In India, logistics cost, in average, is much higher as compared to many other economies. India’s flagship programme ‘Make in India’ cannot be successful if its logistics industry remains weak. Movement of goods in production involves a certain logistic cost. The more the logistic cost, higher is the price of a product.
A few months ago, Suresh Prabhu, Minister of Commerce, Government of India, reportedly said in a logistics conference that India had one of the highest logistic costs in the world. Ranked 44th in the World Bank’s Logistics Performance Index of 2018, logistics costs in India were 13-15 % of the production cost, while the global average was around 6%. In an investors’ meeting held in Kolkata a few months ago, many steel experts emphasised that for India to be globally competitive in production of goods (especially steel), its logistics sector needs to be more efficient. Some experts pointed out that the steel sector in India is not globally competitive due to its high logistical bearings. Sometimes, this cost climbs up to 45- 50% of the factory production cost.
India is dependent on imported coking coal. Import of normal coal also has been growing. These are to be transported from ports to the factories. This involves huge costs and multiple loading and unloading expenditures. Additionally, transportation of iron ore from mines to the factories is also costly. Logistics costs are also involved for many other inputs of steel production.
In logistics, shipping is very important as almost 90% of the total volume of trade occurs through shipping. A report published in early 2018 by Dun & Bradstreet (a company that provides commercial data, analytics and inside for business) states that out of 13 major ports, only three ports, namely, the Jawaharlal Nehru Port, the Kamarajar Port and the Visakhapatnam Port - received a ‘Good’ score. The three ports of Haldia, Kolkata and Mumbai, on the other hand, received a ‘Poor’ score. The most common problems across Indian ports include port congestion, problems with customs clearance, shipping line issues and charges, issues with documentation and paperwork, and problems associated with regulatory clearances. Out of these five issues, four issues constitute 80% of the total issues causing detention and demurrage.
The other major finding of the report is that processes and operations across Indian ports are not uniform and the costs and time for key processes are unpredictable. As a result, the Indian maritime industry runs in an inefficient way that hurts economic growth.
Rail versus road transports
For bulk transportation of coal and many other mine products, cement, fertilisers - rail transport has no substitute. In rail transport, the power consumption is one-sixth of that in road transport. Land requirement for construction of a railway line is 25% of that of construction of a national highway. Environment hazards are much less in railways and accident and other hazards are also less. But in the case of retail and short distance transport, roadways are preferred. In rail transport, when there are multiple loading and unloading, it is not only more problematic but also costlier as compared to road transport. Another important problem associated with rail transport of goods is the unavailability of rakes in time. The government needs to take initiatives to increase rake supply and to complete the dedicated freight corridor as soon as possible in order to reduce its dependency on fossil fuel powered transport options.
India’s weak logistics pulls down its global competitiveness
A recent survey by rating agency CARE stated that slashing the logistic cost by 10% may lead to a growth of exports by 5-8%. To ensure this, efficiency of the logistics sector needs to be enhanced.
An international comparison in the survey may make the point clear. In India, logistic cost as a percentage of GDP has been 13-14%. In BRIC countries it is 10-11%. Surprisingly this is 8-9% in many other developing countries. The US spends 9.5% on logistics and Germany spends around 8% of its GDP on logistics.
Then why does India spend so much on its logistics sector? The CARE survey noticed that it is the lack of inter-modal and intra-modal traditional systems of logistics. Even today, the organised logistics sector comprises only 10% and the rest is sector is overtly unorganised. A change for the better needs to happen fast. This is important as the logistics sector is employment-intensive. Improvement in the sector can create new employment.