While the logistics sector is well placed for growth, addressing certain inherent challenges with respect to infrastructure, tax, manpower and regulatory policies will step up its pace of growth
The Indian logistics sector has gained great significance over the years largely due to increased industrial activities. All facets of logistics – transportation, warehousing, freight forwarding, container services, shipping services and so on – have grown well in the last decade and factors such as a changing tax system, rapid growth in emerging industries such as automobiles, pharmaceuticals, FMCG and retail and an increasing focus on outsourcing to a single vendor have led this growth. According to a Cushman and Wakefield report, “The Indian logistics sector is growing at an annual rate of about 10 per cent to 12 per cent and may attain the size of US $385 billion by 2015.” And logistics is poised for a significant growth as companies across industries such as FMCG, retail, pharmaceuticals and automobiles are increasingly outsourcing their logistics requirement to third party and fourth party service-providers. “With impending change to move towards a national and uniform goods and service tax (GST) from the current state level Value Added tax (VAT), there would be an increased demand for hub and spoke movements, large scale warehousing and specialised logistics services,” notes Vineet Agarwal, JMD , Transport Corporation of India (TCI).
The logistics sector is also viewed as the second largest employment generator in the country as it employs close to 45 million people. “However, there are many changes required for this sector to grow further like a comprehensive national logistics policy, focused investment into logistics infrastructure and people skill development,” says Agarwal. There are several other areas like technology adoption, policy simplification for trade facilitation that requires constant attention and focus.
It is needless to say that as our economy and industries grow and develop, logistics too will continue to accelerate in an upward trajectory. As Agarwal rightly puts it, “This sector has now become a high-activity segment especially as product life cycles have shortened and supply chains have gotten longer.”
Dealing with challenges
The sector faces multiple challenges due to poor conditions of storage infrastructure, inefficiencies in transportation, poor roads and a low rate of technology adoption. “Pending issues with Goods and Services tax (GST) and no industry status has hampered the growth of the sector significantly by restricting the creation of the common market to permit free and unimpeded movement of goods and services across the country, easier access to finance, robust regulatory mechanisms and a better image,” states Agarwal. He continues, “As a result, India currently spends 12 per cent to 13 per cent of its GDP on logistics in comparison to 7 per cent to 8 per cent in developed countries.“
The challenge of technology adoption can be solved by educating customers about the real value it creates in the supply chain. Pirojshaw Sarkari, CEO, Mahindra Logistics says, “It is all about us, as logistics service providers, we need to make technology a part of every solution we create and clearly display the quantifiable benefits of the same. Technology has long been looked at from a discrete cost perspective, not from the total logistics cost standpoint.”
The sector is also highly fragmented in nature which has led to diseconomies of scale due to the small size of operators.
Vineet Kanaujia, VP – Marketing, Safexpress, states, “While the sector is a sunrise sector in India, it is predominantly unorganised at the moment. In fact, only one per cent of the sector is organised.” And there are side effects associated with it. According to Agarwal, small operators are not only prone to flouting rules to ensure margins but also put an immense downward pressure on pricing. India has one of the lowest freight rates indicating very low margins leaving transporters with few options to invest in assets and technology.
Lack of skilled manpower is another concern for transporters. “There is a huge requirement of truck drivers in this sector,” states Kanaujia. As per estimates, by 2020, around five million truck drivers will be required. “However, it is not a lucrative profession which is why there is not much traction in this space,” he adds. A paradigm shift is required wherein more talent enters this sector.
Infrastructure is a bottleneck and the pace of change has been very slow. Logistics is still dependent on roads for transporting goods as alternate modes of transportation have not developed fully due to lack of funds for key logistics infrastructure development areas like dredging and port connectivity. “Different service tax on domestic sea transport and domestic air cargo movement in comparison to road and rail has also stalled the emergence of other means of transport,” explains Agarwal. Multi-modal transportation is still at a nascent stage in India as there is no level playing field for private companies.
