Historically the different modes of transportation within the logistics industry have been competing against each other for market share because of which the Indian logistics industry has been unable to reap the benefits of coordinated logistics movement, leading to inefficiencies and high cost of logistics. There is a need to leverage the inherent advantages of the individual modes, promote collaboration among them and develop an integrated logistics network in the country, where efficiencies and effectiveness will decide the modal mix for transportation.
The Indian logistics sector has traditionally been characterised as cost inefficient. These inefficiencies are primarily a result of relatively weak core infrastructure (leading to high turnaround time), complex tax policies and supply side constraints. As a result, India spends almost 13 per cent of its GDP on logistics compared to 8-10 per cent in developed markets like the US, Europe and Japan. The inability to optimally utilise cheaper modes of transports like railways and waterways has also been a major contributor to the high logistics costs.
Infrastructure has been a major constraint across the various modes of transportation, with low penetration of national and state highways in the country, congested railway network and fragmented ports hamper these modes from realising their true potential. High rail freight rates due to cross-subsidisation of passenger fares and low priority for freight trains have reduced the attractiveness and competitiveness of railways in India. Similarly, the fragmented port network in the country limits scale economies, leading to high costs for liners. Although roadways have remained the dominant mode of transportation, issues like overloading and high idle time increase the turnaround time for road freight and make it inefficient.
ICRA estimates significant improvement in logistics costs over medium to long term. With increased focus of the government on developing infrastructure in railways and waterways sectors, supported by ambitious projects like Dedicated Freight Corridor and Sagarmala, a more optimum transportation mix would develop over the longer term. In addition, substantial investments in highway connectivity and the GST will ease the bottleneck in road transportation, thereby reducing the turnaround time. However, collaboration among the various modes remains critical to realise the true potential on these investments. With the government's focus on bringing in efficiencies in the logistics sector, India is entering into a new era of logistics that will focus on collaboration instead of competition.
According to Shamsher Dewan, Vice President, Corporate Ratings, ICRA, “Despite limitations, the Indian logistics sector is in an attractive spot right now. From landmark tax reforms to dedicated infrastructure projects under implementation, the sector is expected to undergo significant developments over time. In ICRA’s view, the GST implementation, foreign capital investments and emergence of new business models would start showing its positive impact on the road logistics sector over the near-term, while the government’s focus on improving India’s modal mix through proposed investments in railways and seaways will have a long-term bearing on the overall logistics sector, catalysing a shift towards a more efficient modal mix.”