Logistics Sector in India – Importance, Challenges, Policy

One of the most struggling sectors in the current pandemic is the logistics sector. As the sector is demanding special packages to deal with the scenario, it is pertinent to remember the government’s decision to have a new National logistics Policy as declared by the Finance Minister during the Budget speech this year. In this backdrop, it is important to study the features, status, and issues of the sector.

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What is Logistics sector?

  • Logistics is the cumulative process of managing, storage, and transportation towards their final destination.
  • Logistics is the backbone of the supply chain(management of flows of goods from the pointof origin to the point of consumption). Itincludes transportation, inventory management,warehousing, materials handling, packaging, andintegration of information.
  • For example, in the natural gas industry, logistics means managing pipelines, trucks, storage, and distribution that handle oil along the supply chain.

What is the importance of the logistics sector?

  • The efficiency of the logistics sector is highly important for the country’s economy as it boosts economic growth, increases exports and generates employment in the country.
  • India is poised to become the third-largest economy in the world by 20304 and the second largest, after only China, in terms of Purchasing Power Parity (PPP) by 2040. To realize these projections, the Government of India has launched the “Make in India” program aiming to support the manufacturing sector and increase its contribution to the GDP from the current 17% up to 25%.
  • The logistics sector employs around 45 million people (Formal and informal) with a sectoral growth rate of around 14-15% in the last few years.
  • India spends around 14-15% of its GDP on logistics and transportation which is a very high amount which not used efficiently, can create serious asymmetries.
  • The manufacturing sector, on which we have focused a lot on flagship projects such as Make in India, is dependent on the logistics sector for cost-effectiveness.
  • The agricultural sector, on which over half of the population depends, has a critical dependence on the logistics sector. The issue of food storage and food wastage is rampant in India.
  • An efficient logistics network along with a transparent cross border trade facilitation is the main driver of export competitiveness in the country.

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What is the potential of an improved logistical sector for India?

  • While the GDP growth by logistics improvements is important, the quality of that growth and the employment and income it creates, especially for the most economically vulnerable segments of the population is the end of that growth.
  • World Bank study in Latin America proved that reducing the logistics costs share in the final price of goods by 14% can enhance demand by around 8–18% and increase employment by 2.5%– 16% in that sector. This is particularly important for micro small and medium enterprises, which employ over 110 million Indian citizens.
  • Specifically, for agricultural products, the same reduction in logistics costs increased demand by 12% and increased agricultural employment by 6%.
  • Logistics efficiency can benefit farmers community by a reduction in wastage of produce during transportation to markets. For example, in OECD countries, the loss of agricultural products during shipment is on the order of 2% to 3%, while many developing countries experience losses of up to 25%
  • Currently, India loses 40% of agricultural production to wastage in the supply chain. Reducing that wastage means providing an income boost to farmers and also lower overall prices for produce securing food for Indian citizens at low prices.
  • Employment in the Indian logistics industry is a very hard job. More than 25% of truck drivers return to their home base only after eight days, reducing quality of life and leading to poor physical and psychological health.
  • Furthermore, poor logistics practices lead to practices such as overloading of trucks, which compromises road safety—over 20% of the 1.4 lakh fatalities in 2014 were truck drivers
  • This combination of low pay, high risk, and low quality of life is resulting in a decline in the number of truck drivers.
  • Resolving critical issues in logistics can improve safety and health while providing higher quality employment opportunities in other sectors.
  • Finally, improved logistics can bring positive environmental spill-overs. Currently, the share of CO2 emissions from logistics is around 7% of the total CO2 emissions in India. In Delhi alone, freight movement alone amounts to 67% of the total PM2.5 emissions, 61% of the total SO2 emissions, and 62% of the total NOx emissions.

What are the challenges for the logistics sector in India?

Infrastructure

It is one of the biggest hurdles that has cramped growth of the logistics sector, it gets reflected in inadequate and low-quality modal and terminal transport infrastructure, inefficient and ill-designed storage facilities for cargo and containers and inefficient operational and maintenance protocols, and poor adoption/adaptation of technology.

Transport issues

  1. Road sector is fraught with issues like heavy load on National highways (2% of total road network carries 40% of the load), Poor road quality, delays in expressway building, High level of fragmentation in trucking industry among others.
  2. The port sector has its issues such as high turnaround time, inadequate depths at ports along with delays in dredging, the lagging behind of coastal sector due to inadequate port and landside infrastructure, etc.

