Enroute to Recovery

Logistics industry has always been an underdog and has not received the much-deserved attention yet. Though the sector is full of potential, it is yet to achieve optimal utilisation of resources.

The evolution of businesses, along with consistent high economic growth, has led the logistics industry to scale up and meet the growing demand for sophisticated transport and storage functions. Logistics was–and in some cases, still is–thought of as a business process, and not seen as a part of the value chain. The industry emerged out of the need to differentiate the point of deliverable as a value chain addition. The need to get the product to the consumer, as opposed to early business models where the consumer had to come to the business, generated the need for end-to-end logistics solutions.

Logistics costs in India stand at approximately $309 billion, which account for roughly 13-14 per cent of the GDP. This is higher than the global average of under 8 per cent, as the Indian logistics sector is largely unorganised and inefficient compared to its global counterparts. These inefficiencies in the logistics chain currently cost the Indian economy an estimated $95 billion.

According to an IIM publication, transportation cost as a percentage of total logistics cost in India is approximately 40 per cent. Inventory handling cost is estimated to be 24 per cent and warehousing (refer page 42 for warehousing feature) takes up 26 per cent. IndiaÂ’s transportation costs are very high due to inconsistent quality of roads, intra-city traffic, and regulatory delays (the regulatory delays were more or less solved by the introduction of the Goods and Services Tax (GST), but its fruition is yet to be seen). High labour costs will cause automation to take over at least the menial jobs, such as inventory handling.

An estimated 90 per cent of logistics service providers in the Indian market lie in the unorganised segment. Unorganised players offer extremely low costs since they do not adhere to the compliance norms that keep costs high for their organised counterparts. This disregard for compliance, and the resulting lack of a level playing field has deterred competition and led to the development of a commodity mindset with lack of differentiation. The growing need for organised logistics to improve time, cost, and quality efficiencies in India is propelling opportunities for the growth of the logistics sector. Recent policy initiatives such as the GST and Make in India, along with the potential for high growth that the Indian economy has, will create demand for more and more organised players.

Anant Swarup, Joint Secretary – Logistics & Social Media, Department of Commerce, Ministry of Commerce & Industry, Government of India, gives some figures. He says that the present global industry is worth $15.5 trillion and it is likely to grow at the rate of 7.5 per cent over the next five years. In India, the industry is $160 billion and is likely to touch $220 billion by 2020. Passenger traffic is growing at a CAGR of 15.7 per cent. Air cargo is increasing by 14.3 per cent, shipping has registered a growth of 6.2 per cent. Warehousing can grow at 10.6 per cent and cold chain at 15 per cent.

“The Government is very clear. Unless we promote inter-modality, the multi-modality model is not going to work,” feels Swarup.

For this, “a new division has been created in the Department of Commerce whose mandate is integrated development of logistics,” he adds.

Meanwhile, logistics players have welcomed the move of creating a separate division for logistics under the Ministry of Commerce and Industry. Earlier, they were under seven different ministries, including the railways, highways, and civil aviation. “Now,” says Chander Agarwal, Managing Director, Tciexpress, “as it is in the planning stage, we have to wait and watch. But we are hoping that it will coordinate and integrate the development of the sector by way of policy changes, improvements to the existing procedures, identification of bottlenecks and gaps, and introduction of technology-based interventions.”

To this, R Dinesh, Managing Director, TVS Logistics Services says, “Logistics plays a vital role in strengthening the economy. It is the lifeline of every other commercial sector.

The sector is evolving at a fast pace, and infrastructure and technologies are paving new paths for growth.” Neelesh Mundra, Partner, McKinsey & Co points out a few findings from the sector. The government has taken the right steps–both in infrastructure spending and policies. The biggest inefficiencies in the value chain are within a few commodities (e.g., agriculture). To have an effective logistics system, India needs to leverage its coastline. Employment creation is not an opportunity–it is a necessity for survival. Operating models need to change to ensure productivity, improvement, and skill-building. They need to embrace SCM 4.0, since it can help in improving efficiency significantly. The start-up eco system is blooming – the industry needs to reach out and find partners.

GST: The game changer
With industrial output and consumption-driven sectors recovering in H2 FY2018 from the initial lull post GST implementation, the freight demand in the country has also reported a healthy pick up during the second half of the previous fiscal. The performance of key listed logistics players indicates that the momentum of growth picked up as the year progressed. From an aggregate revenue growth of only 4.6 per cent in Q2 FY2018, it gained pace to 10.8 per cent in Q4 FY2018, as freight volumes picked up. Transporters also took advantage of the improvement in freight demand to pass on the increase in diesel prices to their customers during the latter half of the year, as against freight rate cuts taken earlier in the year, in light of weak demand.

Pirojshaw Sarkari, Chief Executive Officer, Mahindra Logistics, points out that GST impacted the inflow of new orders and cash flows initially, as customers were grappling with the changes. Slowly, things are falling in place. On ground, the per-day running time of trucks has gone up. In the last one year, many customers and logistics companies have consolidated their warehouses by moving from the earlier tax-efficient model to obtain maximum operational efficiency. Additionally, Sarkari mentions, “There has been significant time-saving and paper work reduction, due to digitisation with the advent of the e-way bill.

