GST will reduce the share of the unorganised sector in warehousing

GST will level the playing field and create an equitable development of the warehousing industry across India, says Jyotheesh Kumar, Chief Executive Officer, ValueShipr.

Large warehouses will become the way forward after the uniform GST regime comes into force (from April 1, 2017). How do you see the road ahead for logistics providers and warehouse developers? How should they gear up for the surge in demand for mega-warehousing post the uniform GST regime?
The GST is a value-added tax that will replace all other indirect taxes in India. One purpose of the GST is to make taxes ´destination´ based rather than origin based, or ´efficiency´ based rather than ´regulation´ based. The supply of a product from the manufacturing location to the customer entails an excise duty, a VAT which could be imposed at state and Central levels, and a central sales tax. In some states, there is also the additional burden of an octroi which is imposed at state borders.

As compared to this, the liability of the GST will be uniform across the board, thereby eliminating the cascading effect of taxes. It will reduce the price differences by making all regional tax liabilities equal. This will remove the cost difference between states and lead to a homogenous growth of logistics and warehousing across the nation.

As a result of reduced tax liability, GST will reduce the share of the unorganised sector in warehousing. Prices charged by the organised players will come down and reduce the price advantage that the unorganised warehouses currently enjoy. Thus, GST will level the playing field and create an equitable development of the industry across India. I believe that this one factor could drive growth of warehousing in India. The introduction of the GST will represent a boom in various industries, and warehousing is no exception. Now is a good time to invest for players, because they have an opportunity to increase profitability with access to markets or regions that were previously unviable. They can proactively invest in the industry.

Industry participants will need to look at their supply chain efficiency and ensure that competitive cost structures are put in place. This can be done in various ways, designing a multi-tiered distribution network where there is specialisation in certain functions (storage and inventory management) and some functions (software services, packaging, labelling) are outsourced. Another will be to partner with a 3PL logistics provider or logistics technology platforms to ensure optimal utilisation of resources.

The GST and the flagship scheme of ´Make in India´ will lead to a tax compliant way of doing business through strategic warehouses of larger dimensions. Therefore, is ´big´ going to be better business as far as warehousing is concerned?
As India becomes one big market, there will be fewer and larger warehouses. Standard tax rates will allow corporations to move away from the practice of building a warehouse in different states to adhere to each state´s tax code. For example, a big packaged consumer goods company could thus make do with one large mother warehouse at critical points in the country and employ logistics companies to manage distribution and supply chains. Over time, this will lead to development of new or expanded logistics hubs in different regions that would be driven by commercial and economic efficiency considerations rather than regulative matters. Therefore these large warehouses would be customised and efficiently managed and will serve as a logical outpost of companies in the vicinity of their customers with the ability of taking ´Just in time´ to the next level. However, for specific categories like food and perishables, there may still be some clustered small warehouses.

Kindly correlate the infrastructure growth plans over the next four years that can help reduce the high logistical costs in India (18 per cent), closer to the international average of 8 per cent?
India spends around 14.4 per cent of its GDP on logistics and transportation as compared to less than 8 per cent spent by the other developing countries. The building of dedicated rail freight corridors will promote efficient haulage of containerised cargo by rail. One key advantage of the dedicated freight corridor is that freight trains could be run on time tables similar to passenger trains, and the frequency can be theoretically increased to one train in 10 minutes. This will reduce time for goods transportation between Mumbai and Delhi to 18 hours from 60 hours now.

The planned waterways impetus will be 50 per cent cheaper than road and nearly 30 per cent cheaper than rail. The coastal leg, apart from being more fuel efficient, can also carry larger parcel sizes and provides a great opportunity for consolidation of loads.

The Government of India´s ambition to replace the National Maritime Development Program (NMDP) with the more comprehensive Maritime Agenda 2010-2020 is in line with its objective to increase port capacity. It intends to encourage private investment in both major and non-major ports and bring port performance at par with international standards. Through this programme, the government plans to invest Rs.2,870 billion in generating total port capacity of 3,200 MMT and cater to expected cargo traffic of 2,500 MMT by the end of 2020. Over 160 airports currently fall into this category, and following through on this initiative would improve regional connectivity across the nation.

