To reap the full benefits of GST on inter-state trade, both hard and soft logistics infrastructure need to improve
The world over, poor logistics often means poor trade. In other words, how efficiently countries trade defines how they grow and compete in the global economy. For India, good logistics will also play a critical role in the success of the “Make in India" initiative, enable small-scale producers to access newer markets, and allow farmers to benefit from the timely uptake of perishable produce.
India has already taken a major step forward in this direction. When it is rolled out, the goods and services tax (GST) will help integrate this vast and diverse country, transform it into one common market, eliminate inefficient taxation, and go a long way in boosting the manufacturing sector.
But much more can be done. Logistics is a series of services and activities that constitute supply chains—such as transportation, warehousing, brokerages and so on. Although these activities are essentially carried out by private firms, their efficiency depends upon public infrastructure. This includes both “hard" or physical infrastructure as well as “soft" or institutional infrastructure such as systems, procedures and regulations. Trucks, for instance, use publicly funded roads and highways, while international trade is subject to the procedures followed by border agencies. Logistic activities are also regulated from the fiscal, environmental, safety, land use and competition perspectives. In large economies such as India, responsibilities for both hard and soft infrastructure are shared by a number of central and state agencies.
Some estimates suggest that logistics costs in India amounted to a sizeable 14% of gross domestic product (GDP) in 2014. It is also suggested that inefficient logistics chip off a whopping $45 billion from India’s economic output, or about 2% of the country’s GDP.
So, have India’s recent efforts to improve its global logistics ranking borne fruit? On this, there is good news.
The World Bank’s 2016 Logistics Performance Index (LPI), which ranks 160 countries every two years, found that India moved up to 35th place internationally, compared to 54 in 2014. In other words, within two years, India had improved its logistics performance significantly. Globally, Germany stood first for the third time running, while China stood at 27, South Africa at 20, and Russia at 99. The World Bank’s LPI found that when compared to other countries, including other nations of the Brazil-Russia-India-South Africa grouping, the Indian operators surveyed were especially positive regarding improvements in areas such as the supporting infrastructure for trade (e.g. ports) and the processing of goods by customs. These findings should give a shot in the arm to the government’s efforts to boost the business environment.
The good news is only partial, however. For it is not only important to connect India internationally, but also to improve connections between India’s states. A number of studies have focused on this well-known challenge. One recent study measured the impact of internal borders on the country’s economy. It found that delays at inter-state borders were comparable with those at international checkpoints in other parts of the world. Poor inter-state supply chains not only erode the competitiveness of the country as a whole, but also prevent the benefits of better international connectivity from spreading across the country.
As evidenced in the World Bank’s latest index, India has made rapid strides in improving its logistics infrastructure. As for hard infrastructure, seven new multimodal freight corridors are on the anvil, and work on some is well under way. These include the Western and Eastern Dedicated Freight Corridors where high-speed trains will run along electrified freight-only tracks from the hinterland to ports on the western and eastern coasts.
In the Ganga basin, the eastern rail freight corridor will link up with the highways, in addition to the proposed Ganga waterway, enabling goods to switch seamlessly from rail to road to barge to ship in an unbroken continuum. Along the way, 15 logistic parks will serve as transport and service hubs.
On the equally imperative softer aspects of logistics, the GST is most certainly a major step forward. However, to reap the full benefits of GST on inter-state trade, more will be needed. Today, a truck on an Indian highway reportedly covers an average of 250- 300km per day, compared to 450km in Brazil, and 800km in the US.
Studies have found that for up to 60% of journey time, the truck is not moving at all—a large part of that time is spent at checkpoints getting tax and customs clearances. These difficulties can have a substantial impact on freight routes: For example, exporters from manufacturing hubs like Tirupur and Coimbatore in Tamil Nadu report diverting their shipments by several hundred kilometres just to avoid the Tamil Nadu-Kerala border crossing.
A start could therefore be made by removing unnecessary delays at inter-state checkposts. Many national, state and international organizations dealing with a range of issues, including shipping, commerce, finance, and transportation, have recommended a series of measures to improve the situation.
The World Bank’s LPI report too provides a number of examples from countries that have implemented logistics reforms successfully. Some of these examples may be relevant for India. For instance, it will be important to monitor the performance of domestic supply chains to inform policymaking, and conduct a public-private dialogue on the issue. Such efforts will help determine the best way forward and contribute to the country’s emergence as a rising global manufacturing power.
Sebastian Saez and Arnab Bandyopadhyay are, respectively, lead economist and lead transport specialist at the World Bank in New Delhi.