De-fragmenting the sector

The continually increased budget expenditure on the logistics sector, only 1 per cent of which is in the organised sector, has not borne fruit in cost reduction, so it’s time to recognise efficiency as the new theme to work towards, suggests Monika Pal Bharti.

Various reports suggest that India spends nearly 12-15 per cent on logistics vis-à-vis other developed/developing countries spending about 8-10 per cent. A high proportion of logistics cost in India is accounted by transportation (>60 per cent) and inventory carrying costs (>30 per cent).

Further, stemming from India’s well-documented logistical inefficiency in transportation and storage, there are many hindrances that lead to these inefficien­cies from the time cargo arrives at a port—high pre-berthing detention times, inadequate connectivity of the ports to the hinterland via rail and coastal and inland waterways, railway inadequacies of rolling stock as well as line capacity etc. The poor physical and communications infrastructure has been a deterrent for large investments into the logistics sector, leading to a fragmented sector with the organised players accoun­ting for only about one per cent of the market share and most of the players being regional in focus and spread.

The differential Value-Added Tax (VAT) and muni­cipal taxes prevailing across the states have also not helped the cause. The logistics operators and end user companies have had to spend inordinate amounts of time and money to comply with the paperwork, checks and clearances and taxes. On average, a vehicle loses between one and two days on Indian roads due to
these inefficiencies.

Some of the steps which are likely to have a major and long lasting impact on the logistics sector are:

Introduce GST: The current policy of levying indi­vidual state VAT on inter-state sale of goods has forced the companies to operate multiple warehouses in diff­erent states. This leads to huge inefficiencies of scale. One of the biggest impact of Goods and Services Tax (GST) on the logistics sector will be to do away with the multiple and differential state VAT and thus bring about efficiencies of scale due to the hub-and-spoke model of warehousing and distribution.

Encourage inland waterways: The cost of deve­loping an inland waterway is 5-10 per cent of the cost of developing an equivalent railway or a four-lane highway. It is estimated that one litre of fuel can move 105 tonne-km by inland water transport compared to 85 tonne-km by rail and 24 tonne-km by road. In India, it is the most suited mode to transport cargo to regions like the east and north-east. However, since this mode is still at a nascent stage at best, the government will have to initially pitch in to increase and maintain draft along the key routes. It should also explore the Public-Private Partnership (PPP) route, and offer grants to encourage private players to develop and maintain the waterways.

Encourage multimodal transportation: Containe­risation has caught on in the last decade in India espe­cially in exim cargo but has a long way to go in compa­rison to the developed nations. The per­centage of do­m­e­stic containerised movement is even lower. Multi­modal containerised movement should be enc­ouraged through:

i. Logistics hubs: Mega logistics hubs should be encouraged through PPP. These hubs should be strategically located close to major transportation hubs, industrial zones, big consumption and pro­duction centres, etc. These hubs will encourage larger and organised Third Party Logistics (3PL) players who have the capacity to offer a large variety of services like customs clearance, packaging, stor­age and consolidation at these hubs.
ii.Freight corridors: More dedicated and high-axle bearing rail capacities will enable swifter and more economical movement of containers for exim as well as domestic cargo.
iii. Higher axle trucks: Multi-axle vehicles which can carry two 20 ft or one 40 ft containers are available, but their use is not widespread due to motor vehicle laws and high toll rates. The government needs to encourage truck operators to invest and operate the larger trucks by offering toll benefits and rationali­sing the motor vehicle laws on load restrictions on our roads.

The author is Senior Vice President, Feedback Infrastructure Services. With input from Suresh Chelly, Deputy Manager, Feedback Infrastructure Services.