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Business Banking

Your Partner In Growth

Logistics and infrastructure


Exploring opportunities
Contents

1. Executive summary 3

2. Macro-economic overview 6
2.1. Indian economy - Impact of global economic decline 6
2.2. The way ahead for Indian economy 10
2.3. Interlinking sustainable economic growth with logistics 10
2.4. The logistics cost factor 12

3. Logistics industry overview 13


3.1. Evolution of the global logistics industry 13
3.2. Opportunity indicators for global logistics sector 14
3.3. The Indian logistics sector 16
3.4. Significance of SMEs in the Indian logistics industry 23

4. SMEs in logistics: Succeeding in the market place 24


4.1. Competitiveness of SMEs in logistics 24
4.2. Assessment of challenges – internal & external 31
4.3. S-W-O-T Analysis 31

5. Transport infrastructure 33
5.1. Transport infrastructure performance 33
5.2. Railways 34
5.3. Roads 36
5.4. Ports 38
5.5. Airports 41
5.6. Infrastructure finance 44
5.7. The PPP approach 45

6. Conclusions 46

Abbreviations 48

Bibliography 49
1. Executive summary

Macro-economic outlook As the logistics services industry evolves, competitors are


Contrary to the much talked about theory of moving away from asset-based commoditized services
‘decoupling hypothesis’ which held that emerging to more strategic, information-based approaches.
economies will remain relatively unaffected by the Customers are demanding a “single point of contact”
downturn due to their substantial foreign exchange for all logistics services. In one of the global logistics
reserves, improved policy framework, etc emerging study conducted by Deloitte, a set of attributes was
economies too have been hit by the crisis and India is no developed to identify high opportunity industries
exception. However the Indian economy has fared much with diverse but complementary product flows for
better than most of its Asian peers in the face of the the logistics outsourcing industry. The attributes were
global economic recession. The real GDP grew by 6.7 formulated based on the requirements of the various
per cent in 2008/09, and expects a revival in the latter aspects of supply chain planning and implementation
part of 2009. Although domestic demand, the mainstay including design, implementation and management of
of the economy, has held up relatively well, there are logistics services. Some of the attributes of industries
signs that the worst might not be over yet . researched that would offer the highest opportunity /
best fit for logistics service provider include -.
History has shown that export-led growth is a crucial
component of sustainable economic growth. There • Large logistics spend
are many enablers of export oriented economic • Relatively high value products
growth including facilitating regulatory environment, • Manage across multiple modes
establishing export oriented zones like SEZs, elimination • Manage complex, time sensitive supply chains
of administrative barriers to FDI in export-oriented • Diverse supply chain footprints including their own
sectors etc. However the most important enabler is the operations, suppliers and customers
improvement in transportation infrastructure (mainly • Maturity in outsourcing cycle (currently managing
ports, roads, airports and railways), telecommunications 3PLs)
and power. Government incentives aimed at promoting • Decentralized management of logistics
economic growth can make areas such as infrastructure • Complementary to current base of 4PL business
i.e., development of Greenfield ports, airports, road, • High cube and high weight products
and rail logistics attractive for private investment. This
helps capacity augmentation and thereby encourages Competitiveness of SMEs in logistics
industrial production. In addition, logistics cost is an The contribution of SMEs to the nation’s economic
important factor that affects the competitiveness of growth is by no means small. As globalization and
nations as well as firms. The logistics cost is considerably technological change reduce the importance of
high in India (around 13-14 per cent of GDP ) than economies of scale in many activities, the potential
developed world regions like U.S (9.5 per cent) & Europe contribution of smaller firms is enhanced and logistics
(7.15 per cent). The comparatively high logistics cost SMEs are no exception. Today, despite facing regional,
can be attributed to factors such as a complicated tax geographical and legislative diversity, the Indian logistics
regime, fragmented market structure and inadequate SMEs reverberate sound local dynamics, assurance of
infrastructure. a personal service and the emergence of a new genre
of integrated solution providers. Since the Small &
Logistics industry overview Medium Enterprises constitute a significant percentage
The reduction in the logistics cost can be brought about of the logistics service providers, it would not be
by improving the national logistics infrastructure to inappropriate to mention that these SMEs would be
facilitate smooth transfer of materials and information. acting as the catalyst in reducing the national logistics
Simultaneously, at the micro level, the logistics service cost component.
providers need to infuse better management practices,
employ technology that facilitates its logistics process to
reduce its service cost.

3
Deloitte’s survey of Small & Medium logistics players from large foreign players and price sensitive nature
aimed at bringing to the fore, developments in the of Indian markets. There is yet another impediment,
Indian logistics space and more importantly the broad although short term, i.e., the impact of slowdown
level challenges that the industry is currently facing, in terms of decline in international trade. This can
particularly from the perspective of a Logistics Service be curtailed by concentrating on domestic markets,
Provider (LSP). The survey covered players across a which are still quite promising. On the external front,
wide spectrum of logistics segments such as freight infrastructure and regulatory bottlenecks are the prime
forwarding, shipping, customs booking, container cause of transportation delays and cost overruns, which
freight stations, warehousing, and multi-modal consequently hamper the quality of logistics services.
transportation & thus aimed at offering them a platform
to share their varied concerns. Transportation infrastructure outlook
The 11th five year plan Approach Paper calls for the
The analysis of industry’s internal factors suggests that investment to increase from a current level of 4.6 per
moving to higher value added services is perceived as cent of GDP, to between 7 & 8 per cent. The Capsule
the biggest growth opportunity by the Indian LSPs. Report on Infrastructure sector performance by Ministry
Besides, in a situation like today’s, optimizing operations of Statistics and Program Implementation, the year on
is viewed as the best means of surviving in business and year rate of growth in cargo traffic has considerably
competing effectively. In a way, this would also assist declined in FY 2008-09. The freight loading for Indian
the individual players in accumulating sufficient profits railways for 2008-09 of 833 million tonne did not meet
to be ploughed back in business, as a means to tide over the target of 850 million tonnes. The Railway Ministry
the problem of limited access to affordable credit. The has outlined many measures to generate revenues
trend of consolidations by way of mergers and forging from non-traditional sources to bolster the railways’
alliances with other players is fast picking up in the balance sheet. The Railways are also working out the
logistics community and would address the fragmented details of a premium service for movement of containers
nature of industry. Given these opportunity areas, a with assured transit periods for time-sensitive cargo.
focused training approach and extensive implementation Permission has also been provided in the recent budget
of advanced technologies could boost the international to container train operators to access private sidings
competitiveness of Indian LSPs. to help attract piecemeal traffic that are at present not
being carried by railways. Further, the railways is also
Other logistics cost inflators are variable vessel expected to unlock its land resources by holding an
charter costs, fluctuating fuel prices, exchange rates, auction for private real estate developers to build malls,
non-availability of return loads and high haulage rates. cineplexes and shopping arcades.
Further, the LSPs are typically resorting to initiatives
like negotiating and renegotiating contracts, load
optimization, efficient route scheduling, working capital
management and inventory cost control among others,
to overcome the burgeoning logistics cost. While
a likely boom in construction and pharmaceuticals
spell opportunities for the logistics sector in terms
of increased potential of multi-modal movement of
raw material & manufactured products, progressive
reforms such as introduction of a singular Goods
and Service Tax (GST) and the Government’s push to
infrastructure expansion are equally encouraging. On
the other hand, major threat is posed by competition

4
The major ports in the country handled 530.35 million by government or by a private partner, definitely helps
tonnes of cargo during 2008 – 2009, which was 7.9 in economic stimulus. Accordingly the government
per cent lower than the target set for the period and plans to invest around Rs 1,00,000 crore to build about
around 2.1 per cent more than that the traffic of 519.31 12,000 kms of roads for the F.Y 2009-10 mainly through
million tonnes for the previous year. There has been a the toll-based model, with options to bring in foreign
drastic decline in augmented capacities at major ports investors. Infrastructure projects being capital intensive,
during the last four years. In addition, lack of proper with long gestation periods; the Financial Institutes (FIs)
facilities, deeper drafts, good connectivity and necessary and the banks need to create new structures to facilitate
equipment / technology has contributed to high logistics the funding. New ways of structuring like take-out
costs. On the positive side, with the Government financing, roll over financing, put-call options, hedging
encouraging private participation in port development, / swapping of exchange / interest rate risks etc are also
non-major ports have begun contributing significantly being offered for funding of long gestation projects.
to the economy. The new Government’s ambitious The user’s willingness to pay for the services availed
agenda to award 6 concessions for ports and initiate for affects the cash flow. The strength and experience of
20 others through PPP totaling to more than Rs. 3300 the promoters, concession framework, tax benefits to
crore, within a span of 3 months, is being regarded the project, inputs / off-take arrangements add to the
as a welcome move. While there are a lot of new bankability of the project.
avenues in aerospace services in the coming decades,
the constraints associated need to be addressed to Public Private Partnership (PPP) offers a distinct possibility
enable the smooth growth of the sector. Some of the for increasing total investments by using a limited
issues faced by the sector include mounting losses of amount of public resources to leverage a much larger
the airlines, volatile aviation fuel prices, congestion at amount of private investment. Given the bottlenecks
airports, shortage of qualified technical manpower, and inefficiencies often encountered in public
upgradation of security, land acquisition, high taxation, infrastructural investment, such PPPs could also increase
high airport charges etc. Indian aviation space economic efficiency and lower the capital requirement,
offers promising opportunities in the areas of airport provided that regulatory mechanisms are adequate.
infrastructure, airport and ground support equipment,
MRO facilities, ground handling services, trained Conclusions
manpower, air cargo along with tapping the potential Globalization, consolidation, technology advancements
stream of non aeronautical revenues. and outsourcing have only led to growth in the logistics
services market and this industry will continue to evolve
It has been established that spending in road sector has in the coming years. Firms can enhance their market
a multiplier effect in terms of job creation and increase competitiveness by reducing their logistics costs, thus
in per capita income. Hence any spending, whether lowering the total costs of goods and services. Any
impetus to improve the competitiveness of the firms
at the national platform would enable the nation to
register a dynamic economic performance in a global
environment. India has got a huge opportunity of
reducing its national logistics cost by studying and
benefiting from other success stories. This would include
upgrading the macro logistics infrastructure to world
class standards and by providing a facilitative role to
the SME players in the logistics sector to improve their
service level competitiveness. The effect of the referred
improvement would substantially provide a ripple
effect in the larger canvas of the country’s logistics
development thereby acting as a catalyst in reducing
the national logistics cost.

5
2. Macro-economic overview

2.1 Indian economy - Impact of global economic as against US $ 251.7 billion in 2007-08, registering
decline a growth of 14.3 per cent in dollar terms. It is
Many investors living today have never really had to being increasingly felt that unless we take some
weather really tough financial times. It is difficult to fundamental steps to diversify India’s export basket,
meet someone who was old enough during the Great most fiscal incentives may only benefit the profitability
Depression to recall how tough that was, especially on of the few exporters in the short term and not give
investors. Although there have been recessions since, a big thrust to the overall export performance of the
none has been of such a disturbing magnitude as the country.
current crisis. The current crisis is unique not only in its
India’s EXIM trade trends in billion US $
severity and its projected length, but in how far-reaching
its effects will be felt worldwide. Contrary to the much $ bn
talked about theory of ‘decoupling hypothesis’ which
held that emerging economies will remain relatively 300

unaffected by the downturn due to their substantial


foreign exchange reserves, improved policy framework, 250

and robust corporate balance sheets, emerging


economies too have been hit by the crisis and India is no 180

exception.
120

The extent to which Indian economy is affected can be


60
assessed by gauging the magnitude of changes in the
following key parameters:
0
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
• Trade Deficit: As the global economy shrank, so
did the growth in India’s external trade. The dismal Export Imports
industrial growth was partly caused by a weak
external demand. Further, a flare up in petroleum Source : Directorate General of Foreign Trade

prices in 2008 led to a sharp rise in import bill,


thereby adding to the trade deficit. India’s cumulative
value of exports for the period 2008-09 was US $
168.7 billion as against US $ 163.1 billion in 2007-08,
thereby registering a growth of 3.4 per cent in dollar
terms. On the other hand, the country’s cumulative
value of imports for 2008-09 was US $ 287.8 billion

