Logistics is an extremely crucial pillar of India’s economic development. The present logistics infrastructure is insufficient, ill-equipped and ill-designed to support the expected high growth rates of the economy over the next decade or so.
The Logistics Performance Index (LPI), an interactive benchmarking tool created by the World Bank, helps countries identify the challenges and opportunities they face in their performance on trade logistics and what they can do to improve their performance. As per the aggregated LPI for the years 2012-2018, India ranked 42nd out of 167 countries. Despite the relatively low rank, India has a certain advantage because most of its infrastructure network capacity is in the process of being constructed (i.e., it does not have the burden of revamping existing infrastructure). In fact, the logistics sector has witnessed a robust growth in the recent years which has steadied post Covid-19. This growth has been driven by the rising retail and manufacturing ecosystem in the country. Touted as the country’s ‘sunshine industry’, the Indian logistics sector is readying itself to move from its present unorganized, fragmented business model to an organized, regulated structure -and there’s a lot happening to make this possible.
The logistics industry, has praised the launch of the National Logistics Policy (NLP) on September 17, 2022. The much-awaited policy is comprehensive and puts special emphasis on streamlining processes for seamless coordination, and reduction in overall logistics cost, besides incentivising employment generation and skilling of the workforce.
The National Logistics Policy lists out the following three key targets:
India’ logistics costs are currently at 13-14 percent of the GDP, which is much higher than the average of 8-10 percent cost incurred by most developed economies. The high indirect costs due to unpredictable supply chains and poor first and last mile connectivity add to the logistics cost. Presently, the sector is also highly fragmented and unorganized.
India has a complex regulatory environment, with multiple and overlapping regulations governed by various stakeholders. For example, there are over 20 government agencies; 37 export promotion councils; 500 certifications; 200 shipping agencies; 36 logistics services; and 129 inland container depots and 168 container freight stations. Additionally, there is also a low level of technology adoption among various stakeholders.
The policy has the following key deliverables to be achieved through the Comprehensive Logistics Action Plan (CLAP). They are:
The government of India is investing in the creation of dedicated rail freight corridors that would allow the freight trains to run to exclusive tracks. The dedicated freight corridors will eventually lower the cost of moving cargo by making use of electricity-powered trains with greater capacity. The electricity-powered locomotives will also substantially reduce the environmental impact of the logistics sector. The government of India is taking several important steps to increase the share of rail freight.
To begin with, they have increased the length of the freight trains raised axle loads, and improved the speed of the locomotives. This is helping to enhance the existing rail freight network. Moreover, the massive investment in the creation of the dedicated freight corridor is the most important step towards increasing the efficiency of this sector. Additionally, modal integration across, rail, road, and sea freight and the investments for better train-port-road integration are also important factors that are reinforcing the Indian rail freight industry. Lastly, the robust private sector investments and the government-private partnership for project financing are being seen as significant steps in this regard.
Some of the world’s largest logistics players and private equity fund managers are foraying into Indian industrial and logistics spaces in the country which has a total stock of about 350 million square feet. Most players are looking to invest anywhere between $500 million and $1 billion in new ventures in the next couple of years. The highly fragmented nature of the logistics market is another key determinant of private equity interest. Unlike heavily consolidated sectors dominated by a few established players, logistics comprises a dynamic mix of traditional organisations with sprawling operations and disruptive, high-growth up-and-comers looking to transform the industry.
For private equity, fragmentation opens up vast possibilities. It provides a ready supply of right-sized target companies for a classic ‘buy-and-build’ strategy, whereby the PE-backed platform rolls up smaller players. Similarly, the intrinsically global nature of the industry opens up an almost exponentially wider range of acquisition and organic growth opportunities. The digitalisation of the logistics industry creates an additional incentive on both sides of a buyout. On the private equity fund side, their underlying investors are expressing a growing preference for tech-enabled companies and future-proof portfolios. Having previously been viewed as an analogue sector, logistics has quickly become highly innovative.
As per a report published by McKinsey & Company ‘Transforming the nation’s logistics infrastructure’, there are four main changes that are required to revamp India’s development in the sector:
All in all, the Government’s recent actions and policies promise to boost the sector’s development. The philosophy of integration across movement and storage of goods being proposed by the Government invites optimism from an overall efficiency point of view. Further, by focusing on digital technology, the Government’s aim to upgrade the existing system will compliment such proposed integration and lead to faster, better communication with potentially fewer errors. With this, India hopes to reduce the cost of logistics from 13% and move up to position 25 on the logistics performance index.
This article was originally published in The Times of India on 6 February 2023 Co-written by: Deepto Roy, Partner; Pranav Nanda, Principal Associate. Click here for original article
Contributed by: Deepto Roy, Partner; Pranav Nanda, Principal Associate
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