterways and ports through the Sagarmala project. Under this programme 415 projects, at an estimated investment of around US$123 billion, have been identified for port modernisation and new port development, port connectivity enhancement, port-linked industrialisation and coastal community development over the period 2015-2035. Most of the projects will be developed by the private sector or through public-private-partnership (PPP). Similarly, a Road Transport and Highways Ministry appointed study, under the proposed Bharatmala project, has identified 44 economic corridors with a length of 21,000 km that will result in faster movement of cargo. Here too, the emphasis will be on PPP schemes.
However, infrastructure development is not the only positive development for the logistics industry. The introduction of the Goods & Services Tax (GST) too will have a far-reaching impact. To start with, the removal of trade barriers between the states has already resulted in faster movement of goods and reduced downtime. Road transport and highways minister Nitin Gadkari had said that the logistics sector would gain the most from GST as costs would fall by almost 20 per cent. Warehouses will now be set up on business considerations, rather than on the basis of tax arbitrage. This consolidation of warehouses is likely to lead to a ‘hub-and-spoke’ model, with larger trucks moving between warehouses and smaller trucks doing last mile delivery. The truck market will therefore change, with a bigger proportion of large long-haul vehicles. GST will also result in a shift of business to transport companies in the organised sector, which will aid fleet modernisation. The availability of input tax credit on movement of finished goods will lower transport costs. The faster movement of perishables will lead to an expansion of the cold chain network.
Finally, new companies are increasing their usage of technology to address the shortcomings in the logistics industry. The e-commerce sector has also become a driver of logistics growth and their solutions include efficient sourcing, standard packaging practices to facilitate easy and secure transportation. Logistics service providers are leveraging technologies such as big data and cloud-based application platforms for better order fulfilment and tracking of shipments.
Significant investment opportunities exist across every segment in the Indian logistics industry and several leading international logistic companies such as Fedex, UPS, DHL, Kintetsu World have already entered the Indian market, through greenfield projects, joint ventures and acquisitions. 100 per cent foreign direct investment (FDI) via the automatic route has been opened for almost all logistics sub-segments. Private equity players in the segment include well-known names such as Warburg Pincus, The Carlyle Group, Accel Partners, Tiger Global, SAIF Partners. UAE-based firm DP World, having previously invested US$1 billion in India, is planning to invest another US$1 billion in the country’s infrastructure sector along with logistics and container terminals.
In short, the major changes in the country’s logistics network opens up vast investment opportunities for private players.