Skill Development

  • The availability of appropriately skilled manpower in the logistics sector hampers its efficiency and effectiveness. The sector needs to specifically build a pool of personnel comprising truck drivers, seafarers, warehousing managers, quality inspection supervisors, among others.
  • There is a limited availability of institutes for soft skills, operational and technical training in for the logistics sector. The unorganized nature of the sector, bad working conditions do not attract a skilled workforce in turn making training institutes rare.

Information Technology

Low level and speed of adoption of new technologies has been a big constraint. As a result, the logistics ecosystem has to deal with operational inefficiencies and poor asset utilization.

Regulatory Hurdles

  • In India, the logistics value chain is being managed by several ministries such as Road Transport and Highways, Shipping, Railways, Civil Aviation, Commerce and Industry, Finance, Home Ministry, etc. This fragmented regulation creates red tape issues.
  • Also, a large number of government agencies like Central Drug Standard Control Organization, Plant and Animal Quarantine Certification Service are made responsible to provide relevant trade clearances and impact the value chain.
  • This fragmentation of regulatory framework costs heavily to the logistical sector of India with delays, uncertainty, etc.
  • Obstacles in land acquisition and consolidation, and change in land use continue to be major impediments.
  • Apart from above, Higher transaction cost in logistics is one of the major issues for India.
  • Lack of transparency in compliance further adds to the woes of the sector.

National Logistics Policy of India

As the Finance minister declared during the budget speech, the government will come up with the National Logistics Policy. The Draft National Logistics Policy which was published last year can guide the upcoming policy. We shall see the important features of the draft policy.

What are the objectives of the draft policy?

The key objectives to be achieved in the next five years are

  • Creation of a single point of reference for all the existing logistics and trade facilitation processes.
  • Reducing the logistics cost (as a percentage of GDP) down from an estimated current cost of 13-14% to 10%, i.e. near to the average costs in developed countries.
  • Optimization of the current modal mix (road-60%, rail-31%, water-9%) nearer to the international benchmarks (25-30% for road, 50-55% for railways, 20-25% for waterways) and also the promotion of multi-modal infrastructure.
  • Improvement in first and last-mile connectivity to improve market access to the farmers, MSMEs and small businesses, etc.
  • Efficiency enhancement across the value chain by digitization and technology adoption.
  • Bringing in better standardization in logistics (warehousing, packaging, 3rd party players, freight forwarders)
  • Creation of a National Logistics e-marketplace as a one-stop marketplace.
  • Doubling the employment in the logistics sector by generating more jobs and Focussing on skill enhancement and gender diversity.
  • Making further efforts to improve India’s ranking in the World Bank’s Logistics Performance Index to between 25 to 30.
  • Providing much-needed impetus to the MSME sector in the country through a cost-effective logistics network.
  • Encouraging adoption of green logistics in the country

What are the thrust areas mentioned in the draft policy?

This policy defines the key thrust areas for logistics in India, which will be the focus of the relevant ministries as well as act as a guide to the state governments. They are mentioned below.

  • Focusing on critical projects to drive an optimal modal mix and to enable the first mile and last mile connectivity and Wherever required, providing Viability Gap Funding to respective state governments to expedite select projects
  • At present, there is a gap in the availability of Multi-Modal Logistics Parks (MMLPs) for enabling seamless multimodal freight transfer. The driving of the development of MMLPs will be the main thrust area.
  • Driving interventions to reduce logistics cost and promote logistics efficiency for movement of key commodities by commodity-specific interventions like in coal, iron ore, steel, cement, food grains, fruits and vegetables, etc.
  • Country’s logistics sector is highly unorganized and fragmented with a large number of stakeholders. So, creating a single-window Logistics e-marketplace for them will be one of the thrust areas.
  • A logistics data and analytics center will be set up. This single hub will serve as a source of data for relevant performance metrics for the different limbs of the logistics value chain and will enable data-driven decision-making.
  • A ‘Centre for Trade Facilitation and Logistics Excellence’ (CTFL) will be created in partnership with the Indian Institute of Foreign Trade (IIFT), New Delhi. CTFL will help cooperation between the key stakeholders such as relevant central ministries, private sector, industry associations, and academia.
  • The draft seeks to create an Integrated National Logistics Action Plan and align with respective state development plans.
  • The Indian warehousing sector is highly unorganized and fragmented. The majority of the warehouses are of small sizes (less than 10,000 sq.ft.in size) and nearly 90% of the market is unorganized. The draft policy seeks to support the strengthening of the warehousing sector.
  • Export and import accounts for about 27% of India’s GDP. It is of critical importance to streamline EXIM processes to increase efficiencies, reliability, and cost reduction if we are to integrate with the regional and global value chains. The draft policy seeks to do this to increase trade competitiveness.
  • The Logistics Wing will work with standard-setting bodies for logistics in India such as the Bureau of India Standards, Indian Institute of Packaging to customize the international standards, and facilitate the development of relevant standards for India.
  • Currently, there is a dearth of skilled manpower in the Logistics sector. 20 million jobs will be added to the sector by 2022 According to the Logistics Skill Council. To meet this demand, it is important to bridge key gaps in skilling in the sector. The draft seeks to Generate employment, enhance skilling and encourage gender diversity in the logistics sector.
  • E-commerce in India will continue to grow exponentially, with the improving penetration of smartphones and thrust on digital India. Logistics is the backbone of e-commerce and Efficient logistics is the key differentiator amongst e-commerce companies. Promoting cross-regional trade on e-commerce platforms through a seamless flow of goods will be a major focus of the future logistics policy.
  • The draft also seeks to set up a StartUp acceleration fund, which will be managed by the Logistics Wing, to help incubate startups in the logistics sector. This will enable the sector in adopting newer technologies faster and promoting innovative practices that can help in reducing costs and turnaround times.

