T C A Srinivasa-Raghavan: The logic of logistics

OKONOMOS

"Freight cost as a percentage of import value in developed countries averages 2.9 per cent. In developing countries it is around 6 per cent."

Most economists, if you ask them about it, will agree that transport is crucial to trade "" no transport, no trade. Yet ask them about logistics and they will look at you blankly. Some may even snigger a bit.

It is not easy to define logistics because it is like an elephant: you know it when you see it but can't define it. But the idea is not hard to grasp: It consists, at its core, of efficient supply management, in which transport plays the central role.

The reason for this ignorance and neglect of logistics is that India is still behind the rest of the world in the way it thinks about how to conduct business. It is also a testimony to the way we have liberalised since 1991 "" financial sector first "" that more people know about derivatives than about logistics.

To cite just one extreme example of this, the finance ministry was forward-looking enough to set up a 'high-powered' committee to suggest ways of making Mumbai an even bigger international financial centre. But the ministry of surface transport "" please note that because of political reasons, we do not have a unified ministry of transport "" has not, to the best of my knowledge, thought it fit to adopt a similar approach to logistics.

It should, because as a recent paper* by Subrata Mitra of the Indian Institute of Management, Calcutta points out, the industry earns a global revenue of $300 billion. Given the size of its economy, the US generates the maximum revenue, around 60 per cent.

Mitra says that the "market in India is the least developed and highly fragmented. However, there is an immense potential for a growth of about 20 per cent per annum."

The reason for focusing on logistics is simple. At present logistics costs account for around 13 per cent of GDP. In the US, they cost around 9 per cent. "The savings would be around $20 billion resulting in a potential 4 per cent cut in prices of Indian goods globally making them more competitive."

The point may please be noted: exactly the same approach was used by the finance ministry's high-powered committee on making Mumbai a centre of international finance. Perhaps it is time for the ministry of surface transport to start pushing logistics as a core agenda as well.

For several years now, the Asian Institute of Transport Development (AITD), where I am a consultant, has been pointing out the need for India to focus on logistics. Towards this end, it is organising an international seminar on the subject in October so that the idea of logistics can become a part of the thinking on transport policy.

The key, says its chairman K L Thapar in a draft background paper, lies in recognising that size and scale matter. "The central drivers of the logistics revolution are massive increases in the scale of operations arising from the increases in ship sizes and port capacities, technology-driven output and productivity, facilities for mega-transshipments at ports, and the scaling up of land infrastructure via mergers and acquisitions." As a result, there has been an integration of different modes of transport, leading to a seamless system of the movement of goods.

The challenge for India , says the paper, is "that whereas freight cost as a percentage of import value in developed countries averages 2.9 per cent, in developing countries it is around 6 per cent. The costs components are: vessel/voyage (43 per cent), terminal/cargo handling (27 per cent), landside (19 per cent), and overheads (10 per cent)."

*A Survey of the Third-Party Logistics (3PL) Service Providers in India, IIM-C, http://www.iimcal.ac.in/res/upd/WPS562.pdf