A flare up in petroleum prices in 2008 led to


a sharp rise in import bill, thereby adding to
the amount of net imports

6
• Fiscal deficit: Fiscal deficit is an economic A number of social sector projects have been
phenomenon, where the Government’s total announced which, while benefiting employment
expenditure surpasses the total receipts (excluding creation and infrastructure development, will further
borrowing). It signals the government about the worsen the state of the fiscal balances. Furthermore,
total borrowing requirements from all sources. economists are of the view that the centre’s gross
India’s combined fiscal deficit of the Centre and the fiscal deficit in 2009-10 is likely to over-shoot the
states at close to 9.5 per cent of GDP in 2008-09 budgeted estimate of 5.5 per cent on account of an
is among the highest in the world. It has risen increase in expenditure and slow pace of increase
by almost 4 per cent points in a span of just one in tax revenue. According to some policy makers,
year (i.e., 2008-09 vis-à-vis 2007-08). The change following an aggressive disinvestment policy can help
in economic environment between 2007-08 and the Government mobilize enough proceeds to contain
2008-09 and corresponding fiscal stimulus packages the country’s fiscal deficit.
by the Government during this period to deal with
the economic slowdown has contributed to widening • Industrial Production: Close on the heels of global
of this deficit. To add to this, the Finance Minister, as cues, India’s industrial production rose by 2.6 per
expected, has announced a budget keeping the “Aam cent in 2008-09, down from 8.5 per cent in 2007-08.
Aadmi” in mind. It fell by 0.75 per cent year on year in March 2009.
Manufacturing output also dropped by 1.4per cent
Combined fiscal deficit (as a % of GDP) year on year to Rs.1.25 trillion in January-March 2009,
after rising by just 0.9 per cent in the fourth quarter
10%
of 2008. In contrast, the month of April witnessed
8%
a rise in industrial production by 1.4 per cent from
a year earlier. This happened for the first time after
6% three consecutive declines over the trailing four
months. The corresponding manufacturing output for
4% April also recorded a rise of 0.7 per cent from a year
earlier. This upside can be attributed to improvement
2% in domestic demand. However, some economists
relate this to election spending by way of increased
0% construction and electricity production over recent
2005-06 2006-07 2007-08 2008-09 months. If this is true, then the pick-up in growth may
be just a temporary phenomenon.
Source : Ministry of Finance, GOI

India’s combined fiscal deficit of the Centre


and the states at close to 10 per cent of GDP
in 2008-09 is among the highest in the world

7
• Inflation: Consumer Price Index (CPI) - based Notwithstanding the earlier, the Indian economy has
inflation tracks the year-on-year rise in prices paid fared much better than most of its Asian peers in the
by consumers to retailers. Typically, high liquidity face of the global economic recession.
injection by the RBI to tackle the effects of global
turmoil, rising food prices, and the increase in oil Percentage Y-o-Y GDP change

and commodity prices have contributed to a high


CPI-based inflation. Vietnam

Thailand
Consumer price inflation (average %)

Malaysia
10

Indonesia
8
India

6 China

Singapore

4
Korea

Hong Kong
2

Japan

2004 2005 2006 2007 2008 2009 2010 -10 -5 0 5 10

World Asia (excl Japan) India 2010 2009

Source : Economist Intelligence Unit Estimates Source : IMF, WEO database

Consumer price inflation only marginally slowed It grew more than expected in the quarter ended March
and stood at 9.6 per cent year on year in February. 2009, boosting the confidence of both the corporate
According to recent data, it is now ruling around 8 per sector and the newly formed government. This reiterates
cent. Although this is expected to average around 6 the belief that the Indian growth story remains and is
per cent in 2009 and 4.7 per cent in 2010, it will be still by & large domestic driven. A spending spree by
significantly above the Asian & world averages. the government and robust growth in agriculture and
services industries helped the economy grow 5.8 per
The slowdown in India’s economy is not only due to cent year-on-year in the quarter ended March 2009.
the impact of the global recession, but also the bursting The real GDP grew by 6.7 per cent in 2008/09, and
of a real estate bubble following an unprecedented expects a revival in the latter part of 2009.
economic boom between 2003/04 and 2007/08.

8
Real GDP growth (% change)

10

-2

-6

2004 2005 2006 2007 2008 2009 2010

World Asia (excl Japan) India

Source : Economist Intelligence Unit Estimates

Quarterly estimates of GDP for 2008-09 (at 1999-2000 prices) % chg

Industry Q1 Q2 Q3 Q4

Agriculture 3.0 2.7 -0.8 2.7

Mining & quarrying 4.6 3.7 4.9 1.6

Manufacturing 5.5 5.1 0.9 1.4

Electricity 2.7 3.8 3.5 3.6

Construction 8.4 9.6 4.2 6.8

Trade, transport, comm. 13.0 12.1 5.9 6.3

Finance, insurance 6.9 6.4 8.3 9.5

Community 8.2 9.0 22.5 12.5

GDP at factor cost 7.8 7.7 5.8 5.8

Source : Ministry of Finance, GoI

The real GDP grew by 6.7 per cent in 2008/09,


and expects a revival in the latter part of 2009

9
2.2 The way ahead for the Indian economy The government should also induce some of the
India’s relatively less dependence on merchandise better-performing PSUs, particularly those engaged in
exports, its smooth functioning financial system, and infrastructure, such as power, transport, construction,
comfortable forex reserves are believed to aid swift etc., to expand and speed up their investment
recovery from the slowdown. Although domestic programmes. Finding resources for infrastructure
demand, the mainstay of the economy, has held up development and speeding up investment in this sector
relatively well, there are signs that the worst might not should receive top priority, for, as the World Bank has
be over yet. Forecasts by the Organization for Economic observed, infrastructure is a key factor in improving the
Co-operation and Development (OECD), the Asian lifestyles of the masses and addressing the pressing issue
Development Bank (ADB) and the Economist Intelligence of poverty.
Unit for the current year are markedly more pessimistic
than the government’s. The OECD projects a further 2.3 Interlinking sustainable economic growth
deceleration in 2009 as a whole, to 5.9 per cent. The with logistics
ADB also forecasts that growth will slow again this year, Typically, export-led growth has been a crucial
to 5 per cent. component of sustainable economic growth. There
are many enablers of export oriented economic
Neither organization expects economic activity to growth including facilitating regulatory environment,
bounce back until mid-2010. Looking at a broader establishing export oriented zones like SEZs, elimination
time frame, India’s economic think tank Centre for of administrative barriers to FDI in export-oriented
Monitoring Indian Economy (CMIE) predicts a 5.8 per sectors etc. However the most important enabler is
cent growth in 2009-10 and expects that economy the improvement in transportation infrastructure,
will bounce back to 9 per cent growth by 2011, when telecommunications and power. A booming economy
impact of poor exports demand would be overcome. generates higher purchasing power, which in turn
World Bank’s recent projections of an 8 per cent growth accelerates domestic demand. This leads to an increase
for India in 2010, ahead of China’s expected growth of in production as well as EXIM trade, which necessitates
7.7 per cent further add to this optimism. increase in need for cargo movement both locally as
well as internationally .
The new government already has its task cut out. On
an optimistic note, the industry anticipates a growth Government incentives aimed at promoting economic
rate of around 6 per cent in the current fiscal, and with growth can make areas such as infrastructure i.e.,
the government keen on introducing reforms in its first development of Greenfield ports, airports, road, and
few months in office, the situation can get even better. rail logistics attractive for private investment. This
The challenge before the new government is to initiate helps capacity augmentation and thereby encourages
measures aimed at bringing about fiscal consolidation industrial production.
within a reasonable span of time. With the revenue
growth expected to decline significantly, the only way
to bring down the revenue and fiscal deficit would be to
drastically cut down the subsidies, particularly non-merit
subsidies that never reach the intended target groups
or the poorer sections. It will also be necessary to curtail
wasteful expenditure in several areas.

10
Although several headways have been made in A snapshot of the Eleventh Five Year Plan for the various
the infrastructure sector over the last few years, categories of logistics infrastructure is indicated in the
shortcomings still exist in almost all the segments, be table below. However, with a mid-term review of the
it highways, railways, ports or airports. Infrastructure plan in face of the slowdown, there is a likelihood
developments like the railway dedicated freight of these targets being softened. But again, with
corridors, road development projects and infrastructure being the key to sustaining the nation’s
modernization of over 37 operational airports will growth, it will be left to policymakers’ domain to
increase India’s handling capacities, thereby enhancing strike a balance between review of growth targets and
logistical performance. infrastructure development.

Transportation infrastructure – Deficit, eleventh plan targets, & permissible FDI

Sector Deficit Eleventh plan targets FDI Envisaged


investment size
Roads / highways 65,590 km of existing national • 6-lane 6,500 km in GQ 100 % FDI under automatic route US$ 78.5bn
highways: • 4-lane 6,736 km NS-EW
• Comprise only 2% of network • 4-lane 20,000 km
• Carry 40% of traffic • 2-lane 20,000 km
• Of which 12% is 4-laned; 50% • 1,000 km expressway
is 2-laned; and 38% is single
laned

Ports Inadequacy of New capacity: 100 % FDI under automatic route US$ 22 bn
• Berths • 485 million MT in major
• Rail / road connectivity ports
• 345 million MT in minor
ports

Airports Inadequacy of • Modernize 4 metro and 35 • 100% FDI for existing airports US$ 7.74 bn
• Runways non-metro airports (FIPB approval for FDI beyond
• Aircraft handling capacity • 3 greenfield in North Eastern 74%)
• Parking space and terminal Region (NER) • 100% FDI under automatic
buildings • 7 other greenfield airports route for greenfield airports
• 49% FDI is permissible in
domestic airlines under the
automatic route, but not by
foreign airline companies

Railways • Old technology • 8132 km new rail 100% FDI permitted in railway US$ 65.45 bn
• Saturated routes • 7148 km gauge conversion infrastructure under automatic
• Slow speeds (freight: avg • Modernize 22 stations route
22kmph; passengers: avg • Dedicated freight corridors
50kmph)
• Low payload to tare ratio (2.5)

Source: Planning Commission, IBEF

11
2.4 The logistics cost factor
Logistics cost is an important factor that affects the
competitiveness of nations as well as firms. However, it
is considerably high in India than first world regions like
U.S. & Europe, thus affecting the cost competitiveness
of India’s exports. It is estimated that transportation and
warehousing costs constitute a major chunk i.e., around
60 per cent of the logistics cost. In India, the logistics
cost is expected to be around 13-14 per cent of GDP as
against the US (9.5 per cent) and Europe (7.15 per cent).

At present, the Indian logistics sector is very fragmented.


Despite being a major contributor to the nation’s
economic development, it is still not awarded the
much needed status of an independent sector so
as to warrant an exclusive budgetary allocation and
corresponding focus on development. The major players
can be broadly categorized as pure transport providers,
transporters providing certain value added services such
as warehousing, and completely integrated players
providing 3PL services. The major elements of logistics
costs for Indian Industries include transportation,
warehousing, inventory management and other value-
added services such as packaging. The comparatively
high logistics cost can be attributed to factors such as
a complicated tax regime, fragmented market structure
and inadequate infrastructure.

While several factors like these go against India’s


logistics industry, there are indeed many growth factors
and opportunities enumerated in the subsequent
sections that suggest its steady transformation.
3. Logistics industry overview

Logistics has always been a central and essential feature Evolution of the logistics model
of all economic activity. Despite this importance, there
is a long history of organizations paying little attention
5PL (electronic co-ordination of
to their logistics. They traditionally concentrated their
supply-chain-information ownership)
efforts into manufacturing products and considered the
movement and storage of materials as an Increased information intensity
Reduced asset intensity

uninteresting errand that formed part of the 4PL (SCM limited asset provision)
overheads of doing business.

However, over the years, the status of logistics has 3PL (Supply chain expertise
continued to improve, primarily due to recognition by with some asset provision)
the organizations of the following critical factors:

• Appreciation of high logistics cost and opportunities 2PL (pre-dominatly


for major savings asset provision)

• Increasing competition for both users and providers of


logistics, who have to continually improve operations Source : Deloitte Research
to remain competitive
Customers are demanding a “single point of contact”
• New types of operations, which can force changes for all logistics services and are looking for “one-stop
to logistics – such as just-in-time, total quality logistics shopping” unable to cope with complexities
management, flexible operations, time across their supply chains. The models in logistics
compression etc. industry have accordingly evolved over time to address
the changing needs of the market and vary based on
• Need for improved technology for identifying, scope of service offerings, degree of collaboration, levels
locating and tracking materials of asset intensity and IT capabilities across the supply
chain. The logistics model has been evolving from a
Recession in many markets, combined with new specialized function to fourth party Logistics (4PL) and
sources of competition, has raised the consciousness of fifth Party Logistics (5PL) companies .
customers towards value of service delivered to them
by their service providers. Accordingly, the logistics First and Second Party Logistics handle all logistics
industry has consciously strived to be at the focal point functions, such as trucking and warehousing, which
of strategy formulation and operational excellence face low returns and high levels of asset intensity but
to continue in its endeavour for providing maximum low barriers to entry. With the increasing need for
contribution in value creation. “one-stop solutions”, many 2PL have evolved into 3PL
by adding new logistics capabilities and integrating their
3.1 Evolution of the global logistics industry operations. They are asset light and usually tend to have
Globalization, consolidation, technology advancements high returns; they contact most of their capacity needs
and outsourcing have led to growth in the logistics to 2PLs. While the 2PL puts in hard cash tangible asset,
services market. The capabilities of logistics service the 3PL puts in intellectual property.
providers are growing along with the changing
expectations of their clients. As the logistics services Fourth party logistics is an integrator that assembles
industry evolves, competitors are moving away from the resources, capabilities, and technology of its own
asset-based commoditized services to more strategic, organization and other organizations to design, build
information-based approaches. and run comprehensive supply chain solutions. The
figure below illustrates the gamut of services that a 4PL
provider will offer.

