Home » The impact of GST could lead to reduction of 5percent in overall logistical costs

The impact of GST could lead to reduction of 5percent in overall logistical costs

The impact of GST could lead to reduction of 5percent in overall logistical costs

Vineet Agarwal, Managing Director of TCI, and Chairman, Transystem Logistics International, elaborates on how GST will level the playing field and create an equitable development of the logistics industry across India.

The top seven warehousing clusters in India expect to add 218 mn sq ft of space over the next four years, since large warehouses will become the way forward after the uniform GST regime comes into force. How do you see the road ahead for logistics providers and warehouse developers?
The expected implementation of GST will boost the demand for warehousing, 3PL solutions and multimodal services, areas where TCI has a strong market presence. The industry will see a major change; sourcing, distribution and warehousing decisions which are currently planned based on state-level tax avoidance mechanisms instead of operational efficiencies will be reorganised to leverage efficiencies of scale, location and other factors relevant to the business.

The second big benefit of GST would be consolidation of warehouses. Demand for warehousing is expected to grow at a CAGR of 18 per cent in the next four years due to increased investments in the retail sector and increasing import and export activities in India. GST presents an opportunity for industry players to consolidate their warehouses and set up larger facilities, which will bring in supply chain efficiencies.

It will also enable movement of business from unorganised to organised players. GST is what the transformation logistics industry has been eagerly awaiting and we believe the positive impact of GST could lead to a reduction of 5 per cent in overall logistics costs, pending smooth implementation and no other surprises.

How should the industry gear up for the surge in demand for mega-warehousing post the uniform GST tax regime?
To stay competitive, companies should be ready with their new supply chain strategy post GST – with details of an optimal network structure and the steps that need to be taken to get there. TCI has a GST Network Modelling Approach. Our supply chain experts and tax consultants work in tandem to design an optimised network and provide complete guidelines of how to get there.

Implementation of GST will lead to the need for larger warehousing and more movement to hubs. It would also mean lesser paperwork and faster movement of trucks. In FY17, TCI Group plans to incur a capex of Rs 235 crore, of which around 40 per cent would be for setting up of warehousing hubs.

Is ´big´ going to be better business as far as warehousing is concerned? Please elaborate on this aspect to show how the scale and size of warehouses will impact the industry…
With the effect of GST, instead of maintaining smaller warehouses in each and every state, the companies will be setting up lesser and bigger warehouses, and can follow the hub-and scope model for freight movements. Hence, there is a bigger opportunity that awaits the 3PL service providers who can manage these bigger routes and deliver accurately and efficiently.

GST will transform the way goods are transported within the country. Today because the sizes of warehouses are very small, corresponding smaller inefficient trucks with a carrying capacity of nine to 20 tonne are being used. In the near future, trucks with 40 tonne plus carrying capacity will ply on the highways, which will service large warehouses.

Companies would invest in large tractor-trailers and higher powered commercial vehicles to carry heavier and more voluminous loads. It would make more sense to carry 40- tonne cargo in a single vehicle than carry the same load in two trucks. What will positively change is in warehousing, where the inventory is re-invoiced at a nearby yard /warehouse – this will not have to undergo the CST (now 2 per cent, under GST-0 per cent). As GST will bring everyone into the tax ambit, it will reduce the share of the unorganised sector in warehousing and transportation. Prices charged by the organised players will come down and reduce the price advantage that the unorganised players currently enjoy. Thus, GST will level the playing field and create an equitable development of the industry across India.

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.

The government´s new initiative on the projects like Dedicated Freight Corridors (DFC), ´Sagarmala´ and ´Bharatmala´ would further enable seamless multimodal logistics services.

The DFCs which are being implemented will see a major boost in implementation of ICDs/CFS. Freight transportation by railways will also get a boost. Due to higher cargo containerisation, commissioning of two DFCs, and setting up of multimodal logistics parks across the country and along the DFCs, the share of railways in carrying domestic freight should increase, strengthening the prospects of multimodal transportation in India.

The eastern (Ludhiana to Dankuni) and western (Dadri to JNPT) DFCs will cover almost 3,300 route km, run longer and heavier trains, accommodate faster speeds up to 100 km per hour guaranteed transit time and reduce unit transportation costs. In the near future, road transportation will still dominate over rail transportation in terms of passenger and freight. However, as already mentioned, because of increased cargo containerisation and the operational commencement of DFCs, the share of railways in carrying freight will increase marginally at the cost of some road share.

The Bharatmala Project will connect eastern and western India through 7,000 km of National Highways. It will allow goods to move comfortably across the country and help reduce the cost of passenger and freight travel. The project will improve road connectivity not just in coastal and border areas, but in backward areas as well. Apart from providing connectivity to ports under the Sagarmala project, this project will provide seamless connectivity along the borders with Nepal, Bangladesh, China, Pakistan and Bhutan, which is crucial for strategic reasons.

The Sagarmala Project intends to achieve the broad objectives of enhancing the capacity of major and non-major ports and modernising them to make them efficient. This will enable them to become drivers of port-led economic development, optimising the use of existing and future transport assets, developing new transport lines/linkages (including roads, rail, inland waterways and coastal routes), setting up logistics hubs and establishing industries and manufacturing centres to be served by ports in exim and domestic trade.

How is the current scenario in the logistics industry – in terms of different transport modes (road, rail, air, and water), technology adoption, etc?
The transportation sector is evolving with multimodal transportation solutions being set up and the development of inter-modal transportation infrastructure facilities. Dedicated freight corridors by the railways and improvements in coastal shipping facilities along with the construction of massive state-of-the-art logistics parks at key distribution hubs are helping to meet the specialized warehousing needs of industries. The non-major ports are driving the traffic growth with the traffic at these ports growing at a very healthy rate. This strong growth is expected to continue, with the share of the non-major ports increasing further.

The rise in the growth of online retail transactions via marketplaces is due to the underlying mobile technology and the ready availability of online access. As a result, the profile of the Indian consumer is changing. According to a research report, mobile platforms have emerged as a major gateway for customer purchases as smartphones are increasingly replacing PCs for online shopping. Competition is heating up among online retailers.

Though the supply chain in India has seen many new developments in terms of innovations, adaptation and agility, still most consumer goods supply chains are both complex and information starved. With growth, the cost of this capital avoidance has been steadily increasing. With Digital India coming into the picture the gap between the Indian supply chain Industries efficiency and its innovation, agility and adaptability can be bridged.

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