What are the provisions for funding such huge transformations in the logistics sector?

The draft policy seeks to create a non-lapsable Logistics fund to drive progress among the key thrust areas.  This fund will be utilized to push the thrust area development like creating a Startup acceleration fund, providing viability gap funding for select MMLP projects, Creating a single-window logistics e-marketplace, etc.

What are the institutional/framework measures mentioned in the draft policy?

  • The Draft seeks to enact a ‘Framework Act on Integrated Logistics’ to define the role and responsibilities of all stakeholders in the multimodal logistics space.
  • This will institutionalize the defined roles of the relevant stakeholders as per the National Logistics Policy, 2018, and enable the government to effectively drive the national logistics agenda while ensuring long term continuity.
  • The Logistics Wing under the Department of Commerce will have the primary responsibility to drive the key thrust areas as per the National logistics policy and facilitate alignment across the key central ministries.
  • Committees will be constituted as follows
  1. National Council for Logistics, chaired by the Prime Minister
  2. Apex inter-ministerial Committee, chaired by the Minister of Commerce and Industry
  3. India Logistics Forum chaired by the Commerce Secretary with representation from key industry/business stakeholders and academia.

What has the government done till now to improve the logistics sector?

Infrastructure creation

  • Bharatmala Pariyojana

It is an umbrella scheme for the highways sector and focuses on optimization of efficient freight and passenger movement across the country by bridging infrastructure gaps through interventions like the development of Economic Corridors, Feeder Routes, National Corridor Efficiency Improvement, Border and connectivity roads in the south Asian region, Coastal and Port connectivity roads and Green-field expressways.

  • Sagarmala and Inland Waterways
  1. It is a flagship program to promote Port led development, harnessing India’s long coastline.
  2. 508 projects with an estimated investment of more than 8 lakh Crore have been identified 111 inland waterway channels have been declared as National Waterways,
  • Dedicated freight corridors
  1. This is India’s largest infrastructure project spread across 3,317 km and worth US$12.6 Bn.
  2. In this around 70% of freight is expected to shift to DFC, freeing up capacity on Indian Railways. This would aid in the decongestion of highways, as one freight train would be able to carry a load equivalent to 1,300 trucks.
  • Multimodal logistics parks
  1. The government has planned to build 34 MMLPs through a $31 Bn investment.

These Parks would lease space to private companies to run central operations & save on warehousing cost.

  1. They will also act as freight aggregation & distribution hubs & will enable long haul freight movement to reduce transport costs.

Policy and regulatory changes

  • Logistics given infra status
  1. This will enable the logistics sector to access infra lending at easier terms.
  2. This Will allow for enhanced limits, larger funding as ECBs, longer tenor funds from insurance companies
  3. It will also enable the logistics sector eligible to borrow from IIFCL
  • The BBIN Motor Vehicle Agreement
  1. India, Bangladesh, Bhutan, Nepal signed the MVA in 2015 for seamless movement of goods across borders
  2. The agreement does away with trans-shipment of cargo, saving on time.
  3. It will also provide faster connectivity to North-East India.
  • Creation of Logistics division
  1. The logistics division will help in the creation of an integrated action plan for the development of the logistics sector.
  2. To bring down logistics costs from 14.4% to 10% of GDP by 2022.
  3. To bring the logistics sector to the global level in terms of cost & efficiency
  • The Foreign Trade Policy 2015-2020
  1. The policy lays down measures for infrastructure development.
  2. It identifies measures for the overall enhancement of the trade ecosystem.
  • Technology initiatives have been taken like:
  1. Automated storage and retrieval systems (ASRS) in warehouse and transportation,
  2. Radio-frequency identification (RFID) in place of bar codes,
  3. Global positioning system (GPS) for real-time tracking.
  • GST

