Logistics makes the world go around

India has jumped six ranks to 38th position among 139 countries on the World Bank’s Logistics Performance Index for 2023, the same rank as Turkey, Saudi Arabia, and Portugal, which are much richer countries than India. This is a very positive development because it helps lower the cost of doing business in India. It will help India’s exports and make the country a more attractive destination for investment — especially, but not only, in the manufacturing sector. China is still way ahead at 19th position, Malaysia ranks 26th, and Thailand is just a little ahead at 34th. But India has beaten key ASEAN (Association of Southeast Asian Nations) competitors like Indonesia, Vietnam, and the Philippines, with whom we have a free trade agreement on this important ingredient of competitiveness.

Getting ahead on this World Bank Logistics Performance Index is much more meaningful than going up on the World Bank’s Ease of Doing Business Index, where India had jumped many positions over the past 10 years. But that index was badly flawed. It was based on judgements of “experts”, not on surveys of real businesses, and it also had a conceptual flaw. It was built on the idea that less regulation is always better but economic theory and common sense tell us that cannot be true. Weakening regulation is what led to the global financial crisis in 2008. The recent failures of banks such as Silicon Valley Bank, Signature, and First Republic are also linked to the weakening regulation of mid-size banks since 2019. Too much regulation is bad but so is too little — so any index built on the idea that less regulation is always better has an underlying design flaw. The World Bank stopped that index not because of these flaws but because it was alleged that China used its influence with the senior World Bank management to “game” the index. The index was very popular with the business community, especially because it did not address environmental or labour regulations. The World Bank is now planning to resurrect a better ease of doing business index. But let’s hope it addresses key design flaws in the previous index.

But those problems do not exist with the Logistics Index, which is built on six components: The efficiency of customs, the quality of trade and transport infrastructure, the ease of arranging competitively priced shipments, the quality and competence of logistics services, the ability to track consignments, and, lastly, timeliness. It measures a key component of the cost of doing business. India’s rank on the Logistics Performance Index has gone up and down and now up again. It was 47th in 2010, dropped to 54th by 2014, improved to 38th in 2016, fell to 44th in 2018, and has now gone back to 38th. These rankings are not always easily comparable over time as country numbers change. In addition to ranks come scores on a scale from 1 (low) to 5 (high). Singapore scored the highest in 2023 with 4.3 and Germany was on top in 2018 with 4.2. India’s score was 3.08 in 2012, had improved to 3.42 in 2016, dropped to 3.18 in 2018, and is now back to 3.4. India did well in 2016, and then slacked off and has now recovered on this index.

Going forward, India must not only find ways to keep its score but improve further on it. This is important because our competitors are all trying to improve. The Philippines, for example, jumped 17 ranks from 60th (with a score of 2.9) to 43rd in 2023 (with 3.3, just below India’s), and scores better than India on timeliness. Thailand is slightly ahead of India because of better scores on two components — customs, and trade and transport infrastructure. As India pours money into improving infrastructure, it must also focus on the efficiency of its customs system. India’s customs score improved from 2.70 in 2010 to 3.17 in 2016 but has since fallen to 3.0, something that needs attention. The country with the best customs efficiency in the world is Singapore and there may be an advantage in getting some technical assistance from the city-state to improve the efficiency of our customs service. Lee Kuan Yew, the first Prime Minister of Singapore, focused as much on improving customs and processes as on bettering physical infrastructure. An improvement in our score for customs efficiency will have huge benefits.

In addition to the components of logistics performance, we must also focus on the cost of fuel, electricity, and freight. Before the recent depreciation of the rupee, from around Rs 75 to the dollar to about Rs 82 to the dollar, diesel prices were much higher than in many East Asian countries. Even after the depreciation of the rupee, diesel prices remain 10 per cent higher than in China. Electricity prices are cheaper for consumers than for producers, in the case of whom they remain higher than those in all our competing nations. India’s rail system is also showing improvement but rail freight rates for goods, which are used to cross-subsidise passenger fares, also need a review. India’s rail freight, according to the CPCS (1) at 10.15 US cents per ton mile in 2021, was much higher than China’s 3.51 cents per ton mile or the US’s at 4.16 cents per ton mile, and even much of the EU, where it averages about 8 cents per ton mile. Even with the recent rupee depreciation of 10 per cent, that would still leave Indian rail freight rates among the highest in the world.
 

India is clearly on the move and the focus of the government to improve our logistics is bearing fruit, but this is a battle that must be fought continuously and smartly. “Logistics is not an expense, it’s an investment,” said business coach Michael Allosso. This is the kind of reforms that lay the foundations for sustained growth to becoming an advanced economy.

The writer is a senior visiting professor, Indian Council for Research on International Economic Relations, and distinguished visiting scholar, George Washington University

(1) International-Comparison-of-Railway-Freight-Rates-
(2) .pdf (railcan.ca)