13
4PL Provider managed services

4PL

Order to deliver supply chain services

Transition & support services

Provider managed services

3PL provided services Distribution operations Claims management

Carrier services Transportation routing Freight pay and audit


and scheduling

Forwarder services Transportation execution Trade management

Brokerage services Warehouse management Others

Source : Deloitte Research

As the “orchestrator” of this broad set of providers, a supply chain planning and implementation including
4PL must comprehend broad and deep expertise and design, implementation and management of logistics
capabilities. Since the advent of the 4PL service, the services. The set of attributes derived were to focus
international logistics industry has been researching on attention on those industries that offer greatest
the development of the fifth-party logistics service i.e. opportunity for logistics service providers. The attributes
the realization of full-scale operation of e-procurement. of industries that would offer the highest opportunity /
A key function of the 5PL is to aggregate the demands best fit for logistics service provider are provided below -
of the 3PL into a bulky volume for negotiating more
favorable rates with airlines and shipping companies • Large logistics spend
regardless of which generation of logistics solution • Relatively high value products
belongs to all. • Manage across multiple modes
• Manage complex, time sensitive supply chains
3.2 Opportunity indicators for global logistics • Diverse supply chain footprints including their own
sector operations, suppliers and customers
In one of the global logistics study conducted • Maturity in outsourcing cycle (currently managing
by Deloitte, a set of attributes was developed to 3PLs)
identify high opportunity industries with diverse • Decentralized management of logistics
but complementary product flows for the logistics • Complementary to current base of 4PL business
outsourcing industry. The attributes were formulated • High cube and high weight products
based on the requirements of the various aspects of

The 4PL will serve as the single point of contact for


customers, managing a comprehensive set of supply chain
and logistics services that are executed by other providers

14
The description of the logistics requirements for each of the attributes, is mentioned below:

Large logistics spend • Industries whose logistics spend is significant relative to the value of its products naturally place a high
degree of importance and priority on logistics
Relatively high value products • Industries with high value products place a high degree of importance on logistics which can impact
macro inventory levels
Manage across multiple modes • Logistics functions operating multiple modes of transport face significant issues in dealing with the
resulting complexity and present greater opportunities for logistics service providers
Manage complex, time sensitive • The more complex a supply chain, and the more important it is to manage time across it, the more likely
supply chains companies are to look to a logistics service provider for help
Diverse supply chain footprints, • Diverse and wide spanning supply chains are complex and difficult to manage. Companies with such
including their own operations, supply chains are more likely to struggle with these complexities and may therefore seek help
suppliers and customers

Maturity in outsourcing cycle • History has shown that outsourcing is an evolutionary process and that industries that have a longer
(currently managing 3PLs) history of outsourcing are more receptive to advanced stages of outsourcing such as contracting with third
and fourth party logistics providers

Decentralized management of • The logistics function is difficult to manage across geographic boundaries. Companies with decentralized
logistics management tend to offer ripe opportunities for logistics service providers to add immediate value
Complementary to current base • Industries whose logistics and/or product attributes are complimentary to the 3PLs/ 4PLs base of business
of 3PL / 4PL business (macro flow patterns, etc.) offer opportunities to increase efficiencies of logistics resources (e.g., increased
utilization of transportation equipment) and thereby reduce rates and total spend

High cube and high weight • Industries with these product attributes offer greater opportunity to leverage and better utilize common
products transportation equipment

Based on the detailed analysis of the above attributes, the following industries were identified as potential high priority areas of focus for marketing
opportunities for logistics services.

Auto OEMs & suppliers • This industry offers obvious synergies, large market potential and the most immediate opportunities for
3PL / 4PL
• However, auto suppliers are highly fragmented with very few having large logistics spend

Heavy equipment manufacturing • This industry is similar to the auto industry in terms of shipment attributes
• However there are challenges to penetrating this industry, due to the smaller size and regional focus of
most companies

Metals • Logistics flow balance opportunities exist within the industry; majority shipments flow to automotive and
industrial equipment manufacturing applications
• However, these industries are fairly vertically integrated and traditionally manage logistics operations
in-house
Technology infrastructure • This industry is attractive in terms of majority shipment attributes including complex supply chains with
short order-to-delivery cycles

Retail • This industry offers tremendous opportunities from synergies in shipment attributes; large players are
looking to cut logistics costs dramatically

15
3.3 The Indian logistics sector 3.3.1 The growth drivers
The logistics sector in India has evolved over the The evolving business landscape and increasing
past two decades from being a pure transportation / competition across industries, is creating the need for
warehousing functional service to provision of more more efficient and reliable logistics services than what
value added offerings like customs clearance, domestic exists today. For example, rapid growth of organized
/ international freight forwarding, cross-docking, retail and the need to reach out to the large untapped
reverse logistics, freight consolidation, warehousing of rural markets in India are necessitating development of
modern standards etc. India with a GDP1 of about Rs strong back end and front end supply networks.
31,297 billion is estimated to spend 13 per cent of its While the end user industries like auto, consumer
GDP on logistics creating an industry size of around Rs. durables, organized retail, etc are direct triggers for the
4,068 billion. The sector has been witnessing double growth of the logistics sector in India, some of the other
digit y-o-y growth rate since 2002 and is expected to be drivers are described below:
more than USD 120 billion (approx Rs.5,400 billion) by
Key growth drivers for the logistics sector
2015.

While there has been a growing recognition in India of Streamlining of Investments in


indirect tax transportation
logistics as a strategic tool for enterprise cost reduction structure infrastructure
and improvement of organizational efficiency on the
flip side however, the logistics sector is characterized
by dominance of a disorganized market. Transporters
with fleets smaller than five trucks account for over
Increased demand Infusion of qualified
two-thirds of the total trucks owned and operated of 3PL services Growth Drivers work force
in India and make up 80% of revenues. The freight
forwarding segment is also represented by thousands
of small customs brokers and clearing & forwarding
agents, who cater to local cargo requirements.
Recognition of logistics Globalization of
management as a manufacturing
In order to reduce logistics costs and focus on core
strategic tool systems
competencies, Indian companies across verticals are
now increasingly seeking and using the services of
third-party logistics service providers. Traditionally LSPs • Rise of 3PL services - The logistics cost is a direct
(Logistics Service Providers) concentrated mainly on function of quality of the national transportation
transportation and logistics as they form a major share infrastructure and professionalism of the logistics
in logistics. However, in order to keep up with rising services offered. In addition, the level of maturity of
demands and customer expectations, companies now the logistics industry of a nation is co-related to the
also concentrate on value added services like packaging, share of 3PL service providers vis-à-vis the share of
custom clearance, inventory management and labeling. first and second party logistics service providers.

Transporters with fleets smaller than five trucks account


for over two-thirds of the total trucks owned and operated
in India and make up 80% of revenues

16
In the developed economies like Japan, the • Investments in infrastructure - A well-knit and
United States, Canada and the European Union coordinated system of logistics infrastructure plays
nations, business customers have very similar high an important role in the sustained economic growth
expectations for logistics system performance, of the country. India’s infrastructure deficiencies
regardless of where in the developed economies have become more visible because of high growth
they’re operating. The professionalism and maturity witnessed during the past few years. The most visible
has indeed been derived from the share of the 3PL indicators of overstretched infrastructure are India’s
service players in the referred countries. Hence it is congested highways, airports and ports. Though
not surprising to note that the logistics cost of the the current levels of efficiency are much below
developed countries is comparatively less than that of when compared with other developed nations, the
emerging world nations (India, China, Brazil). government has plans for improvement through
infrastructure development. While projects like
National logistics cost vis-à-vis the share of 3PL in the development of the dedicated rail freight corridors,
logistics market port development projects under National Maritime
Development Program are being envisaged and
Country Logistics cost as a Share of 3PL executed at the national level, it is imperative that
% of GDP India augments its infrastructure spending.

India 13.0 – 14.0% Less than 10%


Given the scale of work that is needed, presently
China 18.0% Less than 10% it is still relatively low at 4.6% of GDP far behind
China’s which is around 10% of GDP. The Planning
USA 9.9% 34%
commission recommends a step-up in this ratio to
Europe 7.1% 54% 8% by 2011-12. Post elections it is indeed perceived
that the government will demonstrate renewed
Source : Various
vigour in implementing transportation infrastructure
projects across the country. It is expected that a stable
The table reflects that there is an inverse relationship government at the centre 2009 will usher a new wave
between logistics cost of a nation and the share of of confidence globally in the Indian economy. The
3PLs in national logistics market . The greater the government has also indicated that bottlenecks and
share of 3PLs the lesser is the national logistics cost delays in implementation of infrastructure projects
thus highlighting the importance of 3PLs in logistics . because of policies and procedures, especially in
railways, power, highways, ports, airports will be
Many Indian companies are realizing the importance systematically removed. It is also expected that a large
of their supply chain network and are increasingly number of PPP projects in different areas currently
calling upon logistics managers for their professional awaiting government approval would be cleared
inputs into corporate and marketing strategies. expeditiously and the regulatory and legal framework
Consequently there has been an uptrend in the for PPPs would be made more investment friendly.
requirement of specialized Third Party Logistics
Service Providers to whom companies are looking to The above factors signal the emergence of an efficient
outsource their logistics requirements. As per industry transport infrastructure, which will trigger the growth of
estimates, it is expected that 3PL solutions in India advanced logistics service offerings.
would grow at a CAGR of more than 20% during the
period 2009-15.

17
• Recognition of logistics as an integral part of • Qualified work force -For an industry to prosper, the
corporate strategy -Over the years, the importance quality of the personnel it absorbs is an essential
of distribution and logistics has become much more facilitator for sustaining its long term growth. While
apparent to a broad range of Indian companies. logistics was not usually the first career choice for
The significance of logistics within a company’s total many and hence quality of manpower was an issue
business structure is illustrated in the table below by that was felt in the industry. However with the
using the inter-relationships of logistics with growing recognition of the strategic role that logistics
other functions . managers can provide, there has been a steady inflow
of some of the best talent in the logistics sector over
Relationship of logistics with other corporate functions the past few years.

With production With marketing With finance From the point of view of supply chain planning, the key
roles for a logistics manager with a broad remit might
Production scheduling Customer service Stock-holding
be summarized as:
Production control Packaging Stock control
Plant warehouse design Distribution centre location Equipment financing
• To lead the design, creation, configuration and
Raw material stocks Inventory levels Distribution cost control
parameter setting of the entire supply chain
Order processing Stock control

• To create the framework and the dialogue that


Source : Handbook of Logistics and Distribution Management by Alan Rushton, Phil Croucher and Peter determine the performance targets along the
Baker
whole chain

For the formulation of any competitive strategy, • To drive the systems and monitor and report the
knowledge of key logistics elements is essential. entire logistics operational performance against
Any factors related to the procurement, storage and agreed targets
movement of goods must, of necessity, be relevant
to the determination of a company’s business. • To review how problems can be solved and
Accordingly there has been a growing importance performance improved
of the role and contribution that the logistics /
distribution manager makes to corporate
strategic planning.

There is an inverse relationship between


logistics cost of a nation and the share of 3PLs
in national logistics market. The greater the
share of 3PLs the lesser is the national
logistics cost

18
Educational institutes in India have also commenced 3.3.3 Opportunities in the logistics space
designing undergraduate, post graduate, diploma The Indian logistics industry is poised for a significant
and executive level courses specifically catering to the growth in the coming years as companies, especially
logistics and supply chain management sector, for in the automotive, pharma, manufacturing, retail and
which there has been a very encouraging response. FMCG sectors, are increasingly opting to outsource their
In addition, logistics companies are sincerely trying logistic requirements to specialized service providers.
to benchmark their HR practices with the best in the Some of the existing and emerging growth areas in the
industry and implementing measures to attract and logistics sector is enumerated in the subsequent section.
retain talent. Given the steady interest in logistics as
a long term career option amongst the brightest of Cold chain storage and related logistics
the Indian youth, it can be safely derived that Indian Cold chains form an integral part of the supply chain
logistics sector will leverage on the growth path it has for storage and distribution of perishable goods and
witnessed over the past decade. temperature sensitive pharmaceuticals and biological
preparations. Estimated size of the Indian cold-chain
• Streamlining of the indirect tax structure - In India, industry is Rs. 8,000-10,000 crore (US$ 1.80 - US$ 2.27
distribution network is designed more by the tax billion) and is expected to grow at 20 to 25 per cent
consideration rather than the requirements of annually. It is estimated that this industry will grow to
servicing customers at optimal cost. Most of the over Rs. 40,0002 crore (US$ 9.09 Billion) by 2015.
consumer goods companies operate with at least As per the planning commission estimates, there are
one distribution center or Clearing & Forwarding presently around 4,762 cold storage units in India with
Agent (CFA) in each state, where they sell, to avoid a capacity of 196 lakh tonnes, with potato constituting
inter-state Central Sales Tax (CST). Such companies almost 81 percent of the total capacity of cold storages
operated with 25 to 50 warehouses all over India, being handled.
which is a very high number compared to developed
economies (less than 5) or even China (less than India may be among one of the world’s leading
10). The introduction of Value Added Tax (VAT) producers of horticulture products but more than half
and the proposed introduction of a singular Goods the fruits and vegetable produce end up rotting as
and Services Tax (GST) are expected to significantly waste, even before it arrives in the market for sale.
reduce the number of warehouses, manufacturers Poor post-harvest methods of warehousing, storage
are required to maintain in different states, thereby and unsafe transportation from point of production to
resulting in a substantial increase in the demand for point of sale are among most prominent causes of this
integrated logistics solutions. avoidable value drain. The key issues in the Agri-logistics
related to the development of the cold chain industry
• Globalizing of manufacturing systems- are of non-standard pricing, limited financial capabilities
Globalization of manufacturing systems coupled of the transporters, opportunistic profiteering, lack of
with advancements in technology is increasingly scientific handling of produce and consequent high
compelling companies across verticals to concentrate prices and limited choices for the consumers.
on their core competencies and avail the cost
saving potential of outsourcing. This is expected to
contribute to an increase in the need for integrated
logistics solutions, which is the niche of every third There has been a growing
party logistics service provider.
importance of the role and
contribution that the logistics /
distribution manager makes to
corporate strategic planning
19
Volume wise perishable products share in India • Container Corporation of India (CONCOR) is moving
into cold chain logistics in a big way and is developing
3%
a cold supply chain business in the form of suitable
logistics infrastructure as well as state-of-the art
storage facilities to sell fresh fruits and vegetables in
the global food market.

