Logistics: Sector ready to turn a corner

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November 08, 2021 6:30 AM

Spurred by policy changes and infra upgrade, the logistics industry is expected to grow at 10-12% CAGR in the near term, improving India's competitiveness

The high cost of logistics in India has been due to an inefficient modal mix, driven by a relatively inefficient road segment.The high cost of logistics in India has been due to an inefficient modal mix, driven by a relatively inefficient road segment. (Representative image)

The logistics sector has been plagued with inefficiencies, which are behind India’s logistics costs (~14% of GDP) being higher than several nations (average 8-10%). This impacts the country’s competitiveness in global markets. But the sector is in the throes of a transformation, Motilal Oswal has said in a recent report, led by: 1) reforms like GST and the e-way bill ushering in a sea change; 2) development of support infrastructure that improves connectivity; 3) change in the perception of logistics from being just about transportation and warehousing to a specialised function; 4) evolving consumer demands; and 5) emergence of tech-driven operators in this space.

With a pick-up in demand, the logistics market, pegged at ~$250 bn, is expected to grow at 10-12% CAGR, to $380 bn by FY25. Some new business models like 3PL and express logistics are likely to grow faster than the overall sector. The shift to organised from the unorganised sector (~90% currently) – would be an additional kicker, Motilal Oswal has said.

Reforms changing the face of the logistics industry: The introduction of reforms like GST and the e-way bill in recent years has given a huge fillip to the sector. With the abolition of state-level taxation through GST, the industry is heading towards consolidation and efficiency (turnaround time is down by ~20%). The e-way bill has improved transparency in the road freight industry. These reforms are propelling higher growth and formalisation.

Infra development takes centre stage: The high cost of logistics in India has been due to an inefficient modal mix, driven by a relatively inefficient road segment. While road infrastructure has improved massively over the last few years, rail and waterways are catching up now. With the dedicated freight corridors (DFCs) getting operationalised in phases, the market share of cost-efficient rail would increase in the modal mix. The strong growth of the infra sector would greatly help logistics players.

Value added services like 3PL and Express businesses are well placed: Increasing need for integrated logistics solutions are pushing the higher adoption of 3PL – which provides inbound and outbound logistics services to manufacturing and service companies. Express services – which offer door-to-door delivery with real-time shipment tracking facilities – are benefitting from a pick-up in manufacturing (B2B) and exponential growth in the e-commerce space (B2C). The 3PL and Express segments are expected to grow at 16-18% CAGR over the next five years, Motilal Oswal’s report said.

Emergence of new age tech and PE funded operators: Over the last decade, several new-age tech and PE funded logistics operators have made a strong penetration in this space, especially in the express industry. Starting with B2C Express (driven by e-commerce), some are now attempting to capture market share in the B2B segment, led by manufacturing. The massive usage of technology is providing an edge to some of these players, with Covid-19 furthering the process, the report has said.

If logistics costs are broken down, ~30% is due to inventory (warehousing as well as in-transit inventory) and the balance on account of transportation. With the steps that have been taken, the Union government is looking to reduce logistics costs to ~10% of GDP, with an almost equal reduction in transport and inventory costs.

Says Davinder Sandhu, chairman & co-founder of Primus Partners, a consulting firm, “With the NIP programme and Gati Shakti as an enabling platform, India has set up an effective framework to address high logistics costs. But there are two major challenges that need to be addressed. The first one is rising costs, with steel and cement prices seeing unprecedented inflation, and finance costs expected to rise. The second challenge is ensuring India builds assets that are future ready and aid the transition to being green and sustainable. We need to shift the planning paradigm from transport to mobility, and ensure a modal shift to rail and water, and an energy shift to electric and green hydrogen.”

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