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Why India Needed National Logistics Policy to Push it on High Growth Lane

Logistics is key to an efficient and effective supply chain for both domestic and global economies. Unlike China whose economy’s size was same as that of India in the eighties, India is unable to be a significant player in the global supply chain because of absence of competitive manufacturing which results from outdated manufacturing technologies and high cost. Another factor that adversely affects the economic viability of Indian products is abnormally high cost of logistics compared to other global economies. While the cost of logistics as percentage of GDP in countries like the US, Japan and China is about 7 to 8 percent, it is 14 percent in India.

The logistics sector in India involves 20 government agencies, 40 partner government agencies, 37 export promotion councils, 500 certifications and over 10,000 commodities. Market size of Indian logistics sector is approximately $160 billion and has been growing at a steady pace despite the pandemic. As per the Ministry of Commerce, the logistics sector provides about 22 million jobs. In addition to the above, the sector accounts for 200 shipping agencies, 36 logistics services, 129 Inland Container Depots, 166 Container Freight Stores and 50 Information Technology (IT) ecosystems. Despite the above numbers, the logistics sector in India is largely unorganised and operates on ad hoc basis incurring high costs in the entire supply chain. There are multiple reasons for this high cost of logistics in India.

The first reason for the high cost of logistics in the country is poor logistics infrastructure in the form of inadequate and underdeveloped highways, ports, inland waterways, air terminals, warehousing and cold chain. Although we have a very elaborate rail network, the reliability and efficiency of the railways to move cargo efficiently is suspect, thereby discouraging businesses to move goods by rail and they rely on the time-tested road transport. Some steps have been initiated by the government to create and upgrade the infrastructure, but a lot more needs to be done for India to become a competitive and developed economy.

The second cause for high cost is the faulty modal mix of transportation in the country. The cheapest mode of transporting mass goods such as foodgrain, cement or steel is by sea/waterways, followed by rail. Road transport is the costliest mode of mass transportation when compared to rail and waterways. Unfortunately, India moves 64 percent of goods by road, only 17 percent by rail and just about 7 percent by sea/ waterways despite being geographically peninsular in nature and having almost 7,500 km long coastline.

China moves more than two thirds of their goods by waterways and rail which are much cheaper means of transport, giving them added advantage of reduced overall cost. The Government of India has started the waterways projects which when effective can contribute substantially to cutting costs and pollution. Due to environmental factors and climate change, several Inland waterways lack well defined river course and depth of water to facilitate inland water transportation.

The third impediment is the need for clearances/permissions from multiple government ministries and departments and the related documentation. Delay due to such compliances results in cost overruns which make the business unviable. Absence of real time interface between various departments of the government due to inadequate use of technology and lack of real time visibility of various functions and processes breed inefficiency.

The fourth challenge is the high and volatile fuel cost as India is mainly import dependent. Fuel being the single largest input in the transportation sector, affects the cost immensely when the crude prices skyrocket due to any political or security crisis. Added to that is the fact that both Central and state governments rely heavily on tax revenue from petroleum products which also push up the cost of fuel.

The World Bank publishes a Logistics Performance Index (LPI) every two years which ranks countries based on factors stated above, besides some other inputs to indicate efficiency of logistics in that country. India was ranked more than 50th in the 2014 World Bank report and is now ranked at 35th position in the 2018 report. This improvement is the outcome of improved infrastructure and simplified rules and regulations during this period. Germany is at No 1 position in the World Bank LPI for 2018.

In keeping with infrastructure development, there is a need to infuse state of the art technology to integrate all stakeholders, systems and departments of the government. Development of infrastructure has been incremental over the years which picked up pace post economic liberalisation in 1991 when the infrastructure sector was opened to private sector participation. However, integration of various functions and processes towards ease of logistics received the desired impetus only during the last few years.

In order to address the above deficiencies in an institutionalised manner, the Government of India has introduced the National Logistics Policy (NLP). The government has clearly stated that the National Logistics Policy is not an overnight transformative move or legislation to improve efficiency of logistics in the country. It has been and will be a ‘work in progress’ to achieve globally competitive low cost of logistics in the country. National Logistics Policy is an enabling policy which has drawn attention to this urgent economic reform which when implemented will help the industry achieve efficiency to become globally competitive.

The NLP envisages integration of the digital system of various departments of the governments and other organisations with access to the stakeholders to give real-time visibility of all functions and processes. The NLP also has the provision for Unified Logistics Interface Platform (ULIP) which will facilitate multi-modal coordination resulting in efficiency and synergy. Like the ease of doing business, the NLP through various actions and enabling provisions aims to ensure Ease of Logistics (EOL).

The logistics will become more efficient using state-of-the-art technologies such as Artificial Intelligence (AI), Internet of Things (IOT), Sensor Integration, drones and robotics. Launching of this policy is the first step to reduce the cost of logistics to less than 10 percent of the GDP as stated by the Prime Minister during its launch and a lot more needs to be done in the future to make this policy a success.

Lt Gen Balbir Singh Sandhu (Retd) was head of Army Service Corps. He is a distinguished fellow at United Service Institution of India. His PhD thesis was ‘Peace, Security and Economic Development of India’s Northeast’. The views expressed in this article are those of the author and do not represent the stand of this publication.

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