Indian roads carry almost 90 per cent of the country´s passenger traffic and around 65 per cent of its freight.

In India, sales of automobiles and movement of freight by roads is growing at a rapid rate. The Government of India has earmarked 20 per cent of the investment of $1 trillion reserved for infrastructure during the 12th Five-Year Plan (2012-17) to develop the country´s roads. The construction of highways had reached an all-time high of 6,029 km during FY 2015-16, and the increased pace of construction is expected to continue in the coming years.

The Government of India plans to invest Rs.3 trillion ($44.73 billion) for developing 35,000 km of roads across the country, of which 21,000 km will be economic corridors and 14,000 km will be feeder routes, which is expected to improve freight movement, ease traffic bottlenecks and improve inter-city connectivity in the country. The Ministry of Road Transport and Highways plans to build five more greenfield expressways across the country, which are expected to reduce travel time and propel economic growth.

Further, the Ministry of Road Transport and Highways, and the Ministry of Shipping, has announced the government´s target of Rs.25 trillion ($372.8 billion) investment in infrastructure over a period of three years, which will include Rs.8 trillion ($119.3 billion) for developing 27 industrial clusters and an additional Rs.5 trillion ($74.56 billion) for road, railway and port connectivity projects,Complementing these massive scale of infrastructure projects, the GST on implementation will in all likelihood shave off 2 percentage points of the logistics spend. Therefore all these factors along with technology and optimal usage of resources would marginalise the impact of the spend and get the spends to single digits.

Is it a reasonable expectation of logistical costs coming down in India to 12 per cent, as being espoused by many stakeholders?
From the current spends of 14.4 per cent of GDP, the implementation of GST in all likelihood will infuse efficiencies as is widely known and in all probability (will) shave off 1.5-2 per cent of the GDP spends on logistics in the near term of 24 to 36 months, post implementation.

What is holding back agro-warehousing from enjoining with the mainstream industry? How realistic are the caps placed on rental and construction costs for warehouses in the agri-sector that are mostly serviced by the government-operated warehouse logistics companies?
A large part of the agri supply chain ecosystem is either in the public sector, or strongly linked to it. The Centre attempts to insulate the cultivator from price fluctuations by procuring their produce at Minimum Support Prices (MSPs), decided by the Commission for Agricultural Costs and Prices after analyzing the costs of growing a particular crop.

The 7,500 Agricultural Procurement and Marketing Committee (APMC) mandis provide a marketplace for the transaction and the Food Corporation of India (FCI) plays the role of the buyer, storing the procured produce in the relevant warehousing corporation´s warehouse. Ultimately, this gets distributed through the Public Distribution System (PDS) shops and reaches the consumer. For non-MSP crops, the producer is dependent on the traditional private channels to market the produce. Agriculture is a ´state subject´ and a large part of investment as well as regulatory progress is happening at the state level. Till very recently, regulatory barriers had constrained the development of storage and processing infrastructure, but measures like inclusion of agri-warehousing under priority sector lending by the RBI, subsidy schemes, tax incentives and the Warehousing Act (which will promote negotiability of warehousing receipts) have helped private players take an active interest in the same. The Private Entrepreneur Guarantee Scheme PEG is one such initiative to incentivise private investment for construction of warehouses by private entrepreneurs, with an FCI guarantee to hire them for 10 years, assuring a fair return on investment by the entrepreneur.

The caps placed on rental costs and construction costs for warehouses in the agri sector have been done presumably to control the infrastructure price component in the pricing. However vis-a-vis a government warehouse which could have been set up years back with a lot of real estate at its disposal, a private entrepreneur may find this control of pricing or the construction cost of warehouse a tad difficult under present circumstance to compete, and it overall may not be a level playing field in some locations.

