Home / Economy / How to push India’s logistics on the right track

The government announced the much-awaited National Logistics Policy earlier this month. The policy, which envisages developing a technologically enabled, integrated, cost-efficient, resilient and sustainable logistics ecosystem, has received Cabinet approval. Over the last few years, the segment has been under the government’s keen eye, with a slew of efficiency-boosting measures such as e-waybills, FASTag and the PM Gati Shakti plan. However, an overhaul hinges on expeditious and efficient execution of such initiatives. Mint explores the factors that plague the sector:

1. Fragmented structure

The logistics sector, which employs over 22 million Indians according to the government, is highly fragmented. Unorganized players control 90% of the market. The transportation segment, which is even more fragmented, commands a 61% share in the overall market, according to research by PhillipCapital. The dominance of small players makes it hard to streamline supply chains and use digital tools for optimization. But the use of technology and policy initiatives that could be part of the policy revamp could drive the sector towards formalization. “The digitization and ease of doing business have helped organized players to increase market share faster and build scale," said a PhillipCapital note in September. The policy focuses on developing support infrastructure, reducing systemic inefficiencies and using technology. Its successful and timely implementation will be key to how fast the formalization takes place, said analysts at Motilal Oswal Financial Services.

2. Unwarranted costs

High logistics costs have burdened the country’s supply chain, which is one of the world’s largest. These costs hover around 14% of GDP, way higher than the global average of about 8%, according to a joint report by Confederation of Indian Industry (CII) and Arthur D. Little in 2020. Transportation alone accounts for 40% of logistics costs, of which roads—which are costlier—represent nearly 64%, followed by rail at 30% and waterway and air transport a combined 6%, the report said.

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India’s poor performance is also mirrored in the World Bank’s Logistics Performance Index, which was last released in 2018. The country ranked 44th among 167 countries, far behind the US at 14th and China at 26th, and its emerging peers such as Thailand (32nd) and Vietnam (39th). The National Logistics Policy aspires to pare the logistics cost-to-GDP ratio to single digits, in line with global standards, but it will have a long way to go in terms of achieving it.

3. Highly skewed

The root cause of the high costs lies in an unbalanced mix in modes of freight movement. Around 71% of the freight is transported by road, a costly mode of transport. Only an estimated 17.5% movement of goods is through trains, according to a Niti Aayog-RMI analysis in June 2021. Road transportation costs 3.6 per tonne per km, compared with 1.6 per tonne per km for rail and 2 per tonne per km for waterways. An obsolete infrastructure and vehicles drive up costs, too. However, by optimizing truck use and promoting fuel-efficient vehicles and alternative fuels, logistics productivity could be enhanced, the report suggested. As part of the new policy, a Unified Logistics Interface Platform has been created to enhance the efficiency and ease of logistics services.

4. Rail trails

This excessive reliance on roads is a result of focused policies and investments in the road transport segment over the years. The share of railways in freight transportation, which used to be 89% in 1951, has dropped to merely 18% in 2020, according to the Niti Aayog-RMI report. A RITES study pegged this incessant fall in rail’s share to have cost the Indian economy about 38,500 crore per year. Rail and waterways are the most economical for longer distance freight, and have a dominant share in freight transport in the US and Europe, respectively. Capacity additions on the rail network can drive this shift in India and the sector could do well with dedicated freight corridors.

Analysts at PhillipCapital believe a modal shift will be a major focus to reduce logistics cost, by increasing the share of railways and waterways, which offer cost-effective as well as greener modes of transportation.

5. Potential pitfalls

The logistics industry has lauded the new policy and many experts see it working in favour of sustainable growth for the sector in the long term. Earlier initiatives such as FASTag and e-waybills have benefited the sector by simplifying goods movement. The impact is also visible in the performance of listed players in the space: the Nifty transportation and logistics index has delivered a 14% return against a 5% fall in Nifty 50 over the last one year.

“Logistics stocks have been outperforming broader markets mainly on the back of continued strong e-waybill generation and normalization of container trade across the globe and higher commodity volumes," said a recent ICICI Direct report. But looming risks of slowdown, coupled with global disruptions in cargo movement, could be key for the sector, the report said. An overhaul will entail more coordinated and swift efforts.

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Niti Kiran

Niti Kiran is a data journalist who really likes data. With over 10 years of experience in corporate and market research, she has an eye for detail. Data research is Niti's forte and constantly fascinates her.
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