Getting to grips with logistics cost

As India focuses on reducing the cost, it is important to get the numbers right

In 2018, a logistics performance index prepared by the World Bank ranked India at 44. The top five were Germany, Sweden, Belgium, Austria and Japan. China held the 26th spot. It is around that time that serious discussions began in India about addressing the debilitating impact of logistics on its global competitiveness. This led to the announcement of a National Logistics Policy (NLP) in September 2022.

The NLP aims to reduce logistics cost through the implementation of a five-pronged strategy. One, the share of the railways is to be pushed up from the current 28 per cent to 40 per cent. Two, multi-modal logistics parks are to be set up. Three, special emphasis is to be given to inland water transportation, coastal shipping, and moving liquid bulk cargo via pipelines. Four, specific plans are to be drawn up for 15 industries that constitute the majority of bulk cargo movement. Five, digital integration is to be achieved for tracking and monitoring.

However, the key question revolves around the level of logistics cost at present, and to what extent the NLP seeks to reduce it.

Well, the NLP starts from the base assumption that India’s logistics cost stands at 13 per cent of gross domestic product (GDP), with a target to reduce it to 8 per cent by 2030. This 13 per cent is quite high when compared to economies such as South Korea and Singapore, where logistics costs are estimated to be 7-10 per cent. In an article in Business Line, Sanjib Pohit of the National Council of Applied Economic Research (NCAER) questioned the accuracy of this 13 per cent estimate. He posited that this figure from consulting firm Armstrong & Associates was arrived at using a model suited for developed economies. Professor Pohit argued that India’s current figure was already in single digits.

This point of view from one of India’s leading think-tanks led to a flutter in the logistics dovecote, and to the logical conclusion that India should build a model aligned with the characteristics of its own economy. And who better than the NCAER itself to undertake a base-line study to determine this cost? So, in mid-December 2023, NCAER came out with an interim white-paper titled: “Logistics Cost in India-Assessment and Long-term Framework.”

The NCAER study found that the logistics cost as a percentage of GDP has been a single-digit number since 2011-12, and advanced the argument that for India, “total logistics cost is less likely to exceed 8-9 per cent of GDP”. This preliminary finding does raise two fundamental issues.

One, does this mean that India already meets global benchmarks, and logistics costs were never really a competitive disadvantage? Clearly, the non-believers would exceed believers by a wide margin!

Two, the NLP had targeted to bring down logistics costs through a variety of interventions (see Infratalk, Business Standard, November 2, 2022) from the presumed 13 per cent to 8 per cent. Now with the NCAER saying that it is already at 8 per cent, what would be India’s fresh target? Is it plausible to argue that the target should be revised to match the 5-6 per cent for the US?

Well, there are a whole lot of inter-related issues that need to be examined before a final verdict is out and accepted. The first is the practice of expressing logistics cost as a percentage of GDP. It is not ideal for an agricultural and service-driven economy, as Poonam Munjal and Sanjib Pohit of NCAER point out. They also emphasise that an economy dependent predominantly on road transport is expected to have higher logistics costs. This perspective leads to the percentage of sale of goods as a better indicator than the percentage of GDP.

The second issue is that if India is to have its own  framework for measuring and tracking logistics cost then a far more in-depth and rigorous exercise needs to be undertaken by including a mass of real-time and Big Data, and in building consensus about this econometric model.

The third is that even one macroeconomic number expressed as a per cent of GDP or sales may not achieve much by way of targeted policy reforms. It may be better to have a set of industry-specific indicators to reflect the situation across various product groups or industries. It is this kind of disaggregated data that would be most useful.

Commenting on this subject, Bibek Debroy, chairman of the Economic Advisory Council to the Prime Minister, in a recent article observed that “while logistics performance may have improved over time, that’s not true of every state. Some have slipped”. Thus, there is also a case for disaggregating the data geographically.

This current debate on logistics costs comes at a time when seminal changes are being seen in the way goods are being transported worldwide. With global supply chains being the new normal, manufacturing is beginning to look like sophisticated integration of just-in-time components from all over. The value-weight ratio is on the rise. And technical advances, from drone deliveries to seamless multi-modalism, signal the immensity of changes still waiting to happen.

For India, this thrust on logistics is happening at a time when a large portion of the transportation backbone has been put in place — from greenfield expressways to dedicated freight corridors. The goods and services tax and e-way bill system have transformed the nature of transport documentation; as has on-line tracking of movements. Moreover, India’s development story is not about coastal zones, but embracing vast swathes of the hinterland as well, wherein the Gati Shakti platform seeks to build the necessary connectivity. With all this, the requirement of a new rigorous framework and architecture for capturing and tracking the nation’s logistics cost could not have come a day sooner.

The writer is an infrastructure expert. He is also the founder and managing trustee of The Infravision Foundation