Ensuring faster movement of goods is another challenge for the sector as a lot of time is lost in commuting on the highways. Seventy per cent of the goods are transported through roads and this will continue to be the case for many years to come. “The Government can improve the road infrastructure in India by building more national highways,” says Kanaujia. Out of the total road network in India only two per cent is national highways. “The Government can also bring out better processes and systems on these roads for smooth functioning of traffic,” he adds. The current toll mechanism leads to wastage of time and creates hassles for logistics players by promoting unauthorised payments through agents who help in the cumbersome documentation process. “When a vehicle moves from point A to point B across the country, 50 per cent of this time is spent idling on the check posts,” says Kanaujia.
Sarkari is more optimistic as he says, “As we mature, grow and progress, logistics will see a significant level of consolidation much in line with what more mature and modern logistics markets have undergone.” The consolidation has come about as a factor of progression and maturity of the industry in these markets.
Leading the change
India is a predominantly a consumption driven economy. “Holistic growth which is happening within the Indian economy across various sectors drives the overall economic growth. And this leads to huge demand for logistics and supply chain,” states Kanaujia. This apart, outsourcing of logistics requirements by companies looking to rationalise their logistics costs is on the rise. “Value-added and niche segments like multi-modal solutions are other avenues for growth,” says Agarwal.
A major driver of change is the wider adoption of the third party logistics model by an increasing number of large service providers and their customers. Sarkari says, “Unfortunately, 3PL penetration in India is much lower than in more developed economies. However, the pace of change is really accelerating today.”
FDI in multi-brand retail has opened up exciting opportunities for this sector. “Logistics providers will have to ramp up their capabilities in all areas of operations to meet or exceed customer requirements to stay competitive in this space. With international companies likely to bring their existing logistics partners to India, domestic logistics companies will have to work hard to upgrade their existing infrastructure and also invest in skills upgradation of their employees,” observes Agrawal.
The future growth of supply chain industry depends on investment in logistics infrastructure and a high rate of technology adoption, which is ultimately going to emerge as the backbone of all logistics operations. “Growth will continue across segments and while there may be short- term macroeconomic concerns, the medium to long-term prospects for the industry are truly excellent,” states Sarkari. The key success factors will be the ability of companies to successfully provide solutions across the supply chain, with the in-built flexibility to customise to the needs of each individual service contract. “Managing the service / cost equation for clients and partners will be the key. Further, robustness of processes and the right integration of information technology will define success,” adds Sarkari.
“We expect value-added and niche segments like multi-modal solutions businesses to drive the growth of the logistics sector in the coming years though volume businesses like freight may still continue to contribute significantly to the sector,” says Agarwal. People skill development will also become very crucial in providing value-added service. With impending change to move towards a national and uniform Goods and Service tax (GST) from the current state level Value Added tax (VAT), there would be increased demand for hub and spoke movements, large scale warehousing and specialised logistics services.
“In most developing economies logistics often grows by a factor of 1.2 to 1.7 as compared to GDP growth, with the growth of 3PL logistics often accelerated even more rapidly than that. Over the next 3 to 5 years one would expect logistics in India to continue growing at 9.5 per cent to 11.5 per cent, with an even more positive outlook over a longer horizon,” concludes Sarkari.
CRITICAL SUCCESS FACTORS FOR THE LOGISTICS SECTOR
- Make huge investments in creating supply chain infrastructure like warehousing, back-end processing and construction of cold chains to become reliable logistics partners of MNC retailers looking to enter India
- Move towards a national and uniform Goods and Service tax (GST) from the current state level Value Added tax (VAT). This will lead to higher demand for hub and spoke movements, large scale warehousing and specialised logistics services
- Maintain a high rate of technology adoption
- Introduce global business practices and tweak it to the Indian environment
- Provide solutions across the supply chain, with the in-built flexibility to customise to the implicit need of each individual service contract
- Bring in skilled manpower
- Increase the speed of the movement of goods from point A to point B. Remove bottlenecks on the road