Factors driving the opportunities for door-to-door express logistics providers in tier 2 & 3 markets

Updated: September 20, 2018 11:32:56 AM

India’s logistics industry is currently pegged to grow at 10% per annum according to the ICRA, and reach USD 215 billion in the next two years, according to the Economic Survey.

 

Suresh Prabhu, Commerce Minister, global trade, logistics for India, Indian logistics industry, Indian institute of Foreign TradeIn the last few years, India has emerged as the fastest-growing large economy of the world, and GDP growth touched 7.7% in the last quarter of the 2017-18 fiscal year.

 

India’s logistics industry is currently pegged to grow at 10% per annum according to the ICRA, and reach USD 215 billion in the next two years, according to the Economic Survey. While the sector’s current growth is largely based on catering to large urban agglomerations and tier 1 cities, the future growth for the industry is expected from India’s plentiful tier 2 and 3 cities. Here are the factors that are creating emerging opportunities for door-to-door express logistics service providers in India’s tier 2 and 3 markets –

India’s economic growth and rapid urbanization

In the last few years, India has emerged as the fastest-growing large economy of the world, and GDP growth touched 7.7% in the last quarter of the 2017-18 fiscal year. Just recently the Prime Minister Narendra Modi announced that he would be targeting double-digit GDP growth, to help the country’s economy break into the USD 5 trillion club by 2025. To accomplish this, the Prime Minister intends to double India’s exports and reduce its imports by 10%. To double India’s exports in the next 7 years, there will need to be a substantial boost in manufacturing – and this will require an increased transportation of raw materials to centres of production. There will need to be new centres of production to cater to new centres of living, too. India is rapidly urbanizing, with several small rural centres agglomerating and becoming tier 2 and 3 cities in just the last decade. Delivering manufactured goods to customers in these cities will be a primary contributor to the logistics sector’s growth in the coming years.

The logistics industry in India is incredibly critical to its economic growth, and spending on logistics already comprises 14.4% of our GDP. This means that businesses and customers in the country spend over USD 316 billion annually on moving goods across the country, showing the critical role it plays for the nation’s economy. According to McKinsey, 40% of this expenditure arises from indirect costs such as inventory carriage cost, theft, damages, and losses; as India’s infrastructure and systems are improved, this is expected to fall by half, and the money spent would be reinvested into growth or consumption. On-time delivery logistics companies, relentless in their pursuit of efficiency and time-optimal operations, will lead the charge in improving how goods in India move from one point to the other.

Increased economic activity as well as changing consumer expectations will drive more businesses towards using express services. Customers today want consumer goods delivered as fast as possible, and companies managing their supply chain or product distribution will find time-definite delivery providers to be more efficient at getting raw materials to manufacturing centres and finished products to retail shelves. As the country’s GDP grows, it is expected to drive the logistics industry to 1.5x growth, leading to CARE Ratings projecting the industry to grow at a CAGR of 15-20% between FY2016 and FY2020.

Make in India

The Make in India program, launched by the current government in September of 2014, has made great progress in encouraging foreign companies to invest in India and make it a hub for manufacturing. Since its launch, the program has received investment commitments of USD 240 billion, and has helped India become one of the top global destinations for Foreign Direct Investment. These companies will not only look to cater to global demand, but would also want to use this as an opportunity to cater to the growing Indian population, an attractive target audience. They will also need to rely on the logistics sectors to make sure that their products can reach tier 2 and 3 cities across the face of the country.

Infrastructure development

India’s transport infrastructure has seen consistent improvement over the last few years. Connectivity has improved across the country, as a record 16,271 km of National Highways contracts were awarded, and 8231 km constructed. Promising initiatives like the Bharatmala Pariyojna, a highway and road construction project by the Indian government, indicates that these numbers will continue to grow in the near future. These highways will help intercity and interstate commerce, as a majority of goods in India today are at least partially transported by road. Even railways, the second-highest cargo transportation mode, has seen marked improvement. The accident rate has dropped to a 57 year low, driven by broad track improvement, even as the total distance ever travelled by trains in Indian history was recorded in the 2017-2018 fiscal year, at 1170.7 million train km.

The population

As India grows, so do the number of Indians and the places they live in. India’s tier 2 and 3 cities – those with populations of 20,000 to 99,999 people – are now full of a new generation of youngsters, armed with growing disposable incomes and higher aspirations and ambitions. It is this target audience that many believe will be the engine of India’s growth as it reaps the full benefits of its demographic dividend in the near future. For these new cities to be serviced by a set of new factories, companies, and marketplaces, new supply lines and chains will need to be created. Roughly 300 million Indians live in these cities, and a report by the Boston Consulting Group suggests that this population will increase 4.5x by 2025. These billion-plus Indians are projected to spend an astonishing USD 104 billion just on FMCG products. Bringing these products to the markets or their homes will be an exceptionally lucrative opportunity.

Their prosperity

India’s economic growth also increases its purchasing power, and makes the country’s emerging cities promising, yet untapped markets. A report by EY points out that USD 26.4 trillion of household income in India is currently in tier 2 and 3 markets, as opposed to the USD 800 billion in India’s big 8 metros. A BCG report also predicts that by 2025, tier 2 and 3 cities will account for 45% of India’s consumption, and will add 30% of the country’s affluent households from amongst its fold. Today, the affluent people of these cities are visiting tier 1 cities to access luxury branded products, according to a Euromonitor International Report. As their numbers increase, these brands will want to travel to them – and the logistics industry will be relied upon to bridge this gap.

Policy reforms

With GST and E-Way billing reforms bringing great efficiency to the logistics process, the sector has to definitely thank the promising regulatory environment that has been provided to them. GST has removed barriers and eased the movement of goods across India’s internal boundaries and demarcations. The logistics sector has been identified as an infrastructure sub-sector, enabling greater access to investment and funding while removing other constraints. Further, the government has also made it easier to set up multi-modal logistics facilities, which will help the sector establish the hard infrastructure for the economic requirements of India’s growing tier 2 and 3 cities. And then there’s India’s ambitious Smart Cities program, which intends to transform, upgrade, and optimize 100 tier 2 and 3 cities across India. This will create untold new opportunities for the logistics sector, from being involved in the construction of the new infrastructure, as well as utilizing smart city systems to improve their services.

Entrepreneurship growth in tier 2 and 3 cities

Thanks to the Startup India campaign and a dedicated focus of the government to ensure inclusive growth in entrepreneurship, today 44% of startups are found in tier 2 and 3 cities. These startups have been founded across 419 districts in India. This has been accomplished through a concerted effort to ease the troubles and costs of innovation, with the government reducing the number of forms required to file for a trademark, as well as extending 10% subsidy for trademarks and 50% for filing new patents. The government has also initiated the State Startup Ranking Project, hoping to encourage friendly competition among states in the country and highlight the areas in which each state needs to work and learn from one another to grow their own startup ecosystem.

(By Chander Agarwal, MD, TCIExpress) 

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