Opinion | Indian warehousing sector is at an inflection point

While the talks around India becoming a $5 trillion economy by 2024 seemed like a distant dream till some time ago, the Union Budget 2021 has laid out the perfect foundation for India to chart its growth trajectory.

The government has envisaged a system of economic growth fuelled by infrastructure spends, with increased allocation to the sector besides an additional support to states for capital expenditure.

Along with budgetary allocations, the government has proposed the establishment of a Development Financial Institution (DFI) to monetise existing assets of public sector entities and reinvest them into greenfield infrastructure projects. Further, to attract retail and foreign investment into Indian infra space, the government has proposed to abolish tax deduction at source on REITs and InvITs along with the issuance of zero-coupon bonds by infrastructure companies.

All the above measures could potentially deliver more jobs and provide forward linkages to other industries, which are a part of the global manufacturing footprint.

While infrastructure is the lever that would deliver economic growth, warehousing and logistics is the backbone that all infrastructural growth hinges on. To aid the development of rapid infrastructure development, warehousing and logistics sector will be expected to grow at an even faster rate.

Keeping the requirements of global manufacturers in perspective, there will be a huge requirement of Grade-A warehousing and logistics facilities in the country. The Indian warehousing sector is at an inflection point and is expected to grow at a CAGR of more than 20%. Of this, the Grade-A warehousing stock has been growing at 35% CAGR with a vacancy rate below 10%. It means that the demand for institutional-grade warehousing is almost outstripping the supply at the moment.

There is still significant untapped growth potential as India’s current warehousing stock stands at less than 0.1 square feet per capita, making the sector very attractive among large investors with long-term capital commitment, due to the sizeable developmental headroom available.

Moreover, significant tailwinds in the economy have positively impacted the sector as well. Since the implementation of GST in 2017, the sector has received inflows of approximately $3.6 Billion, signalling favourable investor sentiment for the sector, with plenty of opportunity to grow further.

The covid-19 pandemic ramped up the demand for e-commerce across the country and it is expected to rise further. E-commerce players need close to three times the warehousing space of traditional retail players, which would speed up the warehousing demand further. Moreover, the growth in demand for e-commerce has been secular compared to what we had seen earlier. Firms are looking at warehousing locations in Tier II & III markets as well.

Modernisation and availability of tech-enabled warehousing facilities will be an area with huge growth potential. This alone would be a prime factor in drawing big manufacturing companies. Application of latest technologies, such as AI, digitisation of supply chain, IoT, Blockchain, robotics and drones to increase the efficiency of the processes is an expectation from Grade-A warehouses.

Land being an expensive and most crucial input, it makes the construction of quality warehousing facilities even more capital intensive. While the need for capital is a reality, for investors it is an opportunity to own a part of this growing pie.

The coming months will see a lot of infra projects getting financed, the latest budget indeed has its heart at the right place. The proposal to release the National Logistics Policy soon will help resolve the long-pending issue of bringing down the logistics costs. Executing the projects within time and within costs is imperative to truly reap economic gains.

(Anshul Singhal is managing director, Welspun One Logistics Parks. Views are personal)