How does industry react to the tariffs levied by the government – Port Congestion Tax and Haulage charges – that are detrimental/dampeners for the profitability of doing business? Are there adequate turnaround time operational dynamics in place in Indian ports to justify these levies?
The various tiered levies imposed by the government have been done with some strategic intent at the point of formulation. Tariffs such as port congestion have been designed with the intention that the port could handle more cargo and not be hassled with un-cleared loads and lack of space. This also acts as a deterrent and will result in better planning and scheduling at the end of users. Other levies are also a means of a payback to many of the BOT infrastructure facilities being availed. While these are beyond doubt dampeners to the overall logistics costs which invariably get passed on to the end consumers, a more realistic format would help streamline and also reduce the overall impact.

The business cost of delays is pegged at $ 6.6 billion per year due to truck stoppage time and other supply chain delays. Stoppage time costs incurred have appreciated from Rs.0.16 (2011-2012) to Rs.0.28 (2014-2015) per tonne- km.
What needs to be done to rectify this?
The road infrastructure in India needs definite improvement and many of the governmental plans are in the direction of the same. Consider this, a truck in India covers about 250-280 km in a day in comparison to 750-800 km in a developed country. Hence improvement of road infrastructure will enhance the mileage, and thereby, efficiency.

What is the likely reduction in these costs after the GST tax regime comes into force?
The attempt of GST is to marginalise all other indirect taxes in India. The liability of GST will be uniform across the board, thereby eliminating the cascading effect of taxes. It will reduce the price differences by making all regional tax liabilities equal. It can be fairly assumed that the inefficiencies resulting from stoppages will reduce by about 90 per cent per tonne-km. This will remove the cost difference between states and lead to a homogenous growth of logistics and warehousing across the nation.

The manufacturing sector is being encouraged with policy, infrastructure, finance, ease of doing business and many other initiatives by the Indian government. An emphasis on national highway networking and multimodal hubs is being created to bring in efficiencies on the transportation, distribution and storage sides. Can this help scale manufacturing operations to increase this sector´s contribution to the GDP to a share of 25 per cent as is ambitiously being propounded?
The Government of India plans to invest Rs.3 trillion ($44.73 billion) for developing 35,000 km of roads across the country, of which 21,000 km will be economic corridors and 14,000 km will be feeder routes, which is expected to improve freight movement, ease traffic bottlenecks and improve inter-city connectivity in the country. The manufacturing sector is currently at a share of 20-22 per cent of GDP. India needs this contribution to reach the levels of 36 per cent to be in the same league as developed nations. All the impetus being driven by the government to improve infrastructure, finance and the ´Make in India´ initiatives will yield superlative growth and will orbit the growth upwards of 25 per cent in the next 15 months.

How is the current scenario in the logistics industry in terms of different transport modes (road, rail, air, and water), and technology adoption, etc?
The logistics market size in India is $150 billion and forecasted to grow to $300 billion by 2020. There are about 89 lakh commercial goods vehicles; they make 700 million trips annually, with the market growing at 8.4 per cent. Logistics contributed close to 5-6 per cent to GDP and the sector has been growing at a CAGR of 12-13 per cent. Logistics grows at 1.5 to 2 times of GDP growth and the real spend on logistics in India is to the tune of 14.4 per cent of GDP which is high when compared to developed economies, which are to the tune of 7-8 per cent.

Road overtook rail in the early 90´s .This shift was a consequence of the inability of the Indian Railways to provide the required capacity or respond with expected customer service, while road transport could provide door-to-door service. Further, during the last two decades, road infrastructure expanded rapidly on account of focused policies and investments. India has the second largest road network in the world with a road length of 4,320,000 kilometres.

Measured in billion tonne kilometers (btkm), rail and road account for 86 per cent of the freight transport, while the other modes account for 14 per cent. Though extensive, the road network is still inadequate and suffers from a number of deficiencies like inability to handle high traffic density, tolls, lack of travel infrastructure, poor conditions of roads, etc.

