Indian Logistics Sector & Outlook
1.Introduction
Logistics is regarded as the backbone of the economy as it ensures efficient and cost-effective
flow of goods and other commercial sectors depend on it. Logistics industry in India is
evolving rapidly. It is the interplay of infrastructure, technology and new types of service
providers, which defines whether the logistics industry will be able to help its customers
reduce their costs and provide effective services. Despite weak response, the logistics
industry continues to witness growth owing to the progress in retail, e-commerce and
manufacturing sectors. According to economic survey the country's logistics industry which
is worth around USD 160 billion is likely to touch USD 215 billion in the next two years with
the implementation of GST . Rise of e-commerce logistics and increased domestic
consumption will pave the way for the industry to grow further in future. With the promise of
steady growth and improvement, the service oriented logistics industry is ready to expand
beyond the horizons in the latter half of this decade.
2.Overview
2.1 Global Scenario
Logistics is an integral activity for economic growth as it involves the management of flow of
goods from place of origination to place of consumption. The sector comprises shipping,
port-services, warehousing, rail, road and air freight, express cargo and other value added
services. The global logistics market currently generates over USD 8 trillion annually and
represents around 11% of global GDP. The growth of the logistics sector is linked to growth
in international trade flows and the robustness of the economic environment.
Trade was severely affected during the financial crisis of 2008-2009. Since then, global trade
had been recovering and has returned back to 2009 levels in recent years, i.e. around 60% of
global GDP. The following key trends are being observed in the logistics sector across the
globe
1. Digitization and Automation
Digitization in the logistics sector is currently in a nascent stage with most processes yet to
be automated. The current structure of the logistics sector involves intermediaries, which
lead to leakages in the value chain and hence, higher costs for consumers. Technology is
being applied and implemented in different formats; physical automation for trucking and
warehousing; automated documentation and booking of parcels, online marketplaces for
comparing price and services, etc. All these technological enhancements have provided
benefits in the form of disintermediation of services, cost rationalization and curbing
inefficiencies.
2.Shifting of Trade Centers
Demographic profiles of Asian populations coupled with economic growth has triggered
demand-led consumption. In Africa, critical positioning and access to natural resources is
incentivizing investments in the region. Population density and ever-increasing aspirational
requirements are leading large scale producers to migrate to these regions to build
infrastructure and production facilities. Accordingly, trade movement has been increasing
towards these regions to meet the growing demand and investments.
2. E-Commerce Wave
The growth of e-commerce has given way to specific logistics channels handling only last
mile deliveries. These channels ensure faster delivery and provide assured reverse logistics.
They also insure for the consignee collection of payment. This model is a true 3PL (third-
party logistics) service offering. With the complexity involved and the level of automation
required, big e-commerce companies like Amazon and others have set up their own last mile
delivery services and are now entering as full fledged 4PL service providers.
2.2. Indian Scenario
The size of the logistics sector in India is estimated to be USD 160 billion. Unlike global
trends, the logistics sector in India has been growing at a healthy rate of ~14% over the last 5
years on strong demand drivers. Over the last two decades, the Indian logistics sector has
evolved from mere transportation services to fully integrated service providers. Going
forward, the trend towards integration of logistics service providers is expected to continue
and new players/business models are expected to emerge amid the digitization and
automation of business processes, implementation of the new GST (goods and services tax),
and expansion in the 3PL/4PL service landscape.
India's logistical costs as a percentage of GDP is on the higher side: 13.0% vs. global average
of 11.7%. Logistics in India are plagued by an inefficient system, lagging infrastructure,
lower average trucking speeds, congestion and bottlenecks in surface transportation etc. In
terms of the relative composition of transportation and logistics costs, transportation costs in
the US and China are high due to widespread geography. Interestingly, costs are also high in
India but due to a combination of factors including vehicle quality, stressed drivers,
overloading, poor road infrastructure, and low average speeds. In addition, costs are higher
due to excessive taxes and toll expenditures.
