Small but logical step

Logistics play a key role in the growth of a country's economy. It's no different for India. But logistics, which in this context can broadly be defined as the business of transporting goods to customers, is not in a good shape in India. There are myriad reasons. Goods transport sector in India is dominated by unorganised players. Road infrastructure is dismal to say the least.

Traffic is chaotic, reducing average speed. Air and rail connectivity is not so great and the less we talk about waterways the better. Though the Narendra Modi government initiated Bharatmala project for improving road infrastructure and Sagarmala to enhance infrastructure for waterways and along the country's coastal corridors, India is still far away from developed and some of the developing countries when it comes to logistics and the costs involved in it.

Guestimates suggest that the total logistics bill in India accounts for 13 per cent of GDP. That is fairly high from nine per cent of its GDP that the US, the world's largest economy, spends on the movement of goods across that country. And the percentage is far lower in Germany where logistics costs are just eight per cent.

Nonetheless, the main casualty of the high logistics costs is exports. It's but natural that high logistics costs will jack up overall production costs, thus turning India-made products uncompetitive in global markets. That doesn't mean that there is no adverse impact on the domestic market. Higher transportation costs reduce the competitiveness of our products in the domestic market too, driving customers towards imported goods.

In this context, there is a dire need to reduce logistics cost to spur exports. If that happens, there will valuable dividends as well. The country will not only save billions in transport costs, but will also witness significant spurt in sales of local goods here. A study by industry lobby group Assocham and Resurgent India, a financial advisory firm, carried out in 2016 revealed that India could save up to $50 billion annually (Rs 3.2 lakh crore) if it brought down its logistics bill to nine per cent of GDP, the same as in the US.

Many industry groups claimed before the advent of GST that the new indirect tax regime would bring down the logistics costs by at least 15 per cent. Unfortunately, it did not happen so far. However, the central government's decision this Monday to accord infrastructure status to logistics is likely to come as blessing for the sector albeit in a small way. This move will enable companies in the space to borrow more funds at lower interest rates.

The companies will also have access to cheaper external commercial borrowings (ECBs). Industry feels the cost of funds for logistics companies will now come down by at least 50 basis points i.e., 0.5 per cent. But only large companies will benefit.

Fuel costs account for a major chunk of operational costs in the sector. Also,fuel prices are the highest in India even when crude prices are low. Without eliminating this anomaly by reducing taxes on petrol and diesel, there is no way logistics will get better and cheaper.