Logistics is key to an efficient and effective supply chain for both the domestic and global economy. Unlike China, whose economy was the same size as India in the 1980s, India cannot be a significant player in the global supply chain due to the lack of competitive manufacturing stemming from outdated manufacturing technologies and high costs. Another factor that is detrimental to the economics of Indian products is the unusually high cost of logistics compared to other global economies. While logistics costs as a percentage of GDP in countries like the US, Japan and China are around 7 to 8 percent, in India it is 14 percent.
Logistics sector in India includes 20 Government Agencies, 40 Partner Government Agencies, 37 Export Promotion Councils, 500 Certifications and over 10,000 Commodities. The market size of India’s logistics sector is around US$160 billion and is steadily growing despite the pandemic. According to the Department of Commerce, the logistics sector provides around 22 million jobs. In addition, the sector includes 200 shipping agencies, 36 logistics services, 129 inland container depots, 166 container cargo warehouses and 50 IT (information technology) ecosystems. Despite the figures above, the logistics sector in India is largely disorganized and operates on an ad hoc basis, causing high costs throughout the supply chain. There are several reasons for these high logistics costs in India.
The first reason behind the high logistics costs in the country is poor logistics infrastructure in the form of insufficient and underdeveloped highways, ports, inland waterways, air terminals, warehouses and cold chains. Although we have a very sophisticated rail network, the reliability and efficiency of railroads in efficiently moving freight is questionable, discouraging companies from transporting goods by rail and relying on tried and tested road transport. Some steps have been taken by the government to create and improve infrastructure, but much more needs to be done for India to become a competitive and developed economy.
The second cause of high costs is the incorrect modal mix of transport in the country. Bulk goods such as grain, cement or steel are transported most cheaply by ship/water, followed by rail. Compared to rail and waterways, road transport is the most expensive means of mass transport. Unfortunately, India moves 64 percent of its goods by road, only 17 percent by rail and only about 7 percent by sea/water, despite being geographically peninsular and having a coastline nearly 7,500 km long.
China moves more than two-thirds of its goods by water and rail, which are much cheaper modes of transport, giving them the added benefit of reduced overall costs. The Indian government has launched waterway projects which, if effective, can significantly reduce costs and pollution. Due to environmental factors and climate change, several inland waterways lack well-defined river courses and water depths to facilitate inland waterway transport.
The third obstacle is the need for clearances/approvals from multiple government ministries and departments and associated documentation. Delays due to such compliances result in cost overruns that make the business unprofitable. The lack of a real-time interface between different government departments due to the insufficient use of technology and the lack of real-time visibility of different functions and processes leads to inefficiencies.
The fourth challenge is high and volatile fuel costs as India is mainly import dependent. Fuel is the largest single input in the transportation sector and has a huge impact on costs when crude oil prices skyrocket due to a political or security crisis. Add to that the fact that both central and state governments rely heavily on tax revenue from petroleum products, which also drives up fuel costs.
The World Bank publishes a Logistics Performance Index (LPI) every two years, which ranks countries based on the above factors plus some other inputs to indicate the efficiency of logistics in that country. India was ranked 50th in the World Bank’s 2014 report and is now ranked 35th in the 2018 report. This improvement is the result of improved infrastructure and simplified rules and regulations during this period. Germany ranks first in the World Bank LPI for 2018.
In line with the development of infrastructure, there is a need to bring in cutting-edge technology to integrate all government stakeholders, systems and departments. Infrastructure development has been gradual over the years, gaining momentum after economic liberalization in 1991, when the infrastructure sector was opened to private sector participation. However, the integration of various functions and processes in the direction of simplified logistics only received the desired boost in recent years.
To address the above deficiencies in an institutionalized manner, the Indian government introduced the National Logistics Policy (NLP). The government has made it clear that the National Logistics Policy is not an overnight step or legislation to improve the efficiency of logistics in the country. It was and will be a work in progress to achieve globally competitive low logistics costs in the country. The national logistics policy is a supportive policy that has drawn attention to this urgent economic reform that, if implemented, will help the industry achieve efficiency to become globally competitive.
The NLP envisages the integration of the digital system of different departments of the governments and other organizations with access to the stakeholders to make all functions and processes visible in real time. The NLP also envisages the deployment of a Unified Logistics Interface Platform (ULIP) that will facilitate multi-modal coordination, leading to efficiency and synergy. Like the Ease of Doing Business, the NLP aims to ensure Ease of Logistics (EOL) through various measures and enabling provisions.
Logistics are becoming more efficient through the use of state-of-the-art technologies such as artificial intelligence (AI), Internet of Things (IOT), sensor integration, drones and robotics. The introduction of this policy is the first step in reducing logistics costs to less than 10 percent of GDP as stated by the Prime Minister at the time of its introduction and much more needs to be done in the future to make this policy a success.
Lt Gen Balbir Singh Sandhu (retd) was Chief of the Army Service Corps. He is a Distinguished Fellow of the United Service Institution of India. His doctoral thesis was entitled “Peace, Security and Economic Development in Northeast India”. The views expressed in this article are those of the author and do not represent the point of view of this publication.
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