• With a view to increase share of processed food


in the country to 20% from the present 6%, the
39% 57% government is setting up 30 food parks by 2012
under public-private partnership. These food parks
will have cold warehousing, grading centers and
research laboratories. These parks could also be given
SEZ and other fiscal benefits to reduce production
cost and increasing competitiveness. Considering the
1% high risks involved in the food processing sector, the
government will provide a subsidy of Rs 50 crore per
Milk Fresh fruits and vegetable
Fresh meat and marine sector Others park to private investors.

Note: Others include poultry, ice creams and vaccines • The government plans to establish 50 cold chain
Source: Various
networks, including refrigerated vans all over the
As per industry estimates, approximately 104 million country, which will help the farmers enhance the
tonnes of perishable product / produce is moved in the shelf-life of their produce and retain their quality.
country in a year. Out of that around 100 million tonnes In addition, investment-linked incentives have been
goes through the non-reefer mode and remaining 4 introduced for setting up and operating cold chain
million tonnes goes through reefer transport. Out of facilities, warehousing.
the 100 million tonnes of perishable load 96 million
tonnes directly enter in local and regional markets. Out • The Agricultural and Processed Food Products Export
of this volume, around 86 million tonnes is sold through Development Authority (APEDA) has established
the wholesale and retail outlets based in regional and six Centres for Perishable Cargo at Bangalore, New
local markets without warehousing and cold storage Delhi, Chennai, Thiruvananthapuram, Hyderabad,
conditions and 10 million tonnes is the produce that and Mumbai of varying capacities. The total handling
requires cold storages even when they enter the capacity at these six CPCs is 2.16 lakh tonnes per
markets. Accordingly the requirement of cold chain annum. The operating and ground handling agencies
across the country by the stakeholders far outstrips have been designated for each CPC. In addition,
the handling capacity of the available cold chain APEDA has signed MoUs for setting up of CPCs at
infrastructure in the country. Cochin, Ahmedabad, Amritsar, Kolkata, Bogdogra,
Lucknow, and Goa.
Some of the industry and government initiatives for
development of cold chain infrastructure include -

20
Air cargo Cargo volume handled at international and domestic
The use of air as the mode of choice for the movement airports in India
of cargo has increased over the past few years.
Cargo in ‘000 Tonnes
While the amount of the cargo freighted via air is
growing steadily, the infrastructure related to air cargo 2000
handling and evacuation is not. The Government has
acknowledged the need for development of cargo
related facilities and is taking the necessary steps to 1600

address the situation. India already has an open sky


policy for air cargo. An air cargo hub is being developed 1200
at Nagpur by the Ministry of Civil Aviation. The ministry
also has plans to build dedicated cargo airports across
the country to cater to increasing demand in 800
air cargo traffic.

400
At present India contributes over 1% of the world air
cargo traffic. The five major airports (Mumbai, Delhi,
Kolkata, Chennai and Bangalore) account for around 0
88% of the total air cargo handled in India. Growth 2004-05 2005-06 2006-07 2007-08 2008-09
in cargo / freight volumes is an outcome of macro-
International Total
economic factors such as domestic consumption,
Domestic
exports and imports. Infrastructure remains a major
challenge. The international and domestic cargo Source: Airports Authority of India
volumes (except for the F.Y 2008-09) have shown
a steady growth despite inadequate capacity and The major commodities being air freighted out of India
infrastructure constrains. The blip in 2008-09 can be are garments, machinery components, pharmaceuticals,
accounted due to the global slowdown. dyes, chemicals and perishables such as fruits,
vegetables, flowers, fish and meat. Due to the high
time sensitivity Clientele demand, there has also been a
steady patronage of air cargo services across industries
The Civil Aviation Ministry’s including telecom, gems & jewellery, electronics, IT &
ITES related equipments etc. The Civil Aviation Ministry’s
proposal to frame a policy for the proposal to frame a policy for the development of
airports exclusively for cargo operations is encouraging
development of airports and on commissioning of these cargo airports in due
course of time will provide a much needed trigger to the
exclusively for cargo operations is air cargo segment. These airports will be established in
the country’s major business centres. Under the new
encouraging and on policy on cargo, a Centre for Perishable Cargo (CPC)
would be established, which would ensure movement
commissioning of these cargo of perishable cargo at the airports.

airports in due course of time will


provide a much needed trigger to
the air cargo segment
21
Material handling equipment
The Indian Material Handling Equipment (MHE) market
has been estimated at about Rs 5,000 crore. The
traditionally fragmented material handling Industry has
been consolidating at a fairly rapid pace in the recent
years. Material handling equipment used by logistics
industry include forklifts, pallet trucks, stackers, reach
truck, order picker, overhead travelling cranes etc.

Traditionally, a lot of manual intervention was involved


in the logistics business, as a result of which they
were delay in deliveries; products were more prone to
damage due to poor handling and transit time taken
was much longer. This resulted in low speed, handling
problems like scratches, chipping, breaking and difficulty
in monitoring the material flow.

Demand for material handling equipment has been


increasing in the last few years. One of the primary
reasons fuelling this growth is that companies are
increasingly feeling the need to lower their logistics
Some of the opportunities emerging from the growth in cost. As a result of which there is a shift from manual
the air cargo segment include: operations to use of electric and battery operated
equipments, especially in warehouses to improve
• Providing vendors and industry in the non-metro cities efficiency and save time. Some of the reasons for
a speedy gateway to the world this shift include low maintenance requirement, one
time investment, long life of equipment, no diesel
• Investment in air cargo infrastructure would requirement, etc. In addition, the foreseen increase in
spawn related supporting infrastructure including cargo traffic handled at the major gateways over the
warehousing, industrial parks, Distribution future, the requirement of material handling equipment
Centres etc. will maintain its uptrend.

• The efficiency and the reach of the express cargo Reverse logistics
industry will further improve Many logistics movement of goods go beyond the
conventional supply chain perspective and thereby
• Indian companies can exploit their inherent IT generate add itional business transactions. These
capabilities to develop specific application systems to include failed components repaired to serve as spare
enable air cargo planning, movement, management parts, unsold stock being recovered, old products
and co-ordination improved to meet latest standards again, reusable
material returned and refilled / re-developed etc.
• Domestic airlines can leverage on the development Reverse product flows may generate value on a product,
of the Hub-and-spoke model for the country’s component, or material level.
cargo operations

22
With an ever increasing breed of quality and timely The challenge however that is in India, the forward
delivery conscious Indian consumers, manufacturers logistics chain is far from perfect and hence establishing
have endeavoured to develop logistics network that a sustainable reverse logistics system might be a
would cater to the reverse logistics flow of materials. challenging task.
The ability of a logistics network to cater to the timely
retrieval and delivery of material can be considered as a 3.4 Significance of SMEs in the Indian logistics
strategic tool for customer retention. A customer who industry
enjoys a timely after sales spare part replacement would Small and medium -sized enterprises (SMEs) are usually
generate a positive word-of-mouth campaign. the mainstay of most economies, particularly in terms
of employment and overall development impacts.
While earlier, the manufacturers tried to manage their As per the World Association for Small and Medium
reverse logistics system in-house, manufacturers are Enterprises (WASME), there are over 5 million SMEs in
now also seeking the option of outsourcing of their India accounting for around 80% of the industrial sector
entire reverse logistics network to third parties. However employment. It is the second largest employer of human
outsourcing the management of reverse logistics flow resources after agriculture, employing around 20 million
entails that the third party service provider has the people, contributing 35% of the total export trade and
mechanism to respond to the customer’s query, develop accounting for nearly 40% of the total value of
suitable system to collect the old product from the industrial production.
customer and if required possibly replace it with a new
product, deliver the product to the The above figures reflect the importance and
manufacturer’s location. contribution of the SME sector to the national economic
growth and prosperity. It is hence not surprising to
The manufacturer hence needs to have the confidence realize the importance and the significance of the
that the third party interaction with the customer SMEs in the Indian logistics sector. The logistics sector
should be smooth considering that the replacement of in the country is dominated by the Small and Medium
a product may lead to a contentious issue. Accordingly, Enterprises (SMEs) of which the majorities are the road
before outsourcing of the reverse logistics network, transport providers. It is estimated that more than a
the manufacturer has to collaborate with the logistics million transport operators are owning and running
service providers to chalk out and implement a robust more than 4 million trucks.
reverse logistics system. For the logistics service provider,
the reverse logistics support for a manufacturer would The reduction in the logistics cost can be brought about
never be treated as a one off transaction. The logistics by improving the national logistics infrastructure to
service provider would be required to act not only facilitate smooth transfer of materials and information.
as a service provider, but would be required to treat While at the macro level, the Government of India can
the Client as a service partner treating the Client’s initiate steps for improving the logistics infrastructure
business as his own. While global manufacturers are of the country, the logistics service providers at the
outsourcing reverse logistics operations to third parties micro level would need to infuse better management
in the developed logistics nations; the trend is steadily practices to reduce their service cost and improve their
catching up in India. This provides a huge opportunity operational efficiency. Since the Small & Medium
for the various logistics service providers to expand their Enterprises constitute a significant percentage of the
bouquet of service offerings and consolidate on the logistics service providers, it would not be inappropriate
opportunities that reverse logistics would offer. to mention that these SMEs would be acting as the
catalyst in reducing the national logistics
cost component.

23
4. SMEs in logistics: Succeeding
in the market place

The power of ‘small’ is enough to bring about a wet and dry goods. This will serve as a major attraction
revolution in the way business is done. Typically, firms for international companies, as they are looking for
that start small but do a good job of responding to a one-stop-shop for most of their business verticals.
market needs become larger over a period of time. To In addition, implementation of innovative technology
enable such new entrants with drive and good ideas to and the cost-effective models will help ensure better
grow, it is necessary to create a conducive environment. management of assets, allowing SMEs to reduce
The objective of any program for SME support, expenditure and remain competitive in the present
therefore, should not be to reward firms that happen economic slowdown.
to be small. Rather, it should ensure a functioning
ecosystem, in which new ones can emerge, existing 4.1 Competitiveness of SMEs in logistics
ones can grow, and large and small ones can collaborate Deloitte conducted a survey of several Small & Medium
and leverage their synergies. logistics players to capture the developments in the
Indian logistics space and more importantly the broad
Logistics service providers having investment in level challenges that the industry is currently facing,
equipment (excluding land and buildings) exceeding particularly from the perspective of a Logistics Service
Rs.10 lakh (US$ 0.2 lakh) but less than Rs.2 crore (US$ Provider (LSP). The respondent companies belonged to
4.1 lakh) qualify as Small enterprises and those investing a wide spectrum of logistics segments such as freight
more than Rs. 2 crore but less than Rs.5 crore (US$10.3 forwarding, shipping, customs booking, container
lakh) classify as Medium enterprises3 . Today, perhaps freight stations, warehousing, and
the biggest challenge that these service providers face multi-modal transportation.
is coping with the regional, geographical and legislative
diversity in the country. This results in a lack of standard
practices, procedures, regulations as well as disparities
in the level of compliance. Land transportation in
particular gets significantly exposed to these issues
as the fragmented ownership of key components like
warehouses and trucks makes the consolidation of
services an enormous task, and the resultant offering
becomes extremely inflexible to suit customers’ needs.

Users of logistics services are no longer lured by


buzzwords or big names; the focus is clearly on costs
and delivered value. Hence, the emergence of SMEs
as strong regional or sectoral players is imminent.
SME service providers are rich in local experience and
have the flexibility and speed to deliver according to
the expectations of the principal. Most SMEs are also
owner-driven, and this reassures customers that
they will be dealing with a person rather than an
impersonal service.