The introduction of GST and ongoing streamlining of the GST structure will solve the complex tax structure for logistics which would lead to efficient decision making by logistic firms about logistics – demand, supply, near-to-customer, sourcing, transportation costs and inventory costs.

What are the impacts of the pandemic on the sector?

  • The lockdown and consequent manufacturing halt have reduced demand for logistics services, which will push prices across warehousing, freight, and logistics to decrease.
  • With the countries around the whole world imposing lockdown, export-import activities decreasing to the bare minimum, there is a crisis in the logistics space.
  • Reductions in vessel capacity and equipment shortages are the impacts of the ban on movements other than essential services have had a major impact on the intra-Asia trade lanes too.
  • A large drop in freight volumes has prompted major carriers to resort to service cancellations and delays. The cargo ships have been sailing blank to and from India and the Middle East, Europe, and the Mediterranean.
  • Aviation is one of the worst-affected segments. Air carriers are prioritizing the transportation of essential cargo and critical pharma/medical equipment. Shortages in staff and delays in clearance of cargo has led to congestion at airports.
  • As early as April, the industry doyens were estimating losses to the tune of Rs. 50000 crores due to lockdown.
  • Adding to that the quarantining of cargo ships for 2 weeks at high sees with delayed birthing is adding to the chaos.
  • The industry is seeking relief measures form the government to cope with the economic losses it has suffered.

What will be the growth drivers of the logistics sector?

The future growth of the sector from these challenging positions will largely depend on-

  • Favorable Demography– A large and growing domestic market with 40% of its population below the age of 20
  • Increased disposable income– Consumer class households are likely to reach 137 million in 2025 with a collective disposable income of US$ 1.5 trillion which would increase the demand for the sector
  • Technological Efficiency– latest technology adoption and innovation to reduce the transportation cost by bringing in efficiency and to the consolidation of a fragmented market.
  • Infrastructure up-gradation– Across spectrum infrastructure up-gradation, e.g. logistics park, freight corridors, Bharatmala and Sagarmala projects etc. likely to provide a major fillip to the sector
  • Government Policy support– A major boost in the form of initiatives like industry status to sector, GST regime stabilization, reduction in logistics cost by 10% by 2022.

Way Forward

  • As the draft policy is under the discussion stage, we can be hopeful of the final policy will be a holistic document that will cover multifaceted issues that hinder the logistics sector growth.
  • One important aspect that needs to be discussed is the third-Party Logistics (3PL) which is currently small (accounting only 9% of the total outsourced logistics revenue). It is expected to grow by more than 20% CAGR. Any policy framework needs to take this into account and needs to help the growth and remove the hindrances.
  • The GST structure is still in the streamlining mode. More the time it will take to finally work harmoniously, more issues will the logistical sectors will face. The government needs to work in this regard.
  • The COVID-19 can be an opportunity to improve the logistics sector due to the boom it is about to bring in the sectors like e-commerce. The policy framework must be one-step ahead to leverage the potential.
  • The major industries acknowledge the next step after digitization of manufacturing will be the digitization of the logistics sector.
  • As far as the current losses due to the pandemic goes, some immediate measures must be taken to support the industry.
  • Some of the measures can be an extension to the loan interest and EMI obligations, sanctioning of soft loans, and auto-renewal of national movement permits.
  • GST rates reduction is one of the demands of the sector. Considering the current revenue collection conditions, it needs to be seen if that can be done.

Conclusion

Logistics is the backbone of a country’s economy and development. With India’s growing economy, it is imperative to invest in robust logistics infrastructure and efficient supply chains. The draft policy seeks to improve on many sectors, nut there is also a need to tide over the slowdown that the pandemic has brought. The relief measures are the current priority and once the situation normalizes, we can move towards the policy implementation mode. We must also look to capitalize on the disruptions brought by the pandemic and must leverage those.

Practice Question for Mains

With the double blow of slowdown and pandemic, the need for a National Logistics Policy has never felt stronger. Substantiate (250 words)

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