Whoever said roads are the blood vessels of an economy, probably forgot to mention rails, sea ports and airports! And if all of them together are indeed the blood vessels, then India is definitely headed for a full-fledged heart attack. For, not only are our roads clogged, railways overburdened and airports too expensive but also stores and warehouses, grossly inadequate. The fact that China’s top port Ningeo-Zhoushal handles more cargo than all major ports in India put together, sums up all that’s wrong with Indian logistics sector.

Neha Dewan | @TheDollarBiz

Logistics infrastructure of any economy is a big indicator of growth, narrating the story of progress and development, or the lack of it. In India, the potential of the sector is such that it can easily chart out India’s success story, albeit if tapped in the right way. The logistics sector in India, in essence, primarily comprises of freight and transportation via road, rail, air and water, as well as, other ancillary sectors like warehousing and cold storage. However, the distribution of various modes of transportation in India shows a dramatic contrast to that of other countries, with road networks making up 60% of total freight traffic. As compared to this, roads account for 37% of freight traffic in US, while the corresponding figure in China is just 22%. Rail and coastal shipping come next in line in India, constituting approximately 32% and 7% respectively. On the other hand, inland water transportation and air account for less than 1% each.    

Estimates peg the Indian logistics market at $125-130 billion, and is believed to be growing at a steady rate of 15% per annum. And though hurdles do exist before India can scale up to international competitiveness and efficiency, the forecast for the future looks hopeful and bright. Agrees Jaideep Ghosh, Partner and Head of Transport & Logistics, KPMG, as he tells The Dollar Business, “Rising investment, rapidly evolving regulatory policies such as relaxed lending terms for infrastructure projects, freeing up of road projects from mandatory PPP mode, mega infrastructure projects and the recent Union Budget announcements on multi-modal transportation initiatives are likely to trigger a higher rate of growth of the Indian transport and logistics market.”

So, where exactly is the root of the problem, even though so many measures are bound to accelerate growth? For one, the cost of logistics accrued in itself is high for the Indian economy even though labour costs are relatively cheaper. A look at logistic spends reveals that India’s logistics sector accounts for 13% of the GDP – higher than that in markets like US (9%) and Europe (10%) but lower than that in China (18%).

Robbing Peter to pay Paul

It’s clear that a concerted effort to decrease logistics cost is an important aspect to increase the competitiveness of the Indian economy. According to industry estimates, India loses approximately $45 billion in terms of GDP every year due to inefficiencies of its logistics network. Moreover, the 2.5 times increase in freight traffic, which is expected in the next decade, is bound to further strain the country’s inadequate infrastructure. The existing challenges are daunting enough and reveal the reasons for the lag faced by the sector.

 

In its ‘Logistics Game Changers’ report KPMG highlights how road is more preferred than rail as the favoured mode for movement of goods in India. For instance, as per the report, while traffic on rail has grown more than ten-fold between 1951 and 2007, rail track length only grew 1.4 times during the same period. Further, rail freight tariffs in India are known to be one of the highest in the world, with freight rates being nearly four times of that in US. There is also lesser flexibility to carry different products on rail as special wagons are not very easily available. Moreover, passenger traffic enjoys significant priority over freight when it comes to our rails. This implies that passenger tariff rates are highly subsidised by freight operations – they utilise up to 60% of network capacity but end up contributing only 30% to revenue.

But despite these operational hazards, rail networks have the potential to be the fastest and most cost effective transportation for freight in India. Not only are the costs of rail transportation significantly lower compared to other modes, it also offers the advantages of speed and capacity-related factors.

The over dependence on roads – about three times that of China – is also harmful for the environment as emissions from road transport are way higher than from rail and waterways. A more balanced distribution, in effect, would not only help lower transportation costs but also achieve higher efficiency and lead to more environment friendly zones.

Image of a freight station at night. Indian rail connectivity has not scaled up as significant as was expected after independence

Dedicated corridors

Projects similar to the Dedicated Freight Corridor (DFC), according to the report, can help in fulfilling such objectives. The project that proposes construction of two corridors – one each on the west and east routes – is currently running significantly behind schedule. The DFC network, once executed, is expected to increase the share of rail considerably, leading to a more balanced distribution mix in the logistics sector as a whole. Besides rail, water as a mode of transport has the potential to be an efficient mode for the economy but its’ share, as compared to developed countries, is very low.

Coastal shipping and Inland Waterways Transportation (IWT) make up domestic shipping. As compared to other countries, India’s share of IWT stands at a dismal 0.5% as compared to 8.7% in China and 8.3% in US. Building on India’s IWT can lead to some obvious benefits of fuel and energy efficiency, lower air pollution as well as low capital requirements. The other important mode in waterways – coastal shipping – is also integral for trade but remains largely untapped. Petroleum, oil and lubricants, coal, and iron ore are the major commodity categories accounting for most of India’s coastal cargo movement. The growth of the freight traffic share via coastal shipping, which at present hovers around 7%, is obstructed due to inadequate port and land side infrastructure thereby blocking its large scale use.