As the Indian logistics sector becomes more competitive


globally, multinational companies will look to outsource
their entire logistics services to India. Most of the
logistics companies in India now offer a complete
range of services: warehousing systems, distribution,
tracking of goods and separate storage facilities for

24
As a part of the survey, Deloitte had designed a Foreign alliances
holistic questionnaire, which was administered to Another trend which is fast picking up, is that of LSPs
the respondents during a one-to-one discussion. It forging alliances with foreign players to ensure access
attempted to seek responses on various parameters to untapped geographies and benefit from collaborative
such as company background, operational performance, effort. Having said that, the regional strength of
internal benchmarking, soft infrastructure and also domestic players is equally a compelling factor for SMEs
views on quality of external infrastructure and its impact to collaborate and leverage on. In several cases, the
on logistics businesses. The individual responses thus scope of this relationship has moved beyond the realm
collated, form the basis of analysis that follows. of geographic reach to making strategic investments
and bringing specific logistics related expertise, which
4.1.1 Internal factors affecting competitiveness can be a strong competitive advantage.
Services
In the recent past, the logistics industry has witnessed Key value propositions of alliances

a paradigm shift in scope of service offerings with


the constituent players moving from typically being
single service specialization companies to what are
Value added
now popularly referred to as “Total logistics solution” Reliability service
providers. This has added a new dimension of service
synergies, which ultimately helps the service providers to International Market reach
presence
offer a whole gamut of quality services to the client at
competitive rates.
Key value
Financial
Size proposition of
Furthermore, in a situation like today’s it also helps strength
alliances
diversifying the basket of offerings into a wide
range of avenues so as to minimize risk faced due to
Technical
unpredictable / vulnerable business segments. While Pricing
expertise
managing the complete supply chain presents its own
Company Cost of
unique challenges, it also helps in optimizing costs not background alliance
only for the service provider, but also for their customers
wherein they can have greater control over their
inventory levels to prevent stock outs. Organizations
that have been able to embrace this change and expand Source: Deloitte survey
their capabilities beyond pure play transportation
certainly enjoy a competitive advantage over their peers. Cost
In India, this trend is largely seen in firms which have The current slowdown has robbed the logistics sector
a strong warehousing and distribution capability, a of not just volumes but even margins. The businesses
customer centric approach and a forward have witnessed varying impacts with volumes falling to
thinking leadership. the tune of anywhere between 10 per cent to 30 per
cent and margins declining by as high as 70 per cent.

Users of logistics services are no longer lured by


buzzwords or big names; the focus is clearly on costs and
delivered value. Hence, the emergence of SMEs as strong
regional or sectoral players is imminent
25
While segments such as project cargo movement and Technology
domestic agency business have managed to remain Globally, investment in technology is another important
afloat, others like container business and ship chartering driver of an organization’s efficacy. However, technology
have had to bear the brunt. eg: Booking a container implemented by the respondent LSPs is more or less
from India to U.K. which used to earn around US $1000 limited to cargo tracking in general and for agency
per TEU earlier, now gives only US $300 per TEU. Unlike business in particular, it is confined to systems used by
commercial orders which have taken a hit, personal the principal so as to ensure compatibility. At times,
cargo volumes are still promising and thereby ensuring point-to-point movement of cargo is even manually
reduction of adverse impact. tracked and updated by agents en route the final
destination. The level of familiarization and use of
To ensure survival, some players are charging rock advanced technologies like Global Positioning System
bottom rates and in turn rendering the services of other (GPS), Warehouse Management System (WMS), Radio
players uncompetitive. This has clear implications for frequency identification (RFID) amongst SMEs in India is
individual players to streamline operations. Optimizing quite low.
operations together with cost cutting will therefore go a
long way in helping SMEs gather strength internally and The fear of price sensitive Indian market, not being able
compete effectively. This can be further supplemented to bear the additional cost of technology further acts
by company initiatives such as adopting a sales intensive as an impediment. Again, a few setups despite being
approach including cross selling by different divisions significantly large do not employ such technologies since
and strengthening recovery. they cater to bulk transportation & warehousing, unlike
third party logistics players which are concerned with
Training moving numerous small parcel sizes.
Although basic training is provided in most
organizations, it lacks the necessary focus to tap The chart below plots areas of growth opportunity from
and promote workforce talent and elevate service the perception of Logistics SMEs that were covered by
performance to global best standards. This is partly the survey. The various opportunity areas were assigned
reflected in the survey response, wherein despite having weights, based on world averages sourced from survey
adequate workforce and low attrition, the quality of by leading logistics player UPS, on SMEs in India. These
work has been lagging. have been compared with corresponding relative
importance in per cent terms, which was an outcome
Another reason could be recruitment of inexperienced of the Deloitte survey. From the analysis, it follows that
/ unqualified staff at lower wages, with an objective of moving to higher value added services is perceived as
cutting on costs, unaware of the repercussions it could the biggest growth opportunity by Logistics SMEs today.
have on the quality of services rendered. At certain
places, the operational training is limited to technology
updates, while at some other it is purely in form of on
the job experience. To compete effectively in today’s
age, training in supply chain management practices and
quality management techniques such as six sigma can
help to a great extent.

The fear of price sensitive Indian market, not


being able to bear the additional cost of
technology acts as an impediment
26
Perception of growth opportunity by logistics SMEs

Relative importance for logistic SMEs

35%

30% Moving higher value


added services
Optimizing operations
25%
Improving workforce
quality through training
20%
IT adoption
15%
Forging alliances &
acquisitions
10%

0%
0 1 2 3 4 5 6

Relative weights based on world average

Source: UPS Asia Business Monitor 2009; Deloitte Survey and Analysis

Pursuing the right mix of growth opportunities can help


a player boost its market share. Notwithstanding this,
the customer’s choice of an LSP is driven by a set of
parameters, some of which are indispensable and the
others desirable.

Key determinants of choice for selecting a LSP

Cost effectiveness

Service quality Network reach

Specialized cargo
Equipment Choice of an LSP
handling

Compliance
Reputation
& approvals

Timely delivery

Source: Deloitte survey

27
In the earlier mentioned chart, compliance and • Benchmarking: Each player seemed to be guided
approvals refer to the various licences and/or permits by its own set of benchmarking practices. Internal
which are particularly of relevance to custom house benchmarking is mostly being practiced by way of
and clearing & freight forwarding agencies. Besides the achieving conformity with SOPs to ensure uniform
above factors, public sector organizations also typically level of performance at all operation centres, internal
look for past performance, financial standing and the review, performance audit, and periodic calculation
quantum of orders executed by the prospective LSP in of customer satisfaction index based on customer
a particular period. The desirable factors, on the other feedback. External benchmarking, however, is not so
hand, are sophisticated IT infrastructure, door-to-door widely undertaken by the Indian LSPs yet.
service, alliances, and brand name.
• Innovation: This is one such factor that can help a
Other factors that have a bearing on the player differentiate its services from the rest and more
competitiveness of logistics service providers are: importantly benefit from the first mover advantage.
This could either manifest in form of exclusive
• Transactional relations: This is mostly driven by the service offerings such as serving the niche segment
client’s requirements & degree of his satisfaction with of hydrocarbon transportation, etc or thinking
the services of the LSP. Although on an average most out of box like fitting four cars in one container
deals are carried out on a deal-to-deal basis, many instead of three using a movable deck. Innovation
LSPs are trying to pitch in for longer relationships as can also sometimes take form of intensive capital
this can ensure them a steady flow of work orders. investment, the first of its kind, in equipment at a
place, such that competitors find difficult to match
• Service level agreements: Service Level Agreements such huge investment and eventually tend to lose out.
(SLAs) set out performance standards to be Unfortunately, innovation amongst the Indian logistics
complied by the logistics service provider and SMEs is still at a relatively nascent stage
include parameters such as delivery, quality, safety
information availability, etc. Such agreements bring in 4.1.2 External factors affecting competitiveness
efficiency and accountability in the business. SLAs are These can be broadly classified into infrastructural
largely insisted in contract logistics wherein the service bottlenecks and policy constraints. Infrastructural
provider handles product movement up to the point bottlenecks relate to deficiencies in physical
of purchase and can vary as per the industry and infrastructure such as roads, railways, ports, airports,
nature of cargo. Industries like computer peripherals Inland Container Depots (ICDs) & Container Freight
and hardware, automotive, perishable products are Stations (CFSs), whereas policy constraints refer to the
likely to demand stringent SLAs. It is understood that regulatory & procedural hurdles affecting transportation.
adherence to SLAs in India is around 80 to 85 per
cent while in developed economies it is around 95 per
cent. The survey responses also indicate that pure
play transporters generally are not very conscious
about SLAs as they are more worried about the cost,
as compared to 3PLs who monitor the SLAs closely.

The survey responses indicate that pure play transporters


generally are not very conscious about SLAs as they are
more worried about the cost, as compared to 3PLs who
monitor the SLAs closely
28
Nature of
Area Cause Effect
bottleneck
Inadequate capacity at major ports Heavy congestion at most major ports leading to
higher vessel turnaround time
Untapped potential of non-major ports
Ports
Outdated equipment Inefficient handling

Lack of warehousing Long waiting time

Few busy airports (Delhi, Mumbai, Kolkata, Congestion at main airports


Chennai, Bangalore, Hyderabad)
Numerous unused airstrips & relatively less used
Airports airports
Lack of equipment for odd-sized packages, Inefficient handling resulting in pilferage/damage
professional packers, etc High cost of alternate arrangements (prices quoted
by individual loaders)
Bad quality of roads Do not support the axle weight of the trucks &
Infrastructure cause the roads to break and cave in
Inadequate lanes / lack of maintenance Bad road quality leading to poor speeds, accidents
Roads
and high vehicle maintenance
Inadequate hinterland connectivity Inconvenience due to limited access to
neighbouring ports
Too many level crossings / minimal electronic Choked rail network & resultant lower speeds of
controls / priority to passenger trains over cargo cargo trains
trains
Railways Limited network and terminals of private players Transportation delays & cost overruns
(container movement)
Inadequate capacity / connectivity Transportation delays

Unreliable infrastructure / uneconomical size Less integrated services, inefficiency & resultant
Cold inconvenience
Chain/ CFS/ ICD Inexperienced staff Inefficient handling

Outdated customs formalities incl. documentation Huge delays

Erratic EDI

Interpretation of rules & regulations left to the Ineffective administration of customs laws
Customs discretion of Customs Commissioner
Too many collectorates especially in the NCR
Regulation region
Corruption

Border duties Abolished by most states, but still applicable in Increases cost of transporting through that city &
such as octroi Mumbai, Pune, etc. eventually distorts logistics network
Inadequate Excess loads going unchecked Bad road quality leading to poor speeds, accidents
controls (esp.
roads)

Continue on next page

29
Nature of
Area Cause Effect
bottleneck
Attractive manufacturing incentives such as Distorts logistics network as units in remote
tax holidays for setting up units in a remote / regions of Himachal Pradesh / Assam, etc may
industrially backward region not enjoy the logistical advantage of a place with
Taxation
relatively better connectivity
Multiple taxes for shipping (Tonnage tax + 12 Renders Indian shipping internationally
other taxes) uncompetitive
Involvement of multiple agencies such as Cost overruns, inconvenience & delay
Regulation
Red tape / Commerce Ministry for ICD / CFS / SEZ, rail ministry
bureaucratic for private rail terminals, Ministry of Surface
hurdles Transport for Roads, & Shipping Ministry for Ports
/ Shipping
Applicability of multiple acts such as Railway Act, Subjects multi-modal operations to multiple
Law Merchant Shipping Act, Indian Ports Act, MMTG regulations and makes compliance cumbersome
Act

At present, the congestion at ports has automatically To overcome the burgeoning logistics costs, the
reduced thanks to the decline in trade. But once respondent LSPs are resorting to the following
trade volumes pick up, it could again start posing initiatives:
a significant problem and have a cascading effect
on related transport channels. eg: The ideal transit • Negotiating & re-negotiating contracts
time for container from Ludhiana – JNPT (1500kms) Negotiations with airlines would involve a minimum
is approximately 2-3 days. However, in times of cargo commitment, eventually resulting in lower rates
congestion, this can escalate to even a week or more. for customers. Negotiating with truckers (surface
The LSPs have found a way to mitigate this problem transport) would involve giving contracts to those
by collaborating with ports, which enables them in providing competitive rates besides having a good
availing preferential allotment of window. The long network of pick-up.
term solution to this, however, is development of more
non-major ports. Further, alternatives like development • Load optimization
of coastal shipping and inland water transport can be This refers to judicious selection of cargo by going for
explored to help ease out the infrastructural bottlenecks a right combination of weight & volume cargoes so
and bring down the overall logistics cost. that total capacity is optimally utilized.
From the analysis, it follows that besides poor
infrastructure & regulatory hurdles, the other logistics • Efficient Route scheduling
cost inflators are: This involves evaluation of available routes between
the source and destination and selecting the most
• Variable vessel charter costs appropriate route which will optimise cost and
delivery, proper selection of load & discharge points
• Fluctuating oil / fuel prices and deciding on what quantities to be picked up from
where. The ability to provide the most cost effective
• Fluctuating exchange rates distribution network is being used as a competitive
advantage by the LSPs.
• Non-availability of return loads

• High haulage rates

30
• Increased adoption of IT Areas for improvement / challenges
This is being actively pursued by implementing IT
Level of improvement desired
infrastructure and software for managing business
processes as well as operations. This will increase 90%
efficiency and reduce time taken for various activities Transportation
80%
particularly in warehousing and fleet management. Access to funding infrastucture
70% Regulatory
A well designed MIS enables regular tracking of effectiveness
performance and financial metrics such as sales, 60%

profitability, variance analysis etc., Survey responses 50% Innovation


indicate a mix of organisations having separate IT 40%
systems and also those which have implemented a Quality of manpower
30% IT Adoption
unified ERP solution.
20%

• Saving on logistics related communication 10%


International communication is an integral part 0%
of logistics operations, especially that of a freight 0 1 2 3 4 5 6 7
forwarder. Most work is sorted over emails. The
Relative weight based on world average
operations team refrains from making phone calls,
unless absolutely necessary. Source: UPS Asia Business Monitor 2009; Deloitte Survey and Analysis

