Industrial Sector Updates – Industrial Policy, Ease of Doing Business, etc.

[op-ed snap] Debunking India’s logistics myths


Mains Paper 3: Economy | Infrastructure: Energy, Ports, Roads, Airports, Railways etc.

From UPSC perspective, the following things are important:

Prelims level: Sagarmala project, Logistics Performance Index

Mains level: Various issues associated with logistics sector


Logistics an important sector

  1. Logistics—moving goods and connecting producers with consumers—is a critical part of the modern economy
  2. In India, this sector comprises 14% of gross domestic product (GDP), much higher than in the US or Europe, where it is 8-9%

Initiatives for logistics sector by government

  1. Setting up a division in the Union ministry of commerce
  2. Introducing a national goods and services tax
  3. Giving infrastructure status to logistics

Myths associated with logistics sector

  1. The first myth is that direct costs are the key reason for India’s high-priced logistics
  • The reality is that indirect costs are the real culprit
  • Direct logistics costs are those incurred in the process of moving goods, such as transportation, warehousing, and value-added services
  • Indirect (or “hidden”) costs include inventory carrying costs, theft, damages, and losses in transit
  • These account for 40% of India’s total logistics costs
  • Indirect costs are caused by inefficiencies in the supply chain

2. The second myth is that increasing the use of rail can significantly reduce the cost of logistics in India

  • The reality is that given the prevalence of short-haul movement of goods in India, there is limited room for growth
  • India’s railroads carry no more than a third of the country’s freight
  • The great majority of the country’s cargo routes (about 450 out of 500) are less than 800km long
  • The rule of thumb is that rail makes economic sense only on routes longer than that

3. The third myth is that to cut logistics costs, the focus should be on major commodities, such as coal and steel

  • The reality is that streamlining the agricultural value chain matters more
  • Coal and steel account for about 12-16% of India’s total logistics costs while for agriculture this is about 25%
  • Inefficiencies in the agricultural supply chain, such as improper transportation and storage, are rife, leading to wasted food and quality control problems

4. The fourth myth is that the major issue with road transport is the poor quality of roads and trucks

  • The reality is that the quality—and number—of Indian drivers is more important
  • Roads carry more than 60% of India’s cargo and account for the majority of the total logistics costs
  • Many of India’s roads and trucks could be in better condition, of course, but benchmarking studies comparing India to other developing economies have found that the unit economics are not too bad
  • It is the scarcity of skilled drivers that is the bigger problem
  • India’s ministry of road, transport and shipping estimates suggest a 22% shortage in the number of commercial drivers

Possible solutions

  1. An initiative that could help is the government’s Rs8 trillion Sagarmala project, launched in 2015
  2. It goes in an entirely different direction, by investing in ports and coastal areas, with the goal of increasing the use of domestic shipping in moving goods
  3. If Sagarmala works as intended, we believe it could lower the cost of logistics noticeably

India’s current status

  1. The World Bank ranked it 35th (out of 160 countries) in its most recent Logistics Performance Index, which concentrates on trade-related factors, up from 54 in 2014
  2. India was the top performer among lower-middle-income countries
  3. Logistics firms are beginning to address skill development issue by opening driver training schools, boosting wages and benefits, investing in their drivers’ skills, using onboard sensors to monitor driving patterns, and then giving real-time feedback

Way forward

  1. In order to find the right solutions, it’s important to establish what the real problems are
  2. Doing better requires looking at the logistics system from beginning to end, just as companies experience it, and then strengthening each link

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