2.3 Recent Scenario
The recent Indian logistics sector comprises inbound and outbound segments of the
manufacturing and services supply chains. Of late, the logistics infrastructure has gained the
much needed boost from business houses as well as policy makers. Managing the
infrastructure to effectively compete with other industries has not been given its due
emphasis. Inadequate logistics infrastructure can create bottlenecks in the growth of an
economy. The logistics management regimen has the capability to overcome the
disadvantages while providing cutting-edge competitiveness in the long run.There exist
several challenges and opportunities for the sector in the Indian economy.
3.Challenges Faced By The Recent Logistic Industry In India
The biggest challenge faced by the industry today is poor integration of transport networks,
information technology and warehouse & distribution facilities. Regulations existing at
different tiers are imposed by national, regional and local authorities. However, the
regulations differ from city to city, hindering the creation of national networks. Trained
manpower is essential for the third party logistics sector and the manufacturing and retailing
sectors. It is lacking at the IT, driving and warehouse as well as at the higher strategic level.
The sector is in a disorganized state in India. The general perception of logistics being a
manpower-driven industry and lack of adequate training institutions have created crisis of
skilled management and client service personnel. Poor facilities and management are reasons
behind high levels of loss, damage of stock, mainly in the perishable sector. The problem
arises mainly because of the absence of specialist equipment, like proper refrigerators. Lack
of quality training is another reason. Though practitioners and academicians are slowly
becoming aware of the importance of logistics and supply chain, however, the field is still not
adequately explored as far as research is concerned. It is essential to prioritize research and
development so that the weaknesses in the industry can be taken care of and improved.
3.1Current Issues
The main issues currently faced by the logistics sector in India are as follows
1.Connectivity Congestion
India is ranked 35th in the Logistics Performance Index (LPI) by the World Bank which
benchmarks efficiency of trade logistics across nations. India's low ranking is due to slow
transit time for the movement of cargo through road and shipping networks. In terms of
transportation through shipping channels, transit time is affected due to lengthy custom
clearance processes and the number of intermediaries required for bringing products in/out of
the country. The road logistics network is affected due to poor infrastructure as national
highways constitute only 2% of the overall road network. In addition, toll collection, inter-
state checkpoints and other stoppages lead to higher transit times.
2. Lower Standardization
India's logistics market has been impacted by lower standardization of cargos and
containerization of logistics traffic, hampering the overall speed and thus increasing cost of
movement.
3.Unfavorable Modal Mix
Cargo movement in India is skewed towards road networks. India boasts the world's fourth
largest railway network and is cheaper than roads, but suffers from under investment
resulting in capacity constraints, redundant railway sliding, inadequate rolling stocks, and
non-availability of cargo hubs in proximity to industrial hubs with a large work-force. Inland
waterways, despite being green and cost effective, are affected due to inadequate transit
gateways between inland waterways and linkages to coastal shipping. Air is the fastest
transportation mode but continues to have miniscule (1%) share in the transportation pie and
suffers from limited connectivity and an absence of designated cargo terminals. The inability
to provide last mile connection leads industries to prefer the road as mean of transportation
of goods.
3.Tax Structure and Regulatory Inefficiencies
India is currently in the midst of a transition from a historical state-wise tax regime to a
centralized Goods and Service Tax. At present, India has different applicable tax rates within
29 states and multiple taxes levied are by both Central and State governments when goods
move across the state borders. This leads to higher cost and inefficiency/delays on account of
inadequate documentation and necessary clearances while goods are transiting across
multiple state borders. The planned dual GST model (central GST and state GST) proposes
to replace around 29 state and federal taxes with a single tax regime at the point of sale.
3.2 Solutions To Some Of The Challenges
Infrastructure is the backbone of every country’s growth and prosperity. The same is true for
the logistics industry. Emphasis should be laid on building world-class road networks,
integrated rail corridors, modern cargo facilities at airports. Logistics parks should be set up
and accorded a status equivalent to Special Economic Zones. It is necessary to realize that the
logistics industry can best be benefitted if companies establish training institutions to improve
the service quality of the sector. Good storage and warehouse facilities are important for the
growth of the industry. With increase in the transportation of perishable products, the
logistics agencies need to give a lot of importance to enhancing the warehouse facilities.