• Cutting down on manpower Transportation infrastructure is not just crucial for


This is being actively pursued by implementing ERP logistics services world over, but is also an area that
systems, which enable integration of office systems needs substantial improvement in the Indian context.
and provide client interface. Most of the manual work This is followed by inadequate access to funding,
gets automated and therefore replaces the junior a problem particularly faced by SMEs. Regulatory
human resource at operations level. effectiveness, although equally important for India,
carries a lesser weightage going by the world averages,
• Other measures probably due to foreign countries already having an
These include working capital management, inventory appropriate and enabling regulatory regime.
cost control and periodic reviews among other things.
4.3 S-W-O-T Analysis
4.2 Assessment of challenges: Internal & external Strategy formulation for any entity or a group of entities
A thorough analysis of internal and external factors is primarily influenced by their relative competitive
affecting the logistics industry in general, together with position in the industry. This, in turn, is collectively
acknowledgement of constraints specific to SME players determined by a set of factors such as strengths &
like lack of funding can enable us identify areas of weaknesses (internal), opportunities & threats (external).
improvement for the industry, as follows:

The ability to provide the most cost effective


distribution network is being used as a
competitive advantage by the LSPs

31
A conscious effort to maintain an edge in the areas of ploughing back profits (self funding) and optimizing
strengths, improve on weaknesses, a drive to actively operations so as to qualify for SME loans
pursue opportunities, and take proactive measures to
guard oneself in areas of threats can enable the group • Lack of use of state of art technologies, if suitably
of firms to find their way through adversity. The inputs addressed can boost the international competitiveness
obtained during the survey and subsequent analysis of the Indian logistics industry, as a whole
form the base for S-W-O-T framework for Indian
Logistics SMEs, which is elaborated in the figure below: • Inadequate controls & cost consciousness amongst
drive LSPs, particularly road transporters, often lead
S-W-O-T Analysis for Indian logistics SMEs to low safety standards eg: instances of overloading
by trucks
Strengths Weaknesses Opportunities Threats

• Owner driven • Highly fragmented • Promising • Competition Opportunities


• Adequate • Lack of affordable sectors from large • A likely boom in Construction and Pharmaceutical
labour pool credit (construction & foreign players / Healthcare sectors would imply potential business
• Regional • Lack of use of state healthcare) • Pricing pressure opportunity for LSPs in terms of increased multimodal
dominance of art technologies • Progressive • Influence of movement of raw material & manufactured products,
• Low attrition • Low safety reforms (GST) global market both domestically as well as internationally.
standards • Infrastructure conditions
expansion • Progressive reforms such as introduction of single
Goods and Service Tax (GST) will help rationalize the
Source: Deloitte analysis warehousing set-up in the country and enable the
LSPs to trim their logistics costs
Strengths
• Most enterprises, by virtue of being owner driven, • Government’s plan to award projects worth
tend to offer personal commitment and quality more than Rs. 3,300 crore (US$ 67.9 crore) for
services to their clients development and upgradation of container / cargo
terminals during the first three months in office and
• Relative ease at filling up vacancies in operations budget announcement of facilitating incremental
abundantly reflects availability of adequate labour infrastructural lending through takeout financing
scheme of IIFCL provide the much necessary push to
• With operations & agency network primarily infrastructure expansion and is likely to augur well for
concentrated in a particular region, they enjoy the LSPs
regional dominance and can provide services at
economical rates compared to their counterparts Threats
• Competition from large foreign players can be
• Low attrition, partly aided by the current downturn, guarded against by adopting advanced technologies,
can be further exploited by focusing on training & collaborations and leveraging on regional strengths &
employee friendly HR initiatives resultant cost advantages

Weakness • The deal to deal transactions and price sensitive


• The fragmented nature, an inherent weakness of nature of Indian markets compels the LSPs to charge
the industry, can be effectively addressed through lower rates, whether affordable or not, for fear of
consolidations, partnerships, and segment specific losing out customers to competition
forums aimed at providing integrated services to the
clientele • The impact of global market conditions on logistics
business by way of decline in international trade can
• A common problem faced by SMEs is that of limited be curtailed by concentrating on domestic markets,
access to affordable credit, and can be overcome by which are still quite promising

32
5. Transport infrastructure

The 11th five year plan Approach Paper calls for the Ports—The major ports in the country handled 530.35
investment to increase from a current level of 4.6% of million tonnes of cargo during 2008 – 2009, which
GDP, to between 7 & 8%. While the target of 8% for was 7.9 per cent lower than the target set for the
the 11th plan is still short of the 10% figure which India period. About 80 per cent of the total volume of ports’
needs to achieve, there is still a need for adopting a traffic handled was in the form of dry and liquid bulk,
strategy in terms of how much would the government with the residual consisting of general cargo, including
be investing; and how much needed to be the share of containerized cargo
the private sector, including also FDI in Infrastructure.
The Capsule Report on Infrastructure sector performance Traffic handled at the major ports

by Ministry of Statistics and Program Implementation, In million tonnes


the year on year rate of growth in cargo traffic has
considerably declined in FY 2008-09. A snapshot of 600
the performance of each of the transport infrastructure
500
sector is indicated in the subsequent section.
400
5.1. Traffic performance
300
Rail — The freight traffic carried by the railways during
2008 – 2009 at 833.31 MT was 2.0 per cent lower than 200
the target set for the period, and recorded a growth of
100
4.9 per cent over the performance during 2007–2008.
The freight loading for 2008-09 of 833 million tonne 0
do not meet the target of 850 million tonnes. Freight 2004-05 2005-06 2006-07 2007-08 2008-09
(Prov)
loading got impacted by the economic downturn,
which in turn, has hit the railways’ earnings. The freight Source: Ministry of Shipping
loading for the current financial year has been estimated
at 882 million tonnes

Railways freight loading in million tonne

In million tonnes

1000

800

600

400

200

0
2005-06 2006-07 2007-08 2008-09 2009-10
(RE) (BE)

Ministry of Railways

33
Aviation: The five major airports (Mumbai, Delhi,
Kolkatta, Chennai and Bangalore) account for around
80-85 per cent of the total air cargo handled in India.
These five International Airports handled 5,3,382 tonnes
of export cargo during 2008 – 2009, which was 3.4 per
cent higher than the previous year. The growth rate,
however, was lower than 7.5 per cent in 2007-2008.
Further, 4,29,527 tonnes of import cargo was handled
at these airports during this period registering a negative
growth of 5.7 per cent. The corresponding growth rate
was 19.7 per cent during 2007-2008.

Air cargo traffic handled at Indian airports.

In ‘000 tonnes

1200

900

600

300

2004-05 2005-06 2006-07 2007-08 2008-09

International Domestic

Source : Airports Authority of India

The detailed description with regards to the recent budget estimated its cash surplus (earnings net
development needs, challenges and opportunities of operating expenses & pension) after dividend of Rs
existing in each of the transport infrastructure sector is 5,479 crore to the Centre will be Rs 8,722 crore, 31%
indicated in the subsequent sections. lower than the Rs 12,683 crore (actuals) in 2008-09.
This would imply that organization’s dependence on
5.2 Railways budgetary support and market borrowings heightens as
Indian Railways (IR) serves as the backbone of India’s the cash surplus, the amount available for capitalization
transport infrastructure, and as such contributes (transfer to the development fund and capital fund),
significantly to macroeconomic growth and global is down to Rs 2,642 crore from Rs 6,356 crore in the
competitiveness. The premier transport organization of revised estimates for 2008-09. Accordingly, the Railway
the country is the largest rail network in Asia and the Ministry has outlined many measures to generate
world’s second largest under one management at a revenues from non-traditional sources. This includes
total of 63,332 route kms. Freight contributes to around laying of optic fibre along railway tracks, utilizing land
65% of its total revenue. The Railway Ministry in its and airspace for other commercial purposes, etc.

34
5.2.1 Development needs 5.2.2 Challenges
The existing railway network is crippled by capacity The Railways are carrying the additional burden of sixth
constraints and is inadequate to meet the potential pay commission recommendations. The Railways have
demand of cargo transportation. The ambitious to pay Rs.6,600 crore in arrears alone to the employees
project of railway freight corridor should address the besides the increased salary burden of about Rs. 7,000
capacity constraint. The work for the dedicated freight crore in the F.Y 09-10. About 60% of the arrears on
corridor (DFC) ( which has been renamed as Diamond account of pay commission has to be paid in 2009-10.
Freight Corridor in the recent Rail Budget) , envisages This has coincided with the economic slowdown which
construction of dedicated freight lines along the eastern has affected earning. In two years, the Railways have
and western sides of India covering 2,739 km . Once to pay Rs. 28,000 crore towards salary and arrears.
commissioned, the DFC along with the feeder routes will The two factors have led to an increased operating
ensure the availability of sufficient capacity in the face of ratio of 92.5%. Some of the other challenges facing
rising demand. It is expected to increase average speeds the Railways are professionalizing its cadre, giving up
to over 100 kmph, reduce transit time by half and also tradition of hierarchies which its departments signify,
reduce the cost of operations. The project is expected to bonding the various depts. into a cohesive unit flexible
reach completion by 2016-17. to cope up with the fast changing environment,
cutting cost, yielding economies, reducing tariffs and
Proposed dedicated freight corridor benchmarking performance with comparable
systems abroad.
Ludhiana

5.2.3 Opportunities
Dadri
The rail container policy announced in January 2006
Khurja
allows private companies to undertake container
transportation by rail. As many as 16 licenses have
Son Nagar been issued for operating container trains. In the
Ahmedabad
recent budget announcement, it was indicated that the
Vadodra
Howrah Railways were working out the details of a premium
service for movement of containers with assured transit
JNPT
periods for time-sensitive cargo. Permission has also
been provided to container train operators to access
Source: Dedicated Freight Corridor Corporation of India Limited private sidings to help attract piecemeal traffic that are
at present not being carried by railways.

Implementation details of the Dedicated Freight Corridor Corporation of India Limited

Western corridor Stretch Implementation period

Phase I Rewari – Vadodara (920 km) 2009-2016

Phase II Vadodara – JNPT (430 km) 2010-2017

Phase III Rewari – Dadri (140 km) 2010-2017

Eastern corridor Stretch Implementation period

Phase IA Sonenagar – Mughalsarai 2009-2016

Phase IB Mughalsarai – Khurja (710 km) 2010-2016

Phase II Khurja – Ludhiana 2011-2017


(Dandarikalan)

Source: Dedicated Freight Corridor Corporation of India Limited

35
The railways have also chalked out plans for a freight 5.3.1. Development needs
related revamp in partnership with the private sector.
The partnership involves redevelopment of dilapidated Road sector breakup

goods sheds and freight terminals into state–of-the-art


2% 4%
logistics parks. The railways would hand over the
damaged property on a long term lease to a private
player for development, operation and maintenance on 14%
a revenue sharing basis.

Indian Railway Catering and Tourism Corporation


(IRCTC) have already been mandated to develop catering
services, budget hotels and food plazas at major
stations through involvement of private entrepreneurs.
IRCTC intends to take up around a hundred such
budget hotel projects in the next five years with Public
Private partnership. 20 such concessions have already
been awarded. Some of the proposals that have been
mentioned in the recent budget that offer opportunities
to various private parties include: 80%

• Multi-functional complexes having shopping facilities,


food stalls, budget hotels to be constructed at 50
railway stations serving centres of pilgrimage, tourist
and industry National highways District road
State highways Rural roads
• Private ownership of special purpose rolling stock
for commodities and private operation of freight Source : Ministry of Road Transport and Highways

terminals will be encouraged


To improve and develop national highways, the
• Mega logistic hubs being planned alongside Eastern government has initiated National Highways
and Western Dedicated Freight Corridors Development Programme (NHDP) in a phased manner.
The National Highways Authority of India (NHAI) is
5.3. Roads implementing the NHDP programme The NHDP with its
A good road network constitutes the basic infrastructure planned seven phases covering approximately 50,000
that propels the development process through km at a massive investment of about Rs.3,000 billion
connectivity and opening up of backward regions to has been the blueprint for national highway network
trade and investment. Roads also play a key role in development in India.
inter-modal transport development, establishing links
with airports, railway station and ports. India has the
world’s second largest road network, aggregating over
3.34 million kilometers next only to the United States.
Indian roads carry about 61 per cent of the freight and
85 per cent of the passenger traffic. All the highways
and expressways together constitute about 66,000
kilometers (only 2% of all roads), whereas they carry
40% of the road traffic.