The recent announcement of increasing tonnage in trucks will also lead to optimum utilisation of manpower and resources.”

Here Shamsher Dewan, Vice President and Sector Head-Corporate Ratings, ICRA concurs. He says, “The implementation of GST considerably impacted the functioning of domestic logistics sector in terms of transportation time, preference for organised players, and warehousing strategy employed by companies.”

Ashutosh Bajpai, Vice President–Operations, DHL Express (I) in his comments to a report published by Knight Frank mentions that there is no doubt that GST will result in increase in efficiency. Cost efficiency cannot be generalised for the industry as a whole. Various segments and sub-segments will benefit differently.

A time-sensitive segment like Express Delivery will need time to assess the impact due to complex procedural requirements on account of GST e-way bill data obligations. Full Truckload Shipping (FTL) and warehousing will definitely benefit in the immediate future. Advantage of scale and automation will improve quality and efficiency. ICRA estimates that there have been savings as high as 18-20 per cent in the truck turnaround time post GST, supported by elimination of inter-state check posts. Due to operational efficiencies and time savings, the implementation of E-way bill from April 2018 has also been received positively by the transporter community. Companies are also interacting with supply chain management services to explore opportunities to redesign their warehousing network.

MMTG Act
Logistics players are upbeat on Multimodal Transportation of Goods (MMTG) Bill, 2018, which proposes to bring all multimodal transport operators (MTO) under self-regulation. According to them, de-licencing of MTOs and bringing them under self-regulation is a part of an initiative to ease regulations, simplify procedures, and bring more transparency in the working of the administration. The Bill has proposed scrapping mandatory registration and rationalising the process by freeing those already registered. The committee has suggested an alternative mechanism of self-regulation by the industry through associations or federations of MTOs.

In India around 90 per cent of MTOs are not registered although it was mandatory under the Multi Modal Transportation of Goods Act, 1993, (MMTG Act). It is mainly because there is no incentive for encouraging voluntary registration, or no disincentive, punitive action, or deterrence available in law against the MTOs who operate without registration.

Integration
An integrated logistics policy is the need of the hour. Today, the logistics industry has to deal with multiple government agencies at the union, state, and local levels, which result in avoidable delays. The integrated logistics policy could go a long way in streamlining and consolidating multi-department requirements, besides facilitating corrective action, effective monitoring, and prompt grievance redressal. “Along with it,” says Agarwal, “a mechanism needs to be created to measure the sector’s performance at regular intervals against the set benchmarks, thus providing evidences to the policymakers so that a favourable policy environment is created.” So how is the government developing integrated logistics? Swarup says, “We are developing a national logistics plan for the country, which is a long-term plan for the integrated development of logistics.” To make that plan work, he says, “We have presently identified 22 commodities that constitute 90 per cent of the transportation within the country, including exports and imports. We are trying to map the entire value chain for these 22 commodities and see what the cost is in that commodity.”

He adds, “Another idea we are working on is to develop a portal where we plan to bring in all the regulatory authorities at one single portal. The portal will provide seamless movement of documents. Once information is filed, it should smoothly move across agencies. That will add to the ease of doing business.”

Multi-modal logistics parks
The model of multi-modal logistics parks has been successful the world over and India is headed in the same direction as well. These parks leverage the use of rail, road, air, and waterways for the movement of goods from the manufacturing facilities to consumption clusters, thereby optimising logistics processes through economies of scale.

The government has proposed to build 35 logistics parks all over the country at an estimated investment of Rs 2 trillion, of which six are to be made in Phase 1 of the project. The first six locations are Delhi, Chennai, Bangalore, Vijayawada, Surat, and Hyderabad. They will be joint ventures between the central government, the relevant state government, infrastructure agencies, and investment partners, and will provide services such as freight aggregation and distribution, storage and, most importantly, multi-modal transportation facilities.

According to Swarup, unless the government is able to promote multi-modality, there cannot be efficiency in logistics. “We are working on the multi-modal logistics park policy. NHAI has already identified 35 locations that are suitable for implementing multi-modal logistics park,” he says.

Way forward
ICRA maintains a stable outlook for the Indian logistics industry, expecting it to grow at 8-10 per cent over the medium term. The demand growth would continue to be buoyed by pick up in industrial activity and consumption-led sectors, while increasing preference for outsourcing logistics activities would provide further impetus to organised players.

Additionally, supply-side factors like improvement in logistics infrastructure and emergence of logistics start-ups would offer further impetus to growth. Prevalence of trends like rise in integrated logistics, e-commerce logistics, investments in warehousing, and penetration of technology in the sector, in tandem with the ongoing shift towards organised logistics players, would also induce a structural shift in the industry in the long term.

– RAHUL KAMAT