Roads in India account for more than 51 per cent of the total freight traffic consisting of 3.2 million heavy duty trucks and 2.6 million light duty vehicles. The road freight movement is expected to increase at a Compounded Annual Growth Rate (CAGR) of 15 per cent. It is driven by growth in Indian FMCG, e-commerce, retail and pharmaceutical sectors, which have large freight transport requirements across the country and are generally done by road transportation. Adoption of technology also needs pace to keep up with the growth and enhance the levers of efficiencies. While there has been introduction of ERO-based TMS solutions and warehousing solutions, there is a long way to go before it syncs up to the latest in the developed world. There is a direct co-relation of economic activity in any country and the logistics and transportation infrastructure. Therefore, modernising the transportation infrastructure along with bringing trade friendly policies becomes inherent to developmental goals… Logistics contributes 6 per cent to the GDP which is currently the same as the contribution of the manufacturing sector. Every economic activity has consumption as the final objective and therefore logistics and transportation are a vital component to bridge this requirement. Implementing changing needs and friendly policies will need to be overhauled continually to keep pace with developmental goals.

Amongst all the modes, road and rail transport are the most significant. The modal share between these two has changed over the years, from the 80 per cent rail share in 1950-51, to the road share becoming 65 per cent in 2011-12.

Road overtook rail in the early 90s. This shift was a consequence of the inability of the Indian Railways to provide the required capacity or respond with expected customer service, while road transport could provide door-to-door service. Further, during the last two decades, road infrastructure expanded rapidly on account of focused policies and investments. India has the second largest road network in the world with a road length of 4,320,000 kilometres.

Measured in billion tonne kilometres (btkm), rail and road account for 86 per cent of the freight transport while the other modes account for 14 per cent. Though extensive, the road network is still inadequate and suffers from a number of deficiencies like inability to handle high traffic density, tolls, lack of travel infrastructure, poor conditions of roads, etc.

Roads in India account for more than 51 per cent of the total freight traffic consisting of 3.2 million heavy duty trucks and 2.6 million light duty vehicles. The road freight movement is expected to increase at a Compounded Annual Growth Rate (CAGR) of 15 per cent.

The manufacturing sector is struggling to demonstrate high growth, and exports are dwindling. How has this affected the logistics sector?
Various macroeconomic factors have stymied the manufacturing sector from the perspective of import and export, for the last few years, and this has had a ripple effect on the logistics sector as well. While the government has introduced ´Make in India´ and the anti-dumping policy, we believe these initiatives will start delivering some positive outcome in the days to come.

How is the third/fourth party logistics (3PL & 4PL) market in India? What are the growth drivers and inhibitors for the logistics market in India?
Third/fourth party logistics (3PL & 4PL) comprises about 56 per cent of the unorganised logistics sector in India. Statistics have shown that only about 17 per cent of the logistics market is organised and the balance is made up of small transporters with an average of 3-5 vehicles. These un-organised players operate by the method of engagement /collaboration with various large transporters. The ability to source new business, tracking, working capital, payment systems, technology, etc., are the top inhibitors for the logistics market. A technology platform, highly leverageable, will actually translate the benefits and overcome many of their challenges and bring growth for these logistics players.

How will the move of the government to focus on infrastructure benefit the industry? What is your opinion about this year´s budget?
Development has been the single point agenda of the current government. It is felt that most of the challenges associated with poverty and un-employment, will be overcome by economic development. A GDP growth of over 7 per cent with inflation factored in will be a nominal growth of 12 per cent. Among the developing nations, India has one of the highest growth rates. A further thrust on growth and enhancement in percentile points will benefit the overall economy and the industry as a whole. This year too, ambitious Infrastructure development budgets would be the key proposals.

Is there a high level of cash-based operations in the logistics and warehousing business operations? How has the demonetisation exercise impacted the logistics and warehousing sector?
Due to some of the points mentioned above, this sector has had a high lean on cash being used in operations. It has been opined across diverse platforms that there has been a hit of Rs.10,000 crore in the logistics sector as an aftermath to the demonetisation effect. We believe that this is a temporary phenomenon and will correct itself to present realities in the near term. Also, this has led to many players to organise, re-calibrate their operations, look at the need of cash being used by their resources during the trips, and getting a method to handle this more practically.