36
Phase Length(km) Description Target completion date

I 7,521 Comprises 5,846 km of GQ, 981 km of NSEW corridor, 380 km of December 2009 (GQ by
port connectivity and 315 km of other national highways December 2008)
II 6,805 Comprises 6,319 km of NSEW corridor and 496 km of other December 2009
national highways
III 12,109 Four-laning of 12,109 km of national highways in two phases, March 2012
Phase IIIA and IIIB, on BOT basis
IV 20,000 Two-laning with paved shoulders of 20,000 km of national December 2015
highways on BOT basis
V 6,500 Six-laning of 6,500 km of national highways on DBFO basis December 2012

VI 1,000 Construction of 1,000 km of expressways on DBFO basis December 2015

VII - Construction of ring roads, bypasses, flyovers, etc. on BOT basis December 2015

The spending in road sector has a multiplier effect in Requirement of funds for maintenance of Highways as per the norms and funds provided
terms of job creation and increase in per capita income.
Hence any spending, whether by government or by a Year Requirement Amount Shortfall % Shortfall
private partner, definitely helps in economic stimulus. as per norms provided
Accordingly the government plans to invest around 2002-2003 2200.00 800.00 1400.00 63.64
Rs 1,00,000 crore to build about 12,000 kilometres of
2003-2004 2200.00 731.74 1468.26 66.74
roads for the F.Y 2009-10 mainly through the toll-based
model, with options to bring in foreign investors. 2004-2005 2480.00 745.56 1734.44 69.94

2005-2006 2100.00 868.10 1231.90 58.66


Inadequacy of funds is a prime reason for the demand-
supply gap. Road projects in the country require around 2006-2007 2012.00 814.38* 1197.62 59.52
Rs 2,00,000 crore over the next three years for which,
the Ministry of Road Transport and Highways are Source: Report of the working group on Roads ( 2007-12) for the 11th five year plan
considering innovative financing instruments that will
fund road projects and attract domestic and foreign Apart from funds, other factors as cited in the report
investors. Efforts are also being made to involve all of the working group include outmoded system of
possible investment channels, including pension funds, gang labour, weak planning, scheduling and monitoring
sovereign wealth funds, equity funds, besides funds of maintenance operations, inherent deficiencies in
from banks. The ministry has plans to boost road and structural thickness, lack of attention of drainage and
highway connectivity—at the rate of 20 km daily. poor enforcement of legal axle load limits which have
hastened the process of decay of the NH network.
5.3.2 Challenges Hence there is a need to deploy proper management
The road transport cost comprises of vehicle operating for maintenance of National Highways.
cost and road related cost. The vehicle operating cost
on Highways, which is major component of the total Some other challenges include land acquisition,
transport cost, is entirely dependent on the condition encroachment on highways, environmental and forest
of the roads. In order to reduce this total transport cost clearances, shifting of utilities, railway approvals for
it is essential to maintain the roads at a good level of rail overbridges, local law and order problems, poor
service. The existing NH network is under severe strain performance by some contractors, etc. This translates
due to rapid traffic growth, overloading of vehicles and in form of slower speeds of vehicular traffic. On an
the Government’s inability to provide the required funds average, the kilometer range per Commercial Vehicle
for maintenance of National Highways. per day in India is 240-280, as against 680-700 in the
developed countries.

37
5.3.3 Opportunities The industrial corridor will emerge within 150 km each
The Delhi-Mumbai Industrial Corridor side of the proposed 1,483 km long dedicated railway
Industrial corridors are considered an efficient way freight corridor. In the first phase it will cover six Indian
of integration between industry and Infrastructure states of Delhi (22 km), Haryana (148 km), Uttar Pradesh
leading to economic development. One of India’s most (22 km), Rajasthan (578 km), Gujarat (565 km) and
ambitious projects in recent years, the Delhi-Mumbai Maharashtra (148 km). The industrial corridor will have
Industrial Corridor (DMIC) is a massive project envisaged three ports, six airports and a 4,000 MW power plant to
across nearly 1,500 km of land and linking the two serve it apart from connectivity with existing sea ports
metros of N. Delhi and Mumbai. It aims to boost It would also link 10 cities with a population exceeding
the country’s industrial and economic development a million each – Delhi, Faridabad, Meerut, Jaipur,
by creating supporting logistics infrastructure. Japan Ahmedabad, Vadodara, Surat, Nashik, Pune and Greater
is committed to a huge investment for the project, Mumbai. The government also hopes to formulate a
planned on the lines of the Tokyo-Osaka industrial policy relating to ‘manufacturing investment regions’
corridor. DMIC would be beneficial to both the countries (MIRs), to attract foreign investments for the DMIC.
in terms of development of ports, business parks and
infrastructure. The $ 90 billion project is likely to be 5.4 Ports
executed in seven years. Ports provide an interface between the ocean transport
and land-based transport. India’s port infrastructure
constitutes of 12 major ports (Kandla, Mumbai,
Stretch covered by DFC and DMIC
Jawaharlal Nehru, Mormugoa, New Mangalore, Cochin,
Tuticorin, Chennai, Ennore, Vishakhapatnam (Vizag),
Haryana Dadri
Paradip and Kolkata including Haldia and around 187
Rajasthan non-major ports. Of the non-major ports, only around
Uttar 48 are operational; rest are only fishing harbors.
Pradesh

India India 5.4.1 Development needs


Gujarat
India’s port infrastructure constitutes 11 major ports, 1
Madhya Pradesh
corporate port &187 non-major ports. Of the non-major
ports, only around 48 are operational; rest are only
Arabian Maharashtra fishing harbours. Around 7 of the 12 major Indian ports
Sea Jn port
are operating at more than 100 per cent capacity, as
against an optimum range of 70-80 per cent utilization.

Dedicated freight Corridor (DFC)


Delhi-Mumbai Industrial Corridor (DMIC)

Source : Dedicated Freight Corridor Corporation of India Limited

Road projects in the country require around Rs 2,00,000


crore over the next three years for which, the Ministry of
Road Transport and Highways are considering innovative
financing instruments

38
Capacity utilization at the major ports ( 2007-08)

Million tonnes % Capacity utilization

70 140

60 120

50 100

40 80

30 60

20 40

10 20

0 0
Kolkata Haldia Paradip Vizag Ennore Chennai Tuticorin Cochin NMPT MGPT MPT JNPT Kandla
13.74 43.58 42.43 64.59 57.15 11.56 21.48 15.81 36.01 35.12 57.03 55.83 64.92
14.56 46.70 56.00 61.15 53.35 13.00 20.75 28.37 43.50 33.05 44.70 54.34 62.60
94 93 76 106 107 89 104 56 83 106 128 103 104

Traffic Capacity Utilization (%)

Source: Indian Ports Association

Further, available data show a drastic decline in


augmented capacities at major ports during the last four
years. While there was a 14.8 per cent increase to 456.2
Million MT in major port capacity during 2005-06, the
year 2006-07 saw capacity additions decline to 10.6
per cent. During 2007-08, new capacity additions were
limited to 5.4 per cent and they are projected to further
decline to 4.4 per cent in 2008-09.

39
Aggregate capacity & capacity additions at major ports (2005-2009) non-major ports. Also, port projects typically suffer from
delay in environmental clearances, which on an average
Year Capacity in Additional % Increase take approximately a year and a half for each project.
million tonnes capacity in Going forward, these issues will need to be addressed
million tonnes on a proactive basis. Further, due to global meltdown
As on 31-03-2005 397.50 - - reduction in trade has resulted in decline in cargo traffic.
As a consequence, recently awarded port projects may
As on 31-03-2006 456.20 58.70 14.8
find it difficult to achieve financial closure. While publicly
As on 31-03-2007 504.75 48.55 10.6 funded port projects will stay relatively unaffected,
As on 31-03-2008 532.07 27.32 5.4 private sector port projects would face difficulty in
raising funds.
As on 31-03-2009 555.67 23.60* 4.4
5.4.3 Opportunities
Source: Ministry of Shipping On the positive side, with the Government encouraging
private participation in port development, non-major
5.4.2 Challenges ports have begun contributing significantly to the
Lack of proper facilities, deeper drafts, good connectivity economy. The relative share of non-major ports has
and necessary equipment / technology has contributed grown from 26 per cent to 28 per cent in the four years
to high logistics costs. At present, a lot of time is wasted since 2004-05. While the total capacity of non-major
because of pre-berthing delays. The average turnaround ports in 2008-09 is estimated at 228.3 Million MT, the
time of vessels at major Indian ports ranges from 1.77 corresponding total cargo handled was 220 Million MT.
days to 4.82 days. Dwell time for EXIM containers at
Indian ports is between 1-3 days compared to less than The new Government’s ambitious agenda to award 6
a day at Singapore. Larger vessels, having the potential concessions for ports and initiate for 20 others through
to cut substantial cost, are unable to call at Indian ports PPP totalling to more than Rs. 3300 crore, within a span
due to limited draft. The draft available at international of 3 months, is being regarded as a welcome move.
ports ranges from 12 m to 23 m whereas, in India Players with ports as their core business can now invest
except for a handful of ports like Kandla, Mundra, in strengthening their back-end and soft infrastructure
Ennore, Gangavaram & Krishnapatnam, other ports have such as connectivity linkages and alliances as well
an average draft ranging from 8m to 12m This issue as initiatives for productivity improvements, service
will be partly addressed with the commencement of augmentation and customer development. Foreign and
operations at the much awaited International Container private equity investments in Indian ports in recent times
Transshipment Terminal at Vallarpadam, Cochin Port. reflect a strong faith in India’s port sector and
suggest the inflow of more such funds in the
Port development is further bogged down by the need forthcoming period.
for getting multiple clearances. Multiple agencies
are involved in granting approvals to port projects. Container TEUs handled by foreign operators at various
Indian ports (2008)
These involve project appraisal by the Planning
Commission, Law Ministry, and Ministry of Finance.
Foreign Million Ports
This preliminary process of consultation among
operator TEUs
inter-ministerial groups, prior to Cabinet approval is
Maersk 1.48 JNPT, Pipavav
inherently time consuming. To add to the concern, the
National Maritime Development Programme (NMDP) is Dubai World 2.85 JNPT, Chennai, Kochi,
progressing at a slow pace with many project delays Visakhapatnam, Mundra
and cost escalations. So far, only 41 of the total 253
PSA Singapore 0.45 Tuticorin, Chennai
port projects and 5 of the 111 shipping projects have
been completed. Other issues facing Indian ports relate Source: Business India issue dated May 31, 2009
to port security, and land acquisition particularly for

40
PSA also has a stake in ABG Kandla Container Terminal, 5.5.1 Development needs
which is the concessionaire for Kandla Port. Dragados & The rapid growth in air traffic over the last few years
Gammon collaborating to develop the Mumbai Offshore exposed the deficiencies of airport infrastructure across
Container Terminal is yet another case of foreign the country. After decades of neglect, many of India’s
investment airports were forced to operate well above design
capacity. The resulting congestion in the terminals
Private Equity investments in non-major ports and on the runways delivered a poor experience
for the passenger and a costly, inefficient operating
Company PE Investor Amount (Rs. crore) environment for the airlines. However, although a
weakness today, it would gradually cease to be so, as
Gujarat Pipavav Port IDFC PE 192
the airport modernization program starts to deliver
SICAL IDFC PE 116 results, with new airports in Bangalore and Hyderabad,
Mundra Port GIC, 3i 450 and improvement in facilities at Delhi and Mumbai.
There are 454 airports / airstrips in the country which
Chennai Container Global Infrastructure 25% stake include operational, non operational and abandoned
Terminal Partners airports, whose ownership pattern is illustrated in the
Dighi Port IL&FS 20% stake figure below:

Krishnapatnam Port 3i 994


Ownership pattern of the airports/ airstrips (operational /
Gangavaram Port Warburg Pincus 150 (30% stake) non-operational) in the country (2008)

Source : Business India issue dated May 31, 2009


21%

The concept of port-based SEZs is fast catching up


amongst Indian investors ever since the successful 30%

launch of Mundra Port SEZ. It establishes that credible


port infrastructure is no more value-adding, but
imperative for development of globally competitive
hubs of economic activity and thereby promoting
international trade. 14%

5.5 Aviation
Civil Aviation plays a pivotal role in economic growth
of a nation. Airline industry not only brings efficiencies
in transportation of both people and cargo, but for
35%
a country like India, it can create a large number of
jobs too. It is estimated that every $100 spent on air
AAI State government
transport yields benefits to the tune of $325 to the
Private owners Defence department
economy and 100 additional jobs in aviation result in
610 other new jobs. Having recognized its strategic Source: 11th Five Year Planning Commission’s working group report
importance, Indian aviation has transformed from an on Civil Aviation
over regulated and an under managed sector to a more
open, liberal and investment friendly sector since 2004.
Compliance with global standards has also made air
transport, the safest mode of transportation.

