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world of industries 8/2016 (EN)

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world of industries 8/2016 (EN)

India’s logistics

India’s logistics industry is poised for huge growth WORLD OF INDUSTRIES Sushen Doshi An overview of the overall dynamics of the logistics sector in India, along with a short analysis of the top Indian cities with high potential to be effective logistics clusters and the effect of government’s latest taxation policy that is aimed to create a big boom for the industry. In the recent times, India’s logistics sector has been transforming constantly. With the country’s economy continuously expanding, the growth of entire logistics network is absolutely essential in assisting Government of India’s “Make in India” strategy. The logistics industry plays a pivotal role in reducing costs by improving efficiency and increasing competitiveness. The chemistry between developing infrastructure, technological advancements and evolving demand is likely to define how the logistics in India, is going to help the companies in reducing costs. Interestingly, the change in government taxation policies and regulation of logistics service providers is going to be one of the most important factors in the process of development of this industry. Sushen Doshi, correspondent India for World of Industries Logistics Compared to the situation at the end of 1990s, the Indian logistics sector has come a long way. The integration of the fragmented components of the logistics sector such as services, transportation, packaging, tracking and warehousing etc., has brought India’s logistics industry to its current growth state. Shifting from its traditional “godowns” to functional warehouses has surely made the logistics sector much more efficient. To understand where India’s logistics sector stands today, let’s take a look in comparison to United States – developed economy and China – a market similar to India. In the context of logistics costs as a percentage of GDP, India stands at 13 %, United States roughly between 8-9 % and China at 18 %. If we split up the cost of logistics into 3 parts namely transports, warehousing and miscellaneous, let’s see which of the parts contributes more towards the overall logistics costs. In India’s case the share of transport in the overall logistics cost stands to 63 %, warehousing at 29 %, whereas the US has 67 % in transport and 22 % in warehousing and China has 52 % and 45 % in transport and warehousing respectively. Major industry sectors driving the logistics market in India are Auto components, Cement, Pharmaceuticals and textiles. Whereas the e-commerce along with food and beverages drive the US market. China’s logistics market is driven mainly by the metals, electronics and textiles due to its high exports. Major challenges that India’s logistics companies face are inadequate road and rail infrastructure, lack of inland waterways and huge waiting times at the state-borders for inter-state taxation. The US has highly sophisticated transport network from rail, road and inland waterways as well, but the higher employee wages is a major challenge for the Americans. While the employee cost in China is obviously not as 8 World of Industries 8/2016

NEWS AND MARKETS high as America, but China will certainly be facing a shortage of trained manpower in not so distant future. When you compare the numbers with America and China, India doesn’t seem to be far off. But this is not the case, although India’s logistics sector has come a long way, it still has a lot more to achieve in order to stand out in the global market. Primarily, there has to be further more improvement of the transportation as well as warehousing and storage. A strong infrastructure is backbone of the country India has the second largest road network in the world at 4.7 million km. Transportation, the largest stakeholder in the logistics pie in India, is primarily by roadways, with nearly 60 % of the goods transported via road. Thus, India depends on the costliest mode of travel (road) for majority of its domestic freight transfers. Although India has the 2 nd largest roads network in the world after USA, in terms of quality of road, its lags significantly behind others. However, a lot is proposed in India for infrastructure development, Government of India has earmarked an investment of $ 1 trillion for infrastructure during the 12 th Five-Year Plan (2012–17). The construction of highways had reached an all-time high of more than 6,000 km during 2015-16, and the increased pace of construction is expected to continue for the coming years. GST: bringing India under a single market without any state borders In the story of modern India, i.e. post liberalization of the Indian economy in 1991, GST is the biggest reform in the country yet. GST is the “Goods and Services Tax”, a comprehensive indirect tax on manufacture, sale and consumption of goods and services throughout India. Basically under the GST system, all the taxes from the central government to the state government are amalgamated into one. This would mitigate cascading or double taxation, facilitating a common national market. This creates a more efficient, neutral and a systematic tax system throughout the country. From the consumer point of view, the biggest advantage would be in terms of a reduction in the overall tax burden on goods, which is currently estimated at 25 %. GST would replace most taxes currently in place such as (Table). Central government taxes Central Excise Duty Service Tax Customs Duty Central Sales Tax Central Surcharges State government taxes Value Added Tax Value Added Tax Value Added Tax Luxury Tax Sales Tax With the onset of GST, the physical state boundaries lose their significance from the taxation point of view, supply chain dynamics and market forces of demand would rule supreme. Free movement of goods from one state to another without stopping at state borders for hours for payment of state tax or entry tax would result in huge improvement in efficiency and timely delivery of goods. The implementation of GST would add 2-4 % to the logistics growth in India. At present, a complicated tax regime with poor infrastructure has resulted in exorbitant logistics costs in India. It is now 14 % of the total value of goods as compared to 7-8 % in developed countries. The reforms proposed in the GST will look at re-engineering the supply chain architecture with fewer and larger strategically placed distribution centers along with smaller warehouses for daily “to and fro” runs. Apart from harmonization of warehousing space, companies are also taking this opportunity to give high importance to operational efficiencies and safety standards in the new warehouses with the use of vertical racking, automated conveyor systems, fire sprinklers, hydrant systems, etc. Thus, GST is expected not only to optimize the supply chain networks, but also to bring in high-quality international standard warehouses in the Indian market. Warehousing Storage and warehousing is the second most important component in India’s logistics sector. The Indian warehousing sector is gradually shifting from unorganized to organized mode, and more highquality warehouse spaces are being developed. With the modernization of the supply chain, warehousing has become a critical function, and today, warehouses not only provide safe custody for goods, but also offer value-added services, such as sorting, packing, blending and processing. These high-quality warehouses require automation and safety in operations and would be equipped with vertical racking, reach trucks, automated conveyor systems, and fire sprinkler and hydrant systems. Based on the type of goods stored, storage and warehousing are categorized under five major heads: Industry/Retail warehousing, liquid storage, Agri – warehousing, Cold storage, Container storage. Growth drivers for warehousing In India, export/import (EXIM) cargo, agriculture and manufacturing (textiles, auto and auto ancillary) have been identified as the traditional growth drivers to the demand for warehouse space. Meanwhile, new growth drivers such as organized retail including food and beverage, telecommunications, pharmaceutical and healthcare can be considered as high potential sectors. With the growth of these sectors, coupled with the dawn of technological advancements, the demand for organized and automated warehousing is set to increase. The following are the major demand drivers in the warehousing sector in India: 1. Consumption-led demand: With a 10 % increase in the per capita income, the increased demand and consumption of fast moving consumer goods is proving to be a huge growth factor for warehousing industry. 2. E-commerce led demand: A Booming e-commerce industry set to reach $ 20 billion by 2020. E-commerce is playing a major role in increasing the demand for warehousing in India, especially retail warehousing. As more customers rely on online portals for buying goods, the demand shifts from traditional retail space to warehouses. The e-commerce market has grown at a rate of 57 % from 2009 until 2014. India’s internet penetration is roughly around 20 % of the household in 2014 as compared to more than 80 % in the US and 40 % in China. The future growth potential in the e-commerce sector in India is going to be exponential, as India is all geared up to catch on the Internet penetration levels. World of Industries 8/2016 9