Reduce regulatory barriers and provide a transparent digital platform to ensure easy movement of goods
By Anis Chakravarty & Umang Aggarwal
Amidst a still uncertain global scenario, the Indian economy has managed to grow at a healthy pace and is expected to clock growth in the 7.2-7.4% range in FY19. It is now the world’s sixth-largest economy, at $2.6 trillion, and is expected to become the fourth-largest by 2022, according to IMF. Even with domestic resilience, the economy continues to face certain risks largely emanating from global policy action and rising commodity prices. The rupee had earlier breached the 74 per dollar mark on the back of global monetary policy normalisation and strengthening dollar, which are likely to have negative inflationary and investment flow outcomes. Portfolio investors have pulled out close to $11 billion from the Indian market, and foreign investments can be expected to reroute to destinations with better prospects. The situation needs cognisance since fiscal and monetary policy may be insufficient to ease external risks.
External trade is a vertical that can benefit substantially from improving global demand and weakening rupee, if opportunities are exploited optimally. Trade activity accounted for close to 12% of GDP as of FY18, and remains a major component for sustained economic growth. However, despite a significant jump in total merchandise trade, logistics infrastructure and services in India have remained below par. The logistics segment has suffered due to higher costs, lack of trained manpower resources, and lower adoption of technology in its processes. Logistics costs, in fact, make up for 14% of the product cost, compared to a low 6% global average. At the same time, skills gap in logistics stem from lack of trained personnel at both the operational and managerial levels. Some reasons for this are believed to be low compensation, lack of infrastructure facilities, and lack of necessary training institutions. A 2015 report by the National Skill Development Corporation (NSDC) estimated that India will need around 28.4 million skilled workforce in the broader logistics industry while overcoming issues related to poor labour policies.
India’s rank in World Bank’s Logistics Performance Index (LPI) has dropped from 37 in 2007 to 44 in 2018, while China remains at a remarkably higher position, at 26. Against this backdrop, policy action needs to be directed towards reforms that can strengthen domestic industry, including infrastructure building, improving supply chain management, and specific schemes to facilitate export growth.
Building economic strength
The logistics industry has grown at a compound annual growth rate (CAGR) of 7.8% over the previous five years, employing more than 22 million people, and is expected to now grow at a CAGR of 10.5% to reach 215 billion by 2020. In fact, the Agility Emerging Markets Logistics Index—which is a 50-nation index to gauge for emerging markets’ competitiveness—places India and China in the top-two among the largest emerging markets and remain the leading investment destinations for the logistics industry. Acknowledging the significance of revamping the logistics segment, the government has included the sector in the Harmonized Master List of Infrastructure Sub-sectors, which is likely to be helpful in facilitating the credit flow into the sector, and the status will possibly simplify the process of approval for construction of multi-modal logistics (parks) facilities that includes both storage and transport infrastructure. Most definitely, the market has started recognising the potential benefits of logistics optimisation and the government has begun to streamline the sector in order to facilitate a competitive edge that can enable deeper integration with the global supply chain. Firstly, greater thrust has been provided to highway network building to improve connectivity to major production and consumption hubs. This is a major step given that road carries more than half of freight cargo, which will likely minimise truck turnaround time as well as vehicle downtimes, enhance productivity, and reduce inventory-related costs.
Secondly, once the freight corridor plan becomes operational, trade activity will likely get enhanced given its focus on making exchange of goods cheaper, faster and more reliable. Within this, a major component that needs focus is minimising transportation costs. The government has expedited the process of renewing tracks and completion of dedicated freight corridors (DFC), which is likely to reduce close to 70% of the traffic via operation of freight trains on the two vital routes of Delhi-Mumbai and Delhi-Howrah corridors.
Thirdly, the roll-out of radio-frequency identification (RFID) sealing tags to be used for factory-stuffed exports will likely reduce logistics cost significantly as there won’t be any requirement for on-site inspection by customs officials, while also bringing transparency in the supply chain.
Other measures taken to push for an effective logistics sector include allocation of `1 trillion ($15.7 billion) for the development of logistics infrastructure, which includes 35 multi-modal logistics parks, and another allocation of Rs 6.9 trillion ($108.6 billion) to develop 83,677-km of roads by 2022, which includes the ambitious “Bharatmala” scheme.
Setting up of a dedicated logistics division and granting infrastructure status to logistics segment will be a positive for the economy. The logistics segment is likely to be aided by ongoing amendments to the GST regime as well as implementation of key infrastructure projects. Undoubtedly, the segment is undergoing a change and the government has taken proactive measures. However, more needs to be done given the deepening of trade ties among economies wherein India needs to maintain its competitive edge among its Asian peers. India shows remarkable potential for logistics development, but has been held back due to poor infrastructure and subdued business conditions. In this context, further action should be necessitated in terms of reducing regulatory barriers and provision of a transparent digital platform to ensure easy movement of goods. Separately, incentivising the segment with focused fiscal incentives could encourage private sector investments.