On 21-Nov-2017, Government of India declared that Logistics companies shall be part of India’s infrastructure. What are the implications of this grand announcement?
According to the 3-sector macroeconomic theory, the GDP of a nation comprises 3 levels of wealth-creation:
- Primary—“Extraction”—hunting, gathering & cultivating raw materials that can or cannot be consumed directly. E.g. Agriculture, Fisheries, Quarrying.
- Secondary—“Manufacturing”—processing raw materials into finished goods that can be consumed directly. E.g. Sugar Mills, Dairies, Metallurgy.
- Tertiary—“Services”—offering intangible products that can be consumed directly. E.g. Tailoring, Trading, Banking.
The primary and secondary economic activities critically depend on logistics (i.e., storage and movement) for the raw materials & finished goods to reach the customers & consumers. As a developing economy, nearly half of India’s Rs.155-lakh-crore GDP relies on logistics providers & infrastructure, including roadways, railways, waterways & airways.
India’s infrastructure and transportation industries contribute over 5% of the GDP. The nation has the second-largest road network and fourth-largest rail network in the world. However, the average cost to export and import one container in India is 72% more than in China.
Logistics infrastructure is quite expensive, and so must be planned in an integrated manner for an entire nation, strategically located and well maintained. Due to India’s disjointed central-level planning and poor state-level infrastructure, the logistics cost is over 14–15% of the value of goods, as compared to 6–9% in developed nations. This makes India’s exports unattractive in many of these countries. In addition, poor storage facilities lead to half of India’s agricultural produce going waste. This causes food inflation and hunger across the nation.
While successive governments have been working on improving the road network for better logistics, storage facilities were not being parallelly created.
So, in the 2017-18 Union Budget, the Finance Minister committed that a strategy for development of multi-modal logistics parks—together with multi-modal transport facilities—will be drawn up and implemented in the fiscal. This strategy would bring together road, rail, air, and urban planning to provide seamless movement of freight traffic across states.
With the declaration of “infrastructure” status to the Logistics industry—combined with the introduction of the Goods & Services Tax (GST)—India has finally begun to solve the plethora of problems plaguing the nation for long.
To be eligible for this status, the minimum investment and area requirements for each category of logistic facilities are as follows:
Multi-Modal Logistics Park (MMLP) with Inland Container Depot (ICD)
- Min. investment = Rs.50 crores
- Min. land area = 10 acres
- Min. investment = Rs.25 crores
- Min. land area = 1,00,000 sq.ft.
- Min. investment = Rs.15 crores
- Min. land area = 20,000 sq.ft
This also means that development firms with larger land parcels can utilise their excess land holdings to develop more such facilities, thereby boosting the supply of warehousing facilities.
According to the Central Government, the inclusion of logistics into the “Harmonized Master List of Infrastructure Sub-sectors” makes it easier for logistics companies to:
- Access larger amounts of funds as External Commercial Borrowings (ECB)
- Access longer-tenure funds from insurance companies and pension funds, and
- Be eligible to borrow from India Infrastructure Financing Company Limited (IIFCL).
With this announcement, the Logistics industry is now forecast to grow 10–15% annually. The expected benefits are as follows:
- Better loans: Companies with the preferential “infrastructure” status get business loans easily at lower interest rates for longer tenures.
- More FDI: With better credit worthiness, these companies also attract foreign investments. The new status makes logistics companies eligible for 100% funding via the automatic foreign direct investment route.
- More warehouses: Warehousing is already seeing major investments across India.
- Distributed development: Industries that heavily rely on logistics can now branch out into semi-urban and rural areas connected by transport and storage facilities. This leads to decongestion of urban cities and overall development of large regions. GST has already improved connectivity across India.
- More jobs: With increased investments, logistics companies would expand, and so need to recruit and train workforce from Tier 2 and 3 cities.
Improving transportation would require the coordinated development of railways, roads, and waterways. So, in addition to the above announcement, India is already implementing the dual Bharatmala and Sagarmala projects to dramatically enhance India’s road and port networks respectively. Transportation services account for one-third of the cost of a logistics chain. Roads carry about 60% of the freight cargo in India.
The Indian Railways’ Dedicated Freight Corridors (DFC) would increase transportation speed to compete with roads for the same freight. A container train from Delhi to Mumbai traveling on DFC can cover the distance in 24 hours; a truck would take a minimum of 3 days. National highways constitute just two percent of the country’s road network but carry 40 percent of the traffic load; thus, a better rail network will help reduce road congestion.
Along these networks, the Central Government has allocated Rs.2-lakh crores to set up 35 MMLPs as joint ventures with State governments and private companies. This would cater to 50% of the freight movement, enable a 10% reduction in transportation costs and a 12% reduction in carbon dioxide emissions. Of these, pre-feasibility studies for six locations have already been initiated.
With all these efforts, Government of India expects the Indian logistics industry to grow to USD 360 billion by 2032 from the current USD 115 billion.
Fragmentation of logistics industry players is a key challenge that causes inconsistencies in service quality. This needs to be overcome through consolidation.
As a labor-intensive industry, logistic companies employ a large number of blue-collar workers who need standardized, quality training to compete with international players. The National Skill Development Council of the Central Government could address this challenge.
Regulatory systems, such as GST and e-way billing, needs to be rationalised and further simplified. Practical challenges, such as state-level unrest or bandhs, cross-border corruption, etc. need to be addressed during law-making itself.