41
The Government has acknowledged the infrastructure In addition, while there are a lot of new avenues
deficiency and has wisely sought private sector in aerospace services in the coming decades, the
participation to facilitate infrastructure improvements constraints associated needs to be addressed to enable
(modernization of Delhi and Mumbai airports, the smooth growth of the sector.
commissioning of Greenfield projects at Hyderabad and
Bengaluru, modernization of 35 non metro airports). 5.5.3 Opportunities
The estimated investments at Delhi airport are in the Maintenance and repairs overhaul
order of Rs. 7,531 crores; while that at Mumbai airport MRO as an aviation segment represents a relatively
is estimated to be in the region of Rs. 11,553 crores. untapped opportunity. They include engine overhaul,
Greenfield airport projects have also been proposed at airframe maintenance, heavy checks and line
Goa, Navi Mumbai, Pune, Greater Noida and Kannur. maintenance, component overhaul and major airframe
The objective is to develop facilities conforming to modifications. At present, major part of the MRO work
international standards and try to encourage the for the Indian aircrafts is outsourced to the service
domestic operators to shift base, so as to decongest providers in Europe and Singapore. While airlines are
the major airports. AAI is in the process of carrying out increasing and strengthening their in-house MRO
feasibility studies for this purpose. The Civil Aviation facilities, dedicated MRO players are also entering
Ministry has set a target of getting around 500 airports the Indian aviation space. The Indian MRO market is
operational in the country by 2020. This will include growing at about 15 per cent annually. The entire Asia
renovation of used airports, developing Greenfield Pacific aircrafts and engine MRO market is estimated
airports, establishing merchant and low cost airports to touch US$ 12.9 billion in 2011. Major components
and airports dedicated to movement of cargo and of MRO services in India include engine overhaul and
logistics. components. Together, these account for around 60 per
cent of MRO services business in terms of value.
5.5.2 Challenges
Despite the high growth rates witnessed in the last five
years, certain pressing issues need to be resolved to
realize the full potential of the sector. These include:

• High waiting time and congestion in airports causing


The Civil Aviation Ministry has
huge wastage of fuel
• Airlines incurring losses
set a target of getting around 500
• Taxation issues
• Aviation security
airports operational in the
• Shortage of skilled technical manpower
• High airport and security charges
country by 2020
• Inadequate night parking facilities
• Less number of gates and counters
• Inadequate security machines and shortage of security
personnel
• Requirement of good baggage system
• Lack of maintenance facilities at airports

42
security concerns and up-gradation of navigational
Ownership pattern of the airports/ airstrips (operational /
(2008) aids, traffic control services and adoption of traffic
management technology will further strengthen the
4% demand.
17%

The systems for which demand is expected to rise


include Dedicated Satellite Communication Network
(DSCN), Automatic Message Handling System
(AMHS), Flight Information Display System (FID),
Aeronautical Telecommunication Network (ATN), Voice
Communication and Control System (VCCS) among
others. India imports more than 60% of airport and
20%
ground handling equipments currently. The AAI alone
has an annual budget of US$ 60 million for equipments
purchase. This represents a lucrative opportunity for
40% suppliers of ground support equipments based on latest
technology which increases efficiency and are cost
7% effective in operations. Global manufacturers, by setting
up manufacturing plants in India, can take advantage
12%
of lower input costs, lower labour rates and liberalized
Line Maintenance Airframe (Heavy) aviation policies and manufacture high technology
Components Engine Overhaul equipment at relatively lower costs in India.
Modifications Others
India—as an air cargo hub
Source : www.reserachwikis.com India has a great potential for becoming a possible
cargo hub for SAARC and ASEAN countries and its
Recently, three different joint ventures between Indian strategic location as a transit destination connecting
companies and foreign companies like Airbus, Boeing the eastern- western global corridors. The Civil Aviation
and SIA Engineering have embarked upon setting up ministry has identified Nagpur as India’s national cargo
of MROs. A satellite MRO centre is planned at Chennai hub and has promised an aviation policy for providing
Aero Park. Gujarat government is examining the significant concessions for air freighter operations out
prospects for developing MRO business and making of Nagpur. There are also plans of creating a national
Gujarat, a MRO hub in the region. grid for cargo hubs at various airports in India with cold
storage and warehousing facilities. The Government has
Airport and ground support equipment chalked out various policies and plans for development
Airport and ground support equipment segment of the air cargo infrastructure thereby providing
presents another opportunity with estimated market opportunities to the various entities involved in the
size of US$ 359 million in India for 2008 and expected value chain. Civil aviation ministry proposal to set up
to cross US $ 400 million over next three years. With dedicated cargo airports and Government’s plan to
up-gradation and modernization in place, demand for allow cargo airports within 150 kms radius of existing
technology driven ground support equipments is set airports through automatic routes are major steps taken
to grow. Needless to say, modernization of airports to the cause of developing India as a cargo hub.
to world class standards in the country will make it
imperative to equip airports with the best airport and
ground support equipments. Increased safety and

43
5.6 Infrastructure finance
Infrastructure projects being capital intensive, with long
gestation periods; the Financial Institutes (FIs) and the
banks need to create new structures to facilitate the
Civil aviation ministry proposal
funding. Most infrastructure projects are financed at a
debt: equity ration of 70: 30. The following agencies
to set up dedicated cargo airports
usually finance the debt portion: and Government’s plan to allow
• Multi lateral agencies like World Bank, International
Finance Corporation (IFC), Asian Development Bank
cargo airports within 150 kms
(ADB). radius of existing airports
• Development Financial Institutions like Industrial
Finance Corporation of India (IFCI), Industrial
through automatic routes are
Development Bank of India (IDBI), Small Industries
Development Bank of India (SIDBI), Infrastructure
major steps taken to the cause of
Development Finance Corporation (IDFC), Power
Finance Corporation (PFC) etc.
developing India as a cargo hub
• India Infrastructure Finance Co Ltd (IIFCL), a 100 per becoming a fairly acceptable form of financing. Other
cent government owned infrastructure financing SPV typical ways of funding are rupee term loan, extending
formed in January, 2006. of foreign currency loans, providing non fund based
credit facilities such as opening of project letter of
• Foreign Commercial Banks credit, issuing of bank guarantee for the project.

• Domestic Banks New ways of structuring like take-out financing, roll


over financing, put-call options, hedging / swapping of
Domestic banks have traditionally been reluctant to exchange / interest rate risks etc are also being offered
finance infrastructure projects due to long gestation for funding of long gestation projects. The projects are
period, low commercial viability and unpredictable funded on their viability, projected cash flow and their
revenue stream. However with several positive ability to service the debt. The user’s willingness to pay
developments in policy and legislation, banks are slowly for the services availed affects the cash flow. Sectors
evolving appropriate financing structures for funding such as power, roads, ports, airports and telecom have
infrastructure projects. Project financing remains the been able to raise funds due to level of clarity of govt
basic form of infrastructure development. The lenders policies, historical performance of the sector and the
are also developing innovative structures depending on user’s willingness to pay. The strength and experience
the extent of government participation, loan tenor and of the promoters, concession framework, tax benefits to
risk associated with the project. Avenues like corporate the project, inputs / off-take arrangements add to the
bond market; securitisation of receivables etc is slowly bankability of the project.

44
5.7 The PPP approach Model Concession Agreement (MCA) being used to
Sustaining and accelerating India’s economic growth provide a stable regulatory and policy framework. The
would require substantial investments in infrastructure MCA regulates the PPP contracts by defining the rights
development. Infrastructure development in India would and obligation of all parties concerned. In case a project
require a massive investment of US$492 billion during is not viable due to either long-gestation periods or
the 11th Plan Period, according to an estimate by the inadequate returns, the government is committed to
Planning Commission. Since such massive investments provide up to 40% funding by way of grants in some
cannot be undertaken by public financing alone, the cases, called viability gap funding.
government has identified and is encouraging public
private partnership (PPP) in infrastructure development. There are four major areas that needs to be addressed
for the PPP model to be successful:
PPP offers a distinct possibility for increasing total
investments by using a limited amount of public • A stronger policy and regulatory framework both at
resources to leverage a much larger amount of private the centre and states
investment. Given the bottlenecks and inefficiencies
often encountered in public infrastructural investment, • Appropriate market instruments and capacity to raise
such PPPs could also increase economic efficiency and long term equity and debt
lower the capital requirement, provided that regulatory
mechanisms are adequate. • Credible and bankable infrastructure projects

In India, due to policy changes and reforms, Public • Strengthening of government capacity to manage PPP
Private Partnerships (PPPs) have increasingly become projects.
slowly the preferred mode for construction and
operation of infrastructure services such as highways, PPPs present an opportunity to meet India’s investments
airports & ports. PPPs can be undertaken through a needs that can be translated into a win-win situation
range of alternatives such as BOT, BOOT etc, with the for all.

Infrastructure development in India would


require a massive investment of US$492
billion during the 11th Plan Period, according
to an estimate by the Planning Commission

45
6. Conclusions

The logistics industry will continue to be the focal point • Increased customer expectations - Customers will be
of strategy formulation, operational excellence and moving away from tactical transactional based service
information technology to make maximum contribution outsourcing to solutions that are more strategic in
in value creation for customers. Globalization, nature and supported by leading edge technology
consolidation, technology advancements and and systems.
outsourcing have only led to growth in the logistics
services market and this industry will continue to evolve Firms can enhance their market competitiveness by
in the coming years. reducing their logistics costs, thus lowering the total
costs of goods and services. Any impetus to improve the
Industry research suggests that the following competitiveness of the firms at the national platform
interdependent factors will shape the Global Logistics would enable the nation to register a dynamic economic
Industry over the next 5-10 years: performance in a global environment. USA has
successfully reduced its logistics cost as a percentage of
• Globalization and consolidation - Mergers and GDP from 17% in 1980 to its present level of 9.5 % by
acquisitions of firms are leading to formation of incorporating macro level reforms in the transportation
entities having capability to provide a “single point infrastructure coupled with micro level upgradation of
of contact” to manage global supply chains for their logistics facility in individual firms. India has therefore
clients. Globalization of traditional businesses is got a huge opportunity of reducing its national logistics
driving the logistics industry to address considerations cost by studying and benefiting from other success
like market expansion, new sources of supply, stories. Indian logistics firms will have a major role in
international trade, etc. achieving this cost reduction.

• Increased outsourcing - Companies are utilizing This may include upgrading the macro logistics
logistics outsourcing more and more in order to infrastructure to world class standards and by providing
increase flexibility and responsiveness in their supply a facilitative role to the SME players in the logistics
chain. Global supply chains are getting increasingly sector to improve their service level competitiveness.
complex to manage and companies are focusing
more on core competencies. Government initiatives like development of SEZs,
logistics parks, infrastructure building, privatization of
• Security and risk management - Supply Chain Security transport operations, implementing PPP models etc.,
and Risk Management will be a key area to prevent will encourage private sector investment and lead to
disruptions due to factors like weather, labor issues, greater demand for logistics services. Moreover, growth
strikes, diseases like SARS, or terrorist attacks. of user industries like retail, telecom, consumer goods,
automotive, pharmaceuticals, foods and beverages etc.
• Technological advancements - Rapid advancements in notwithstanding the current economic slowdown will
supply chain technology enablers (like RFID) will lead provide further impetus to logistics services
to increased functionality and greater potential to across sectors.
improve performance of supply chains.

46
Drivers like these and the push / pull pressures
created by the market forces will not only trigger
structural changes in the logistics industry resulting India has got a huge opportunity
in specialization, consolidation, outsourcing, service
migration, new markets, new services but will also of reducing its national logistics
create challenges around service, delivery, quality and
cost as customer needs become more demanding cost by studying and benefiting
and complex.
from other success stories
SMEs, forming the core of the logistics industry, will
be impacted by this transition in a major way and
will have to focus on improvement of its internal
operations, processes, technology upgradation, resource
utilization, service quality, customer relationships, market
intelligence, and financial strengthening, in a nutshell in
overall capability enhancement - in order to respond to
and gain from the changing environment.

47
Abbreviations

2pl Second party logistics IFCI Industrial Finance Corporation of India


3pl Third party logistics IIFCL India Infrastructure Finance Company Limited
4pl Fourth party logistics IRCTC Indian Railway Catering and Tourism
Aai Airports authority of india Corporation
Adb Asian development bank ITES Information Technology Enabled Services
Amhs Automatic message handling system JNPT Jawaharlal Nehru Port Trust
Apeda Agricultural and processed food products LSP Logistics Service Provider
export development authority MHE Material Handling Equipment
Asean Association of southeast asian nations MIR Manufacturing Investment Region
Atn Aeronautical telecommunication network MRO Maintenance and Repairs Overhaul
Bot Build, operate and transfer MT Metric Tonne
Cfa Clearing & forwarding agent MW Mega Watt
Cfs Container freight station NH National Highway
Cmie Centre for monitoring indian economy NHAI National Highways Authority of India
Concor Container corporation of india NHDP National Highways Development Programme
Cpc Centre for perishable cargo NMDP National Maritime Development Programme
Cpi Consumer price index NSEW North South East West
Cst Central states tax OECD Organization for Economic Co-operation
Dbfo Design, build, finance and operate PFC Power Finance Corporation
Dmic Delhi mumbai industrial corridor PPP Public Private Partnership
Dscn Dedicated satellite communication network RBI Reserve Bank of India
Edi Electronic data interchange RFID Radio Frequency Identification
Erp Enterprise resource planning SAARC South Asian Association for Regional
Exim Export import Cooperation
Fdi Foreign direct investment SCM Supply Chain Management
Fids Flight information display system SEZ Special Economic Zone
Fy Financial year SIDBI Small Industries Development Bank of India
Gdp Gross domestic product SME Small and Medium Enterprise
Gps Global positioning system SOP Standard Operating Procedure
Gq Golden quadrilateral SWOT Strength-Weakness-Opportunities-Threats
Gst Goods and service tax TEU Twenty feet Equivalent Unit
Hr Human resource VAT Value Added Tax
Icd Inland container depot VCCS Voice Communication and Control System
Idbi Industrial development bank of india WMS Warehouse Management System
IDFC Infrastructure Development Finance
Corporation

48
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Management” by Donald Waters
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Implementation

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49
Contacts

Mr. Hemant Bhattbhatt


Senior Director
Deloitte Touche Tohmatsu India Pvt. Ltd.
31, Nutan Bharat Society,
Alkapuri
Baroda-390 007
Tel.: +91 (265) 2333 776
Mobile: +91 98240 14075
Fax: +91 (265) 2339 729
Email: hbhattbhatt@deloitte.com

50
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