Emphasis on research and development is potent because it encourages the use of indigenous
technology, which can make the industry cost-effective and can also bring about
improvement in services. Particular focus has to be on research in process excellence which
can help to eliminate inefficiencies and bring Indian logistics on par with global practices.
4 .Key Drivers & Trends
Despite the challenges, the logistics sector in India is expected to grow at a healthy rate of
close to 12%-14% going forward. The growth is expected along with a transition of the sector
from high cost to a leaner cost alternative through rationalization of expenses, elimination of
intermediaries and technology adaptation. This is possible with significant development and
improvement envisaged in infrastructure, adaptation of technology and backed by a changing
regulatory environment. Key drivers and trends which are expected to contribute towards the
growth of the sector are
1. Implementation of Goods and Service Tax & E-way Bill
The Indian parliament cleared the long pending implementation of the Goods and Service
Tax (GST) which simplified the tax structure and improve the turnaround time for trucks,
hence easing cargo movement. The E-way bill is expected to solve one of the major
problems this sector faces – the inter-state transport of goods without the hassle of
documentation and long waiting queues at check posts.The GST is expected to trigger a
significant change in the warehousing sector with the small state-wise warehouses being
consolidated in large nodal based multi-product.
2. Infrastructure Development
Road Development Over the last two years : The Government of India has
increased its pace of road construction. Further, the policy has been strengthened with
the Government mandating that no road project will be awarded until 80% of land is
acquired, which increases the viability of the project and reduces delays in
implementation after award of the project. The Government has set a target of
constructing 15,000 km of roads with budgetary allocation of close to USD 14 billion
for the year. The stage is set to develop a more robust road infrastructure network
across the country.
Inland Waterways Development : India has about 14,500 kms of navigable
waterways which include rivers, canals, backwaters, creeks, etc. Currently, only 4,382
kms of waterways have been utilized. There is a huge potential waiting to be unlocked
through development of these inland waterways. In 2016, the Government announced
106 new national waterways through enactment of the National Waterways Act. This
will help realize the potential of inland waterways as greener and more cost effective
options and establish routes in which adjoining hinterlands could be serviced.
According to government estimates, inland waterways transport has potential
investment opportunities of around USD 600 million in the next 3-4 years, towards
various ongoing/proposed programs.
3. Integrated Supply Chain Service Provider
The logistics sector stands to benefit from the increasing trend of outsourcing. Logistics
functions are traditionally performed by the organizations themselves. However, corporate
entities recognize the benefits associated in engaging third-party logistics providers for
integration of information flow, material handling, production, packaging, inventory,
transportation, warehousing and often security. This allows corporate entities Road
Transport Rail Transport Waterways Transport Cost of Transportation (Rs. per MT per Km)
4.“TECHNOGISTIC Powered” – Technology Reshaping Existing Delivery Systems
Cloud based systems are replacing legacy enterprise resource planning (ERP) systems in
manufacturing and logistics organizations. Software-as-a-Service (SaaS) companies have
penetrated the technology users with much affordable terms providing lean investments and
easy upgrades. These providers offer increased versatility and inbuilt flexibility to adapt to
changes and market developments. Robotics is being utilized at warehouses for tagging,
labelling, sorting, and placing products in carts and shelves. The role of robotics has enabled
round-the-clock operations. This has helped to rationalize the costs of evacuation during low
peak hours of traffic. Similarly, Industrial Internet of Things (IIoT) , Internet of Things (IoT)
and Big Data Analytics are streamlining supply chain functions of organizations for just-in-
time inventory and provide predictive analysis to manage procurement processes.
Technology is enabling logistics firms to eliminate inefficiencies to boost operations.
5.Contingency Preparedness
Logistics solutions are being designed to cater to meet the requirements of emergency
contingencies, especially natural and manmade disasters. With dynamic geo-political
situations and climatic changes, the world is prone to face challenges and disasters more
often. Logistics service providers are getting more attuned to providing services to meet
emergency needs.
