InvestorQ : In India, we often get to hear that poor logistics is the reason for slow growth in India? What does it mean and how can it be resolved?
Sam Eswaran made post

In India, we often get to hear that poor logistics is the reason for slow growth in India? What does it mean and how can it be resolved?

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swati Bakhda answered.
10 months ago

You are bang on target that the hard part for a country like India is the logistics part. Logistics forms the core of any economy. Encompassing transport, warehousing, infrastructure and support services, logistics can contribute substantially to the efficiency of the overall economy. It is estimated that if the Indian logistics becomes more effective with better infrastructure and removal of procedural bottlenecks, then it can contribute an additional 2% to GDP accretion each year. On an annual GDP base of $2 trillion, this works out to an overall benefit of $400 billion per year. That is why logistics sector is so critical to the Indian economy.

The irony, however, is that a variety of bottlenecks have made the life of the logistics industry in India extremely difficult. Problems like poor roads, procedural bottlenecks, traffic congestion and poor use of technology are all major challenges for the logistics sector. This does not take away the key role that logistics can play in improving economic growth. The logistics sector in India is currently worth $150 billion annually, but a highly fine-tuned logistics set-up can boost the overall GDP of India by $400 billion each year. This shows that the logistics sector as a whole has very strong externalities. The impact of the logistics sector is far-reaching and any improvement in the logistics experience can have a multiplier effect on overall economic growth. To overcome the challenge confronting the logistics space, it is essential to understand the key challenges in front of the logistics space.

Cost of logistics services in India

This is the first big challenge for the logistics space in India. Freight costs in India are as high as 7.2 cents/km compared to just 2 cents in Canada and 3.6 cents in Japan. The overall cost of logistics is also fairly high in India. In most developed countries, the logistics cost is just about 6-8% of the overall cost. In China, the logistics cost is 10% but in case of India, the logistics are as high as 14%. This high cost of providing logistics stems from a variety of factors but the point is that it makes Indian products largely uncompetitive in the global arena. This is also because over 70% of the logistics sector is in the unorganized segment.

Skewed system of regulations and taxes

Logistics companies in India are hurt by a plethora of state level taxes and regulations. There are checkpoints at each state border as well as when you enter and exit each municipality. They add up to costs and create substantial delays. Then, there is the issue of multiple levels of taxes. We have municipal taxes and state taxes which vary from one state to another. Of course, it is hoped that with the passage of the GST Bill in the Upper House, this problem should be largely resolved. However, the bureaucratic red tape needs to be drastically cut down.

Congestion is a major challenge for logistics companies

In India infrastructure in terms of roads, rails and ports is grossly inadequate. Most roads, highways and shipping ports are grossly congested leading to inordinate time and cost over-runs. This impacts efficiency. The same ship that can be fully unloaded in China and Korea in 1 day takes a full 6 days to unload in India. This increases the turnaround time and the idling costs for resources.

Transport mix in India is still largely skewed…

Indian transportation is largely paradoxical. A large chunk of goods get transported by the road networks, although transportation by railways and inland waterways is much cheaper. This is because the government has not focused on the railways and the inland waterways. The redeeming feature is that the Modi government seems to be taking up both these challenges on a war footing which gives substantial room for hope and optimism.

Infrastructure is still too dated

India has a total road network of 3.32 million kilometres but state highways constitute just 4% and national highways a paltry 2%. Ironically these highways are the backbone for almost 80% of the goods moved around in India. Major ports in India are already operating at over 92% capacity utilization and hence the room for further tweaking is very limited. National highways carry nearly 40% of the total freight, which underscores the infrastructure problem. Airways and railways are also part of infrastructure but their flexibility and connectivity is quite poor.

Poor use of technology to give a full logistics experience

Logistics sector across the world uses technology extensively to make the logistics process smooth and effective. For example, real time information sharing, real time tracking of freight movement, automated alerts on movement, use of Internet of Things (IOT) to track specific products to the lowest denominator are yet to take off in a big way in India. Globally, freight companies make extensive use of the cloud for storing and disseminating critical inputs.

Lack of trained manpower and training faculty

This is a very big challenge for the logistics sector in India. Till about a few years ago, logistics was not even recognized as a distinct discipline to be studied and analysed. It was always an adjunct to industry. Only recently, the real value of logistics in the supply chain has been appreciated. That means India has lost out on the advantage of creating ready human resources to take up the logistics challenge. There is very limited training faculty, training manuals or training expertise in the logistics space. All these make idea sharing and germination fairly difficult.

Above all, poor warehousing is the big bottleneck…

It is estimated that a big reason for food inflation in India is poor warehousing. While a handful of large companies have invested heavily in warehousing, large sections of corporate India do not have access to top-of the line warehousing facilities. That means wastage adds to total cost of logistics during the storage process. Poor warehousing also means that quality of the product cannot be maintained at the original levels and that becomes a big challenge for perishable products.

Logistics remains a big challenge in India due to a variety of reasons cited above. However, the onus is still on the government to invest heavily on infrastructure and help smooth the regulatory hurdles. That could be the real big push for India Inc.