India's logistics sector to clock double-digit growth, but challenges galore

India currently spends 13-14 per cent of its GDP on logistics costs

INDIA-TAX/LOGISTICS Representational image

The logistics sector in India is expected to grow in double digits and reach $350 billion by 2025. The value of the Indian logistics sector was $250 billion in 2021. Growing at an impressive CAGR of 10-12 per cent, it may reach $350 billion by 2025.

The sector is a very significant source of employment generation, employing 22 million people in 2022, with the number of employees expected to grow by five per cent over the next five years. This was revealed in a concept paper by GS1 India, a standards organisation under the aegis of the Ministry of Commerce and Industry, Government of India, in collaboration with apex trade bodies and key government agencies.

The concept paper also mentions the critical challenges faced by the Indian logistics sector and the potential for improvement and growth. As per the paper India currently spends 13-14 per cent of its GDP on logistics costs, compared to the global average of around eight per cent of GDP. This has created a competitiveness gap of $180 billion in 2020 that will widen to $500 billion by 2030. India ranked 42 on the Logistics Performance Index (LPI) for 2018, far behind its international peers such as Germany, the UK, Japan, Austria, China and the United States.

The paper points out that despite the growth and potential there are multiple challenges that confront the logistics sector in the country. Logistics costs in India account for 14 per cent of GDP, with 60 per cent direct costs and 40 per cent indirect costs, compared to an average of 10 per cent indirect costs in developed countries. Logistics firms in India also face challenges due to a lack of visibility among trading partners and consumers, leading to supply disruptions and delays in the value chain. Besides this India is only in the early stages of process automation, lagging behind global practices that provide transparency and real-time data in supply chain activities.

The paper also points out that approximately 60 per cent of cargo is transported via road in India, while rail and water transportation account for a smaller share. This leads to high logistics costs and reduces competitiveness in exports. The Indian logistics segment also has to deal with poor physical infrastructure, including modal and terminal transport, national highways, freight train speeds, and port facilities and in turn hinders the growth of the logistics sector in India. The sector is also dominated by unorganised companies, leading to fragmentation, low margins, limited investments, and challenges in streamlining supply networks. At the same time the retail market is also largely unorganized, affecting the complexity of the supply chain.

However, interestingly as per the Logistics Ease Across Different States (LEADS ) 2022 survey, states, such as Telangana, Punjab, Haryana, and Madhya Pradesh etc., have performed excellently and could act as role models for other states to imbibe best practices and logistical development models. In terms of the quality of infrastructure, the states of Punjab, Uttar Pradesh, Haryana, and Telangana led the scoreboard. Madhya Pradesh has the largest warehousing capacity in the country while Gujarat and Karnataka lead in the road infrastructure.

Off late the government of India has launched the National Logistics Policy to create a trusted, reliable, cost-effective, resilient, and technologically equipped logistics ecosystem in the country for rapid growth and bridging the competition gap with global competitors which is aimed at reducing logistics costs: The policy aims to reduce logistics costs from 14-18 percent of GDP to eight percent by 2030, aligning with global best practices. As per the NLP the aim is to be the among the top 25 countries in the Logistics Performance Index (LPI) by 2030. The policy also aims to create a data-driven decision-support mechanism for an efficient logistics ecosystem.

GSI recommends that the aim should be to eliminate data inaccuracies and inconsistencies in logistics operations, reduce logistics costs by enabling interoperability, simplifying processes, providing unique identification, harmonising information, reducing duplicity, and standardising information exchange besides implementing the National Logistics Policy effectively.

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