While it is essential for policymakers to further accelerate deliberations on the issues to ensure early implementation, other stakeholders such as service providers, users and industry bodies should also come together to prepare a road map in advance, writes Manish Saigal.
When it comes to logistics efficiency and cost, India is not as favourably placed as some key global economies. While transportation cost is high in the US and China due to widespread geographies, it is high in India due to various factors, including the lack of efficient alternatives to roads for long hauls, poor road infrastructure (resulting in low average speed), significant cess and toll tax and a higher rate of damage. With respect to secondary cost components such as packaging, administration and damage-related losses, the transportation and logistics sector in India accounts for almost 3x and 1.7x the cost share of the US and Chinese markets respectively.
Relative composition of transportation and logistics costs
India's slower-than-desired improvement on several key logistics efficiency indicators means that transportation and logistics continues to remain a complex industry, which lacks operational sophistication and good inter-connectivity among several components.
Reasons for high logistics cost in India
It is believed that roadblocks in the transportation and logistics sector hinder India's GDP growth by approximately 2 per cent. The complexity of the transportation and logistics network is further exacerbated by the fact that the sector is highly fragmented, with several small and mid-size players spread across several regions and divided on the basis of asset types and services. There is also a dearth of players who can offer end-to-end services to customers.
Moreover, in many key logistics-intensive sectors - such as agriculture, food processing, oil and gas, engineering, consumer products, retail, metals and textiles - the source and destination points for cargo are distant and often located in poorly-connected regions. Tied into this is the inefficiency caused by an unfavourable modal mix, which favours roads over other modes of transport.
Further, even though the National Highways constitute a meagre 2 per cent of the overall road network, they account for about 40 per cent of the total road freight. The pressure on such critical routes is likely to mount further, as a major percentage of the planned investments until 2014 is likely to go to state roads.
Estimated split of road investments
Another area of critical but inefficient infrastructure is ports. Most Indian ports are operating beyond 100 per cent utilisation against the optimal utilisation benchmark of 80 per cent. This results in congestion within ports and puts pressure on the evacuation infrastructure, creating bottlenecks in the logistics chain.
Analysis of capacity addition and utilisation
Apart from infrastructural roadblocks, the sub-optimal quality of logistics services results in low productivity, high costs and high turnaround time. A highly fragmented market, low share of third-party logistics (3PL) service providers - which account for 15 per cent of the addressable outsourced logistics market worth $4.53 billion - and low penetration of technology are some of the indicators that determine the quality of the available services.
The prevailing economic uncertainty is making it tough to reduce the cost of doing business. A reduction in supply chain costs can be brought about by improving the national logistics infrastructure, which can enable smooth transfer of materials and information. Simultaneously, the supply chain and logistics community must adopt better management practices and utilise technology to reduce service cost.
The way forward
Three trends that are expected to affect the nature of logistics infrastructure and services in the country, thereby impacting the logistics efficiency and cost, are:
Changing demographics: As India continues to transform into a manufacturing and services-led economy, more people are expected to migrate towards urban areas. It is believed that more than 60 per cent of India's urban population will be concentrated in 20û25 urban clusters by 2030.
Against this backdrop, the logistics support infrastructure in India's metros is inadequate to answer existing trade needs. The challenges range from the availability of assets to congestion and from regulation to monitoring. In future, industrial clusters will need dedicated freight corridors (DFCs), such as the Delhi-Mumbai Industrial Corridor, with high-speed connectivity to key ports and urban centres. These corridors and access routes will likely keep a check on the cost of supplying goods and services to urban centres.
The growth of urban centres in size and number will necessitate the need for a proactive approach toward logistics planning to sustain growth. Further, it will be necessary to ensure that the provision of logistics infrastructure for upcoming clusters does not come at the expense of fulfilling the transportation needs of India's expanding urban clusters.
Evolving requirements of trade: It is believed that a surge in trade will demand innovation in logistics infrastructure and services across modes. As international standards are introduced in a competitive and service-oriented environment, existing infrastructure will probably become obsolete.
• Growth in the domestic manufacturing and retail segments has given impetus to the demand for efficient warehouse-management services. However, warehousing has not been getting adequate investment. The current spending on organised warehousing in India is about 9 per cent of the total logistics spending, as against 25 per cent in the US.
• The existing small warehouses should be replaced with large and modern ones, which incorporate global standards such as tall designs, modular racking systems, palletisation and the use of automation and IT.
• The growth of niche industries will likely necessitate value-added services such as cold-chain warehousing, packaging and track-and-trace services.
• The existing infrastructure should be upgraded to increase throughput. For example, the average number of containers handled per ship per hour is 18 in India, as compared to 28 internationally. Further, the average distance travelled per truck per day in India - 200 km - is half the international average.
Trade will require commodity and geography-specific storage and transportation assets. Without these, the industry's investment potential in other parts of the economy is likely to face roadblocks.
Increasingly skewed modal mix: India's logistics sector is currently constrained by a lack of infrastructure. It is perhaps restricted more by the misuse of transportation modes for certain types of commodity as well as limits on the free use of transportation modes for other types.
The optimal movement of freight - which can be obtained by matching cargo categories with transportation modes - is crucial for expanding volumes across categories.
A lopsided utilisation of transportation infrastructure such as roads and railways, as is the case today, puts pressure on networks and increases cost and turnaround time. The need of the hour is to select the best modes to lower congestion and facilitate a smooth cargo movement.
The desired 'to be' model (figure below) must be a mesh of various transportation networks, which will allow efficient transportation of each commodity type.
It will also act as a natural handover point where networks intersect and large quantities are broken down into smaller volumes for last-mile transportation into urban centres.
As India prepares to move to the next level of logistics growth trajectory, regulatory policies and infrastructure investments must evolve. While it is essential for policymakers to further accelerate deliberations on this issue to ensure early implementation, other stakeholders, such as service providers, users and industry bodies, should also come together to prepare a road map in advance.
Some policy initiatives that should be introduced to address inefficiencies include:
• Introducing appropriate policy changes for different modes of transportation (road, rail, water and air), increasing investment in all of them and building more capacity, especially for railways and waterways
• Harmonising and streamlining processes across government bodies that have a role to play in the logistics sector to reduce stoppages and touch points of cargo movements as well as increase the speed with which goods are transported within and outside the country
• Designing the mesh of cargo networks in such a manner that the intersections of various modes of transport are near the production centres of bulk, industrial, consumer goods and farm produce
• Set benchmarks and standards for the industry, thereby driving the uniformity of warehouses, storage and transportation equipment
• Diverting the transportation of bulk commodities from road to other appropriate modes to provide more capacity to consumer goods and reduce the risk of accidents
• Decongesting airports and seaports, shifting cargo clearance activities away from expensive real estate to inland, port or airport locations
• Establishing safety, health and environment standards at the central level to facilitate uniformity across industry sub-sectors and companies, increase safety and limit the adverse environmental impacts on society.