6. E-Commerce and Emerging Logistics Channels:
E-commerce is currently a USD 16 billion market but growing rapidly and expected to reach
USD 100 billion by 2020. Advent of e-commerce has led to creation of multisource channels
for vendors, even small sized ones. In traditional brick and mortar channels distribution is
much simpler with products arriving at warehouses in bulk, moved around in pallets and
selected by the case, and shipped out to store in bulk. E-commerce businesses pose a unique
challenge to the traditional logistics channel. In ecommerce, inventory arrives in bulk but
needs to be distributed into different SKUs. The distribution to onward channels is much
more diverse and in smaller parcels. The complexity of this process increases with thousands
of suppliers, multiple warehouses and extensive sales channel across geographies, increasing
the risk of misplaced orders. In addition to that, logistics channel companies are also expected
to process the payment through delivery and manage the complicated reverse logistics in case
of return of product. Managing all these activities requires technology and standardization to
synchronize business processes with real-time access and insight to inventory management.
To meet the growing demand of e-commerce logistics, new channels and companies have
emerged with different business models and catering exclusively to e-commerce companies
like DelhiVery, Ecom Express, DotZot, eKart etc. These companies have attracted significant
PEcapital as growth trajectory forecasted to rise on the back of growing market size.
7.Green Transition
Reverse logistics has become an integral part of e-commerce transactions. Similarly, a
sustainable solution for manufacturing companies and production plants is envisaged in the
form of ‘Green Earth’ initiatives for recycling and disposal of residual plant wastages. In
developed countries, manufacturing units follow stringent norms with regards to recycling
and disposal of residual plant waste. However, in India, residual raw material and waste like
sludge is often disposed in open yards. Meeting green standards would require finding
logistical solutions for disposal and treatment through creation of cluster infrastructure for
further processing, recycling and finding alternative use of the residual plant waste.
5.Future Prospects
The logistics firms are moving from a traditional set-up to the integration of IT and
technology to their operations to reduce the costs incurred and to meet the service demands.
The growth of the Indian logistics sector depends much upon its soft infrastructure like
education, training and policy framework as much as the hard infrastructure. To support
India’s fast-paced economy growth logistics industry is very essential. It is estimated that the
industry will continue to grow at a robust rate of 10-15 per cent annually.
The global economic outlook and that of India is expected to significantly improve as India
Inc begins to tackle the economic downturn. With a new government many policies are
expected to be implemented, which will give a fresh impetus to India’s growth engine,
particularly in the corporate and small and medium enterprises (SME) sector, which in turn
will expand demand for the logistics sector.
With the implementation of GST, companies, which currently have small warehouses in
several cities, can just set up a few in specific regions, following the hub-and-spoke model
for freight movement from the warehouses to the different manufacturing plants, wholesale
outlets, retail outlets and various POS. The growth is backed by the boom in the e-commerce
sector and expansionary policies of the FMCG firm.
This has increased the service geography of the logistics firms but they also have to meet the
demands of quick delivery and tight service level agreements. The industry has moved from
being just a service provider to the position which provides end to end supply chain solutions
to their customers. Thus, all this has paved the way for further growth of Logistics and
Warehousing industry in the coming years.
6. Conclusion
The Indian logistics sector continues to evolve, improve with the changing business
environment. It is poor as compare to developed & developing countries. In developed
countries like the US, logistics costs comprising transportation costs account for 7% to 9% of
the cost of the final product, warehousing cost accounts for about 1% to 2% and inventory
holding costs account for about 3% to 5%. In developing countries, logistics costs are
estimated to be higher at around 15% to 25% of the final cost of the product due to lack of
adequate logistics system. In India, logistics cost is around 13%, comparatively higher than
the developed & other developing countries.
To stay competitive we need efforts from all the ends. From both government & private
sectors. With spending on infrastructure & implementation on GST Indian logistics industry
will surely transform. Also with the use of technology & so many tech based companies
transport industry is also integrating ,Which ultimately benefit our logistics sector &
economy.
