Logistics Sector in India and National Logistics Policy – Explained, pointwise

Introduction

The World Bank Logistics Performance Index 2018 (latest available) had ranked India 44th out of 160 nations. China and Vietnam did better than India with 26th and 39th ranks respectively. India’s Logistics Sector performed poorly on Customs (efficiency of clearing process/speed, simplicity etc.) and Infrastructure sub-indices of the Index. Poor infrastructure adds to the costs of logistics. According to one estimate India’s logistics sector records relatively higher costs at 13-14% of the GDP. The corresponding figure for developed economies is ~8-10%. This makes India’s industry uncompetitive. There are several other challenges facing the logistics sector. In this context, the Government has released the National Logistics Policy. The new framework has laid special emphasis on streamlining processes for seamless coordination, and reduction in overall logistics cost, besides pushing employment generation and skilling of the workforce.

What is the current status of India’s Logistics Sector?

Logistics refers to the overall process of managing how resources are acquired, stored, and transported to their final destination. It includes all activities of the supply chain such as transportation, warehousing, packaging, inventory management, the flow of information, order processing and customer service.

In 2019, India’s logistics sector was valued at US$ 190 billion. The sector employed over 22 million people directly. It is expected to grow at a growth rate of 8-10% over the medium term.

Source: Mint

A Logistics Division was established in the Department of Commerce in 2017. It has been tasked with undertaking the integrated development of Logistics Sector. One of its key responsibility is to develop an action plan to facilitate the overall development of the logistics sector through policy changes, procedure improvements, identification of bottlenecks and gaps, and adoption of technology. Still the regulatory environment is very complex as there are over 20 government agencies, 37 export promotion councils, 40 Participating Government Agencies (PGAs), and 500 certifications.

Since 2014, there has been much emphasis on improving logistics, through initiatives like Sagarmala for shipping, Bharatmala for road and UDAN for aviation.

In October 2021, PM Gati Shakti was launched as a National Master Plan for multi-modal connectivity to bring together 16 ministries, including railways and roadways, for integrated planning and coordinated implementation of infrastructure connectivity projects.

Further, better technology has been adopted to strengthen the logistics sector. For example, paperless export-import trade operations have been made possible by the e-sanchit portal, and faceless evaluation in customs has been implemented. E-way bills and FASTag are also frequently used on roads to boost the effectiveness of the logistics industry. Also, a unified tax system like Goods and Services Tax (GST) enables ease in issues related to the logistics sector.

What are the challenges facing India’s Logistics Sector?

Skewed Multimodal Mix: In India, a predominant mode of freight cargo transportation is via road. Nearly 60% cargo is moved by road, while the share of railways is ~32%. Waterways have a meagre share of ~5%. The global average is 25% for roads and 60% for railways. Share of railways is lower because of over-saturated rail networks and high rail tariffs. Road is an inefficient way of transportation because of poor infrastructure, slower speed of movement, multiple check-points etc.

The skewed modal mix raises costs of logistics. The higher logistics costs are reducing the competitiveness of India’s exports. Reports suggest that higher logistics cost is leading to a competitiveness gap of US$ 180 billion for India. The difference will increase to US$ 500 billion by 2030.

Source: Mint

Port Sector Issues: The turnaround times for ships is high (~62 hours in 2020-21, ~8 hours in Japan). This is because of overcrowded berths and delay in cargo evacuation due to poor infrastructure. In addition, time consuming custom clearances add to delay. Logistics companies suffer. Coastal shipping in India gets hampered due to the weak land side and port facilities. Insufficient depth at ports discourage large vessels, thus curbing the large scale use of it for freight movements.

Tax Structure: The complicated tax regime places several hardships on logistics companies in India. Multiple State and Center taxes lead to considerable loss of time in transit on roads.

Warehousing Issues: The poor state of warehousing and their restricting locations are one of the major concerns of logistics sector. Storage facilities are quite fragmented for low margin products thereby resulting in a disincentive to create a large integrated warehousing space. The Government owned most of the large warehouses and used for food grain.

Technological and Skill Deterrents: Automation of processes is still in the embryonic stage in India. Non-standardization in the industry due to its fragmentation further slows down the progress. Acceptance and adoption of technological advancements like RFID, tracking, warehouse management system, etc. can resolve the issues between domain requirement and IT. Besides this, there is lack of quality workforce in this sector, and the available skill set needs to be upgraded urgently.

Fuel Costs: The high fuel costs continues to be a detriment to the sector. Higher fuel prices increase the transportation costs. Rising fuel prices are increasing the surcharges to the freight tariffs. This reduces profitability of the logistics sector.

Government Regulations: Carriers face significant compliance regulations imposed by State Governments and local authorities. It causes time overruns and disruption in supply chains.

Fragmented Sector: Unorganized players control 90% of the logistics market. Most Indian logistics companies are very small, and have limited fleet of trucks/vehicles. This prevents scale and cost economies. Fragmentation leads to low margins which prevents investments to scale-up operations or adoption of new efficient digital technologies. It also makes it hard to streamline supply chains. So the road transportation sector remains inefficient overall.

