Logistics Sector

Present situation and way forward

January 2012
www.deloitte.com/in
2
Logistics Sector Present situation and way forward 3
Contents
About Deloitte 4
About ICC 5
Overview 6
I. Challenges faced by the Logistics industry in India 8
II. Impact of challenges faced 13
III. The way forward 14
Bibliography 16
Websites 18
Contacts 19
4
About Deloitte
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Logistics Sector Present situation and way forward 5
About ICC
Founded in 1925, Indian Chamber of Commerce (ICC)
is the leading and only National Chamber of Commerce
operating from Kolkata, and one of the most pro-active
and forward-looking Chambers in the country today. Set
up by a group of pioneering industrialists led by Mr G
D Birla, the Indian Chamber of Commerce was closely
associated with the Indian Freedom Movement, as
the rst organised voice of indigenous Indian Industry.
Several of the distinguished industry leaders in India,
such as Mr B M Birla, Sir Ardeshir Dalal, Sir Badridas
Goenka, Mr S P Jain, Lala Karam Chand Thapar, Mr Russi
Mody, Mr Ashok Jain, Mr.Sanjiv Goenka, have led the
ICC as its President. Currently, Mr. Shrivardhan Goenka
is leading the Chamber as it's President. ICC is the
only Chamber from India to win the rst prize in World
Chambers Competition in Quebec, Canada.

ICCs North-East Initiative has gained a new momentum
and dynamism over the last few years, and the Chamber
has been hugely successful in spreading awareness
about the great economic potential of the North-East at
national and international levels. ICC has a special focus
upon Indias trade & commerce relations with South &
South-East Asian nations, in sync with Indias Look East
Policy, and has played a key role in building synergies
between India and her Asian neighbours like Singapore,
Indonesia, Bangladesh, and Bhutan through Trade &
Business Delegation Exchanges, and large Investment
Summits.

ICC also has a very strong focus upon Economic
Research & Policy issues - it regularly undertakes
Macro-economic Surveys/Studies, prepares State
Investment Climate Reports and Sector Reports, provides
necessary Policy Inputs & Budget Recommendations to
Governments at State & Central levels.

The Indian Chamber of Commerce headquartered in
Kolkata, over the last few years has truly emerged as a
national Chamber of repute, with full-edged ofces
in New Delhi, Guwahati, Patna and Bhubaneshwar
functioning efciently, and building meaningful
synergies among Industry and Government by
addressing strategic issues of national signicance.
Indian Chamber of Commerce, New Delhi Ofce
D -118, Ashirwad Complex
Green Park Main
New Delhi - 110 016
Phone: 011 46101431-38
Fax: 011 4610 1440/1441
E-mail: energy@indianchamber.net

Indian Chamber of Commerce, Head Ofce
4 India Exchange Place, Kolkata 700 001
Phone: 033-22303242
Fax: 033 2231 3380, 3377
E-mail: ceo@indianchamber.net
Website: www.indianchamber.net

Indian Chamber of Commerce, Bhubaneswar Ofce
32-East Ashok Nagar,
Bhubaneswar, Orissa
Phone: 91-674-2532744
E-mail: rd.orissa@indianchamber.net

Indian Chamber of Commerce, Guwahati Ofce
House No.209, 2nd Floor
Opp. Overtnite Express
Near AIDC, R.G.Barua Road
Guwahati - 24
Phone: 0361 2460216 / 2464767
Fax: 0361 2461763
E-mail: iccner@indianchamber.net

Indian Chamