The logistics industry in India is still at a nascent stage and is highly fragmented. However, the future of logistics sector in India looks bright with government focusing on developing infrastructure, say Bhaskar Subbramanian and Mohammad Athar. Introduction Logistics has a key role in India's infrastructure sectors, the latest growth areas in the nation. The Indian logistics industry is currently witnessing a steady growth phase of over 9 per cent on account of strong performance of industries like automotive, engineering, pharmaceuticals and food processing. The size of the logistics industry in 2010 was around $82 billion and is expected to reach $200 billion by the year 2020. The Structure of Indian Logistics Industry The Indian logistics industry has two levels of service providers. The first level service providers are broker agents, freight forwarders, multi-modal transport operators and third-party (3PL) and fourth party (4PL) providers. The second level service providers are asset based service providers for transportation (rail, road, airways and sea), storage and warehousing or export-import based infrastructure: ICD and CFS. In India, transportation accounts for almost 40 per cent of the logistics cost. Road freight industry is highly fragmented with single truck owners accounting for over 75 per cent of trucking companies. Air freight segment accounts for a small segment of India's freight market but is growing at a fast pace. The leading 3PL service providers in India continue to be those with strong nationwide surface transportation services such as TCI, Om Logistics and GATI. Leading international logistics players such as DHL, FedEx and TNT have a strong brand presence in the country, but their market presence is high only in the Express Logistics Services segment. Government-owned units dominate the market in their respective segments, such as Container Corporation of India (Concor) and Indian Railways in rail transport; Shipping Corporation of India (SCI) in ocean cargo, Central Warehousing Corporation (CWC) in warehousing. Key enablers for growth in Logistics Sector The key factors enabling the growth of the logistics sector in India are: 1. CST phase out and GST roll out It is expected that the phased removal of Central Sales Tax (CST) and implementation of Value Added Tax (VAT) / Goods and Services Tax (GST) will enable manufacturers to streamline the complete logistics chain across the country. In India, logistics decisions are often made based on the taxation policy rather than on optimum supply chain systems. Implementation of GST will bring in a fresh perspective to the entire supply chain system, especially the flow of materials will get realigned-both finished goods from the manufacturing centre to the consumption point and raw materials from the sourcing point to the manufacturing centre. GST regime is expected to bring down the national logistics cost by at least a few percentage points, while improving servicing standards to customers. This will be a favourable scenario for companies in the logistics sector who have been suffering on account of low margins in the recent past. Hub and spoke model will gain prevalence in the industry and this will lead to higher demand for outsourcing logistics requirements. 2. Continuing investments in infrastructure sector Infrastructure gaps lead to higher cost of goods and services. Accelerated efforts are currently underway into developing infrastructure. The planned outlay for the infrastructure sector is more than $1 trillion over the next decade. To provide further boost to the logistics sector, the government has expanded the definition of Infrastructure Sector to include sectors like warehousing and cold chain logistics. This will provide impetus to the development of agro-warehouses and cold chain logistics infrastructure in India through better access to financing. 3. Global integration, trade pressures and increase in EXIM based logistics On account of globalized manufacturing and increasing international trade demands, logistics industry has witnessed efforts and initiatives on streamlining supply chains. As India emerges as a manufacturing hub, increased cross-border outsourcing will drive improvements in the logistics industry in India. With the existing spur in export and import activity, the need for EXIM based logistics infrastructure like ICDs, FTWZ will go up. It is estimated that at least 40 to 50 new rail/road ICDs/ CFS across the country are needed to handle the projected traffic in the next decade. 4. Increased organised retail and propensity to outsource logistics operations Indian retail sector is highly fragmented with 97 per cent of its business in the unorganised sector. The past few years have seen immense growth in this sector on account of many factors like better purchasing power, increased investments in infrastructure, new brands entering Indian market etc. This sector is one of the largest sources of employment and has deep penetration in rural India. Supply chain optimisation is critical for competitiveness and hence, there is increased thrust on creation of logistic centres and delivery mechanisms that will lead to integration of warehousing (storage), transportation and route planning for better logistics operations. As the industry matures, the need for 3rd party logistics will increase further, with companies increasingly focusing on their core competencies and thus moving towards outsourcing entire logistics solutions (both inbound and outbound). Railways logistics in India The size of the rail freight segment is around $11 billion and is expected to grow at 8 per cent year on year. In 2006, the Government of India awarded fifteen licenses to operate rail container services across all routes in India. Currently, eight players have already begun their operations. Private players will need to have their own terminals (ICDs) with rail sidings to load and unload containers. Good-both imports and exports-are transported within India largely through rail and road transport, with pipelines carrying some crude oil and petroleum products. Alternative modes for transport such as inland waterways and coastal shipping have remained largely undeveloped and the situation is unlikely to change in the medium term. Rail transport is primarily used for low value commodities for which transport costs are an important component of the delivered price. However, with the exception of coal, which is almost entirely transported by rail, most other commodities are beginning to shift to roads owing to the shortage of rail capacity in many sectors. - Iron ore exports have experienced a large shift to roads, on account of the rapid increase in exports and the capacity crunch being faced by the railways. - High value cargo such as containers, are also moving away from rail transport. - Fertilisers, limestone and food grains are the other dry bulk commodities being moved by rail. Freight in Indian Railways is dominated by nine major commodity groups as shown. The total freight cargo is expected to more than double by the year 2020, primarily driven by container cargo, coal and cement. For inland transport, rail connectivity is likely to remain critical. To meet the above demand, an estimated 225 per cent increase in rail haulage of port cargo will be required over the medium term (by 2015) . Challenges to growth India's logistics infrastructure is currently too insufficient, ill-equipped and ill-designed to support expected growth rates over the next decade. Further, the logistics industry in India is still at a nascent stage and is highly fragmented. According to industry estimates, outsourced logistics accounts for 54 per cent of total logistics spending in India, but organized players account for only 10 per cent. In road transportation, which accounts for the biggest portion (36 per cent) of logistics spending - 94 per cent of the logistics and distribution requirement is dominated by a large number of small fleet owners (5- 10 trucks) and these account for 80 per cent of the revenues. In outsourced warehousing, 92 per cent of players are from the unorganised sector. Even among the organised logistics players, few have offerings across multiple modes (air, water, rail and road) and services (transportation, warehousing and value-added services such as packaging, cold chain and customs clearance). Lack of adequate infrastructure and complex taxation and regulations are big hurdles. Competition and convergence The Indian logistics sector is expected to witness a consolidation wave. There have been some recent mergers and acquisitions in the logistics industry, such as - Transport Corporation of India's (TCI) 51 per cent equity stake acquisition in Infinite Logistics Solutions Private Limited; - FedEx's acquisition of AFL Logistics; - In the port terminal business, Maersk and P&O Ports have been consolidating their position by acquiring controlling stakes in private container terminals; - Toll Global Logistics, Allcargo Global Logistics, and FH Bertling Ltd are actively expanding operations in India; - International Finance Corporation (IFC) invested $5 million in Snowman Frozen Foods; - Eredene Capital took 90 per cent stake in MJ Logistics (a 3PL cold storage service provider) for processed food and retail industries. Way Forward The future of logistics sector in India looks bright with government focusing on developing infrastructure, private players showing interest in participating in the sector and consolidation in the sector taking place. India is currently being treated as the destination of the future in the field of logistics. Indian logistics market players have started to equip themselves to compete in the global scenario, however, the true potential of these service providers is yet to be realized. The fulfilling of the logistics needs of the growing economy will require stronger and larger players in logistics and enhanced capacities across the value chain at the ports, in railways and roads, development of other modes of transport (inland waterways, coastal shipping etc.) and more efficient storage and handling infrastructure, in order to reach economies of scale and competitive costs. Country Logistics cost (%) / GDP Logistic activities performed by 3rd parties / Logistic activities China, India 16-20 <10 % USA 9.9 57% Europe 10 30-40% Japan 11.37 80% In Million Tonne S.No. Commodity 2008-09 By 2020* 1 Coal 369 700 2 Raw Material for Steel Plants 39 3 Pig Iron & Finished Steel 27 108 4 Cement 86 250 5 Iron Ore (Export) 75 6 Iron Ore (Domestic) 131 150 7 Food grains 41 50 8 Fertilizers 39 70 9 POL 34 48 10 Containers 29 210 11 Others 77 150 12 Total 833 1,850 Exhibit 5: Composition of Freight Traffic * Projected The authors are with PwC India. Subbramanian is Associate Director and Athar is Senior Consultant, Government Reforms and Infrastructure Development.