Source: Mint

What are the salient provisions of National Logistics Policy?

The National Logistics Policy has been launched recently. It provides a comprehensive agenda to develop the entire logistics ecosystem

Vision and Targets

The policy has been formulated with two major visions.

The first is to reduce logistics cost in India by 5 percentage points of GDP over the next 5 years (from current 13-14% of GDP to 8-9% of GDP).

The second is to improve India’s ranking in the Logistics Performance Index. It aims to enhance logistics sector competitiveness through a unified policy environment and an integrated institutional mechanics.

The policy aims to boost economic growth, provide employment opportunities, and make Indian products more competitive in the global market.

The three targets of NLP are:

First, to reduce cost of logistics in India to be comparable to global benchmarks by 2030.

Second, improve the Logistics Performance Index ranking, to be among top 25 countries by 2030.

Third, create data driven decision support mechanism for an efficient logistics ecosystem.

Major Steps

There are 4 significant steps to be implemented under the NLP through the Comprehensive Logistics Action Plan (CLAP).

Integration of Digital System (IDS):There will be digital integration of 30 different systems from 7 departments, integrating data from the road transport, railways, customs, aviation, and commerce departments.

Unified Logistics Interface Platform (ULIP): This will ensure smoother cargo movement. It will enable the exchange of information confidentially on a real-time basis. This National Industrial Corridor Development Corporation (NICDC) Logistics Data Bank Project has been leveraged. This will bring all the digital services related to the transportation sector into a single portal, freeing the exporters from a host of very long and cumbersome processes.

Ease of Logistics (ELOG): It will enable and ensure the ease of logistics business through transparency and accessibility. Through this portal, industry associations can directly take up any such matters which are causing problems in their operations and performance with the government agencies.

System Improvement Group: It will monitor all logistics-related projects regularly.

Apart from the above, CLAP envisages benchmarking service standards, human resource development, capacity building, development of logistics parks, etc.

How National Logistics Policy addresses challenges of India’s Logistics Sector?

First, the policy paves way for reduction in logistics cost in the country. Focus will be on enabling adequate development of warehouses with optimal spatial planning. Establishing multi-modal logistics parks (MMLPs) in crucial markets will improve first- and last-mile connectivity. This will enable better inventory management making the supply chains more efficient bringing down the costs.

Second, promotion of standards, measures to facilitate seamless coordination between different stakeholders, speedy issue resolution, and streamlined EXIM processes will reduce unnecessary delays.

Third, measures to improve digitization, automation across the logistics value chain and better track and trace mechanisms will enable faster movement of goods and reduce wastage in transit.

Fourth, The government will also offer management courses around Logistics and Supply Chain. This will lead to human resource development to create an employable pool of skilled manpower, for the sector’s growth.

Fifth, According to the Government, all States and UTs have been fully onboarded. 14 States have already developed their respective State Logistics Policies on the lines of the National Logistics Policy and for 13 States, it is in draft stage. The institutional frameworks under PM GatiShakti at the Union and State level, which will also monitor implementation of the Policy, is fully operational. This will ensure a fast and effective adoption of the Policy across all stakeholders. Coordination with States will help reduce bottlenecks in inter-state movement of goods.

Sixth, This policy supports enhancing competitiveness of Micro, Small and Medium Enterprises, and other sectors such as agriculture and allied sectors, fast moving consumer goods and electronics. With greater predictability, transparency and reliability, wastages in supply chain and need for huge inventory will reduce.

The NLP is closely aligned with  previous connectivity and infrastructure improvement programs like the Gati Shakti Programme, Sagarmala and Bharatmala projects.

Proper implementation of the policy will result in greater integration of global value chains and higher share in global trade besides facilitating accelerated economic growth in the country, is another outcome envisaged.

What more steps can be taken going ahead?

First, The focus has to be on correcting the modal mix. The Dedicated Freight Corridors are expected to improve the share of the railways in logistics. Efforts must be made to make the DFCs operational at the earliest.

Second, Inland waterways have remained underdeveloped. They provide a cost-efficient and environment-friendly way to move goods. Inland port development must become a priority for the Government.

Third, A technology-driven documentation approach would highly impact the logistic sector by avoiding transit delays and untimely deliveries caused due to improper documentation.

Fourth, the focus has to be on the implementation of the policy. There should be periodic review to check for the outcomes and course-correction.

Conclusion

India aims to become US$ 5 Trillion economy in the near term and a developed economy by 2047. For this, connectivity and robust infrastructure will become crucial points, and the NLP provides the required boost for the sector to this effect. As logistics develop, manufacturing and other industries like warehousing and infrastructure development will also develop. This will spur the growth of commercial real estate and industrial parks. This will help greater integration of Indian industry with global value chains and make India a manufacturing hub. Effective implementation of NLP will be a key step in making India a developed economy.

Syllabus: GS III, Infrastructure

Source: Economic Times, The Hindu BusinessLine, Financial Express, Mint, IBEF, PIB