Low demand may stop freight rates from soaring

Thanks to a drop in freight demand, the recent four per cent hike in fuel prices by the Union Government may not lead to any increase in freight rates. The increase in fuel prices is most likely to be absorbed partly by the fleet operators and partly by the transporters.

Vineet Agarwal, executive director of Transport Corporation of India, told Business Standard that the timing of the hike by the Union government came at a time when freight demand was at its lowest.

"Freight rates are increased based on the supply demand mechanism and at this point in time there is a fall in demand. The increase in fuel prices will most likely be absorbed partially by fleet owners and partially by transporters," Agarwal said.

Giving a historical perspective, Agarwal pointed out that while in the last five years the diesel prices, which typically account for 50 per cent of the operating costs, had gone up by close to 121 per cent, freight rates over the same period of time had gone up only 19 per cent.

"The road freight index has in the last five years gone up from 103 to 123," he said, and pointed out that the 19 per cent increase in freight rates indicated a discount of more than 25 per cent over expected increases.

"These costs have not been passed on to the consumer purely because some of them were offset by lower finance costs, moving to higher tonnage vehicles, over loading and also fuel adulteration across the industry," he said.

"Overall, while freight volumes for the industry have gone up, the freight per tonne or yield has been falling and the severe competition from the unorganised sector has also taken its toll," he pointed out.