New investments in Indian logistics sector

If India has to compete with other developing countries for foreign direct investment, it certainly has to invest in logistics infrastructure, writes Dr Rajiv Aserkar.

Economic development of a country is inevitably linked with its logistics infrastructure. There are ample examples of countries where economic prosperity has flowed in on the back of superior infrastructure. China is one such example, where billions of dollars were spent on building the infrastructure in anticipation of its membership of World Trade Organisation. China invested in world class ports, airports, road and rail network and the global investors did not hesitate in shifting their manufacturing activities to China. In comparison, India joined WTO in January 1995 and had a clear head start of six years over China. In these six years, India could have attracted a large chunk of foreign direct investment, because there was very little competition. In 1990s there was a lot of interest in the newly liberalised Indian market. The foreign investors made exploratory visits to India to assess the attractiveness of Indian market. These potential investors returned with a mixed feeling. Whereas they were convinced about the growth potential of Indian economy, attractiveness of a large 1 billion population and rising purchasing power of Indian middle class, they were concerned about prevailing business environment, high logistics cost and low quality of service in India. They realised that the barriers to foreign investment in India were high, government clearances were hard to get and the critical infrastructure needed for industrial survival and growth was missing. The result was that these investors postponed their investment decision in India to a future date. The newly launched 'Make in India' campaign will certainly address the problems related to bureaucratic hurdles, government clearances, issues related to technology transfer, taxation issues and create a more friendly business environment. But what about physical infrastructure? According to a Mckinsey report, inefficiencies in logistics infrastructure cost the Indian economy an extra $45 billion, about 4.3 percent of the GDP, every year. Table 1 shows the comparative standing of China and India in a survey conducted by Global Economic Forum (WEF) to rank various countries in terms of the quality of their infrastructure. It is obvious that if India has to compete with other developing countries for Foreign Direct Investment, it has to invest in logistics infrastructure. A good starting point for the identification of avenues for such investments would be referring to Logistics performance Index (LPI) published by World Bank every two years. The LPI is the weighted average of the country scores on the six key dimensions:

• Efficiency of the cargo clearance process, which includes speed, simplicity and predictability of formalities by border control agencies, including customs;
• Quality of trade and transport related infrastructure such as ports, airports, road, railroads, information technology required for physical movement of cargo;
• International shipments, which means how well the country is connected with rest of the world and is able to arrange competitively priced shipments;
• Logistics competence is the reflection of quality of services offered by transporters, warehouses, packaging services, logistics service providers and consultants.
• Tracking and tracing of the cargo;
• Handling & Storage

From the above data, it is clear that India has to improve in all the areas in which the World Bank measures the logistics performance in order to come up in LPI ranking. The above table also gives a direction to the areas, where the investment should be directed. In the 12th five year plan, Planning Commission has budgeted for Rs 4.1 trillion on infrastructure investment over the period 2012-2017. This investment, plus the investment from private companies and foreign investors should help India to improve its ports, airports, road and rail network. Specific areas, where foreign investment will be very valuable are Logistics Parks, Air Cargo Complex, Cold Chains, Automated Warehouses and Project Logistics.These investments will help India to improve its infrastructure index. Improvement in infrastructure will also improve efficiency in terms of deliveries and competitive costs. Timeliness and reduced costs will help India score higher in International Shipments index in LPI. Customs index in LPI can be improvedbringing transparency in customs procedure. This can help reduce customs clearance time and smooth flow of goods through the customs barrier. In order to improve logistics competence index, India needs to focus on training in logistics and supply chain area in order to create a pool of service oriented professionals. These logistics service providers will help speedy movement of cargo from origin to the destination. High quality Information Technology infrastructure facilitates tracking and tracing of the cargo in transit during transportation, warehousing and customs clearance procedure. RFID and Electronic Data Interchange technology are extensively used for improvement in tracking and tracing. Policy makers in India can in fact use Logistics Performance Index of World Bank as a template for prioritising their investment plans to make India a logistics super power.