Indian Logistics Industry

Indian Logistics Industry A complex domestic supply chain mechanism meant that most products are fatigued before they reach consumers in India. A logistics park could facilitate the co-location of value added service providers. Even final assembly could happen within the park. A logistics park would thus facilitate (i) economies of scale, scope and co-location, (ii) efficiency in transportation by way of integrated, multi-modal access, (iii) light manufacturing activities, (iv) co-location of value added service providers, and (v) reduced inventory. The essential components of a logistics park are (i) suitable location (ii) rail terminal (iii) air cargo complex (iv) intermediate container terminal (v) warehousing (temperature controlled and ambient) (vi) value added logistics services (vii) food processing zones (viii) open stocking yards, (ix) ancillary production, etc. Logistics park also create community and economic benefits, such as, (i) reduced pollution (ii) single window clearances (iii) greater industrialization (iv) focused environment management and (v) greater use of environment-friendly rail systems. To achieve this, the logistics players should engage in detailed location strategy studies. PPP is the preferred route for building logistics parks. Government should facilitate this by easing land acquisition norms, broadbase basic infrastructure, provide tax incentives, promote industry clusters, etc. And, the nodal agencies should promote intermodal transportation. Logistically friendly countries are more likely to have better global value chain integration and attract export-oriented FDI. Since trade and FDI are the key channels for the international diffusion of knowledge, poor logistics may impede access to new technology and know-how and slow the rate of productivity growth.

Overview • • • • • • •

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The Indian logistics industry accounts for a mere 2% ($100 billion) of the $5,000billion global logistics industry In India, majority (65% to 70%) of the products are still transported by road and only 30 to 35% by rail (primarily EXIM and bulk products) Owing to general inefficiencies, logistics is a high-cost activity in India (13% of GDP) compared to 8-9% of GDP in the US. The country has the second largest network of roads (3.83 million km after US’s 6.43 million km), the fourth largest rail network (63,000 km), 128 airports, 12 major ports, 1 corporate port and 187 non-major ports. Investment in the logistics infrastructure has been raised from $201 billion under the 10th Plan to $492 billion under the 11th Plan The domestic logistics industry is growing at 8-10% per annum and is expected to reach a size of $385 billion by 2015 The warehousing segment which makes up 20% of the logistics industry is dominated by small players with limited capacity. This segment is expected to grow from $20 billion now to $55 billion by 2011, constituting then about 35% of the total logistics industry in India and by that time it would have in excess of 50 million sq ft Warehousing space and more than a hundred Logistics Parks across the country 110 logistics parks are slated to come up across the country in the next five years, covering 3,500 acres at an estimated cost of about $ 1 billion. Thus about 45 million sq feet of additional warehousing space is expected to be developed across

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the country. This will be aided by privatization of ports, opening of dedicated freight corridors, roads development, improved and enhanced ports handling, etc Logistics account for 15-25% of cost of goods in India compared to 10-15% in the West The resulting high cost of operations due to general inefficiencies is causing an estimated loss of $50 billion to the national economy The 3PL activity is less than 10% of the total logistics operations in India, whereas the corresponding figures for the U.S., Europe and Japan are 57%, 40% and 80% respectively

Performance / Constraints •

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India ranks 39th in the World Bank logistics performance index that covers 150 countries. The inefficiencies in the logistics industry stem from (i) a fragmented market (ii) multiple taxes (iii) physical infrastructure bottlenecks (iv) archaic labour laws, and (v) state-centered policies National highways that form 2% of the total roads carry 40% of the traffic The industry is hampered by high transaction costs, more time taken in processing exim containers (12-13 days compared to 3-5 days in France and Denmark), excess documentation (an average 11 documents compared to 2-3 in France and Singapore), and high cost of handling exim containers ($2,600-3,000 compared to $440-450 in Malaysia and Singapore) The average speed of commercial vehicular movement in India is a mere 20 miles/hour compared to 60 miles/hour in the West In the absence of modern warehousing practices, there are regular slippages to the extent of 15-25% of cargo business Key issues to be addressed are: (i) land acquisition practices, (ii) approvals, (iii) zoning, (iv) investor approach, (v) user expectations (vi) design, and (vii) development

Growth • • • • • • •

The anticipated growth of organized retail (currently 6% of total retail compared to 85% in the US) will also spur this industry, he said. Also, outsourcing of logistics to 3PLs will also act as a key industry growth driver A 0.5% cost reduction in logistics will effect an additional 2% growth in trade and 40% increase in the range of products exported Introduction of VAT and phasing out of CST, outsourcing activities, rise in FDI, greater organized retail, higher exports and imports, and greater logistics linkages are key enabling factors India enjoys a time zone advantage, being located between the global producers and consumers The key growth drivers would be: (i) a new tax regime (ii) increased external trade (iii) higher organized retail (iv) more outsourcing and (v) huge infrastructure development Countries performing well have a comprehensive approach, improving all the key logistics in parallel, while those with a piecemeal approach, targeting a single link in the logistics chain, may see initial results but no lasting improvements The demand for high-tech ultra-modern warehouses will grow exponentially in coming years. Initially, to save on Central Sales Tax (CST), the manufacturer used

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to maintain numerous warehouses at multiple locations to show the movement of goods from one company warehouse to another. However, with the phasing out of CST by 2010, Manufacturers will readily outsource their warehousing requirements to the Third Party The economics of transportation logistics clearly favour those who offer a mixed bouquet. The savings could be as much as 10-15 per cent. For instance, it would take Rs 1,850 to transport a metric tonne (MT) of load purely on road from Delhi to Kolkata. However, if a mix of road and rail was opted for, the cost for carrying the same load would be Rs 1,660

Four logistics hubs in the country • • • •

Established hubs: Mumbai, Kolkata and Chennai Emerging hubs: Gurgaon, Vizag, Nagpur and Indore Promising hubs: Jamshedpur, Alwar, Ahmedabad, Bangalore and Ambala Nascent hub: Kochi.

Comparative Performance (LPI) Country

LPI

Customs

Infrastructure

International shipments

Logistics competence

Tracking & tracing

Domestic logistics costs

Timeliness

Singapore

4.19

3.9

4.27

4.04

4.21

4.25

2.7

4.53

United States

3.84

3.52

4.07

3.58

3.85

4.01

2.2

4.11

China

3.32

2.99

3.2

3.31

3.4

3.37

2.97

3.68

India

3.07

2.69

2.9

3.08

3.27

3.03

3.08

3.47

Performance evaluated using a 5-point scale (1 for the lowest score, 5 for the highest).