The beacon of hope

The Indian ports sector, on the other hand, has seen substantial growth over the last decade, with Gujarat enjoying a dominant position as the leading maritime state, handling almost a third of India’s total port cargo traffic and 71% of total non-major port cargo traffic. The sector is on a growth trajectory and initiatives such as the Maritime Agenda 2010-2020 by the Government of India is expected to further bolster port capacity. Launched in 2011, the agenda encompasses an investment of $57.4 billion, in a phased manner, to create total port capacity of around 3,200 million metric ton (MMT). The government also aims to create an additional cargo handling capacity of around 900 MMT at ports along the East Coast by pumping in an investment of around $22.5 billion.

This initiative will encourage private investment in both major and non-major ports and aims to scale up Indian ports to international standards. Private investment is expected to contribute 66% and 98% to total investments in major and non-major ports respectively.

Up in the air

When it comes to the lesser used freight mode of air cargo, India has a long way to go even to be considered an also ran. A parallel between air cargo infrastructure at Indian airports and global practices highlights the lacunae – while there are segregated facilities for different types of cargo at the world’s top airports, most terminals in India do not offer separate facilities. Also there are suitable waiting areas for trucks globally, whereas it is the cargo terminal landsides that are used for parking or holding area for trucks in India, thereby causing congestion.

Increased spending on airport infrastructure might help improve air cargo infrastructure across India. The 12th Five Year Plan (2012-17) has earmarked investments worth Rs.67,500 crore on airports – an increase of 86% – over the investment outlined in the 11th Plan.

To store it all

A proper analysis of India’s logistics sector cannot be complete without a proper study of warehousing and storage facilities. The warehousing market in India comprises of both agricultural and industrial warehousing, with both segments having tremendous growth opportunities. The share of the industrial segment is expected to increase from 86% in FY2011 to around 90% in FY2016. The demand for industrial warehousing space has also gone up to 476 million sq. ft. in 2013, up from 391 million sq. ft. in FY2010. Engineering Goods, Information Technology, Electronics and Telecommunications sectors are expected to be the main drivers of this growth.

In fact, the share of modern warehousing itself is expected to double from 15% in 2010 to 30% by 2015. Rising domestic and EXIM freight volumes, strengthened investment in infrastructure and organised retail are some factors that will spur this growth. But as is the case in all the other segments, this sub-component also contends with its share of challenges that obstructs its growth potential. High price sensitivity among customers, together with various infrastructure hazards, block the ability of service providers to offer high quality services.

Thanks to the Web

The Indian Warehousing Show (IWS) 2014 held in New Delhi recently was witness to a cross section of industry players. Interestingly, some companies that The Dollar Business spoke to, highlighted how e-commerce companies are becoming a hot new favourite for the warehousing sector. Ankur Minda, Manager (Corporate training) at Acorn Warehouses and Logistics Parks, feels increased Internet penetration in the country has led to many such portals springing up, signaling an opportunity for the warehousing segment. “There are a lot of e-commerce companies that are now doing well in the market. Flipkart, for example, has taken up 3 lakh sq. ft. of space in Bhiwandi. These companies require good warehousing facilities and hence they want to partner with logistics companies to stock their goods for more efficient deliveries to clients,” Minda told The Dollar Business.

Similarly, some companies, while expanding their reach to e-commerce also speak of FMCG as a potential sector. “The growth of e-commerce industry offers great opportunities for the logistics industries to grow and generate higher revenues. Nevertheless, the big players in the industry are still focusing on the FMCG and consumer electronics sectors for their main business. The mid to smaller players in the industry, though, have a great opportunity to expand their business by catering to the growth wave in e-commerce,” Mandeep S. Sachdev, CEO, Elite Material Handling told The Dollar Business. But if real progress and scale has to be achieved, countering the problems within the sector by implementing innovative and long standing solutions can be the best way forward for the future of the logistics industry in India. And Deloitte and Indian Chamber of Commerce (ICC) in the ‘Logistics Sector – Present situation and way forward’ shows the road ahead for the industry.

Way forward  

The report says that action is required on three fronts – creating an environment for the Indian logistics market to offer value propositions in logistics solutions, increased capability of the Indian logistics industry to offer these solutions and lastly, governmental and other regulatory mechanisms to offer such an enabling environment. Regulatory framework by the government, in particular, assumes utmost importance.

Apart from efforts to fill the infrastructural gaps, many other changes can help to make this more effective. Efforts such as coordination among various agencies in infrastructure planning, improvement and simplification of tax regimes, reforms in urban planning and improving dialogue with regulatory agencies are some suggestions provided by the Deloitte-ICC paper.

It’s well known that India will stand at an obvious advantage if a more balanced modal logistics infrastructure network is lined up ahead. Besides cost savings and efficiency in the overall freight system, they offer environmental benefits such as reduced energy consumption and lesser air pollution. Significant growth drivers for the logistics industry is anticipated from factors such as growth in industries like auto, pharma and FMCG; increase in trade flows; private sector investments and the development of logistics infrastructure. In addition to this, policy changes for every mode of transport and increased investment in each of them can imply more effective freight movement and progress for the industry – something that is extremely important for India to get back on the high growth path. After all, you can’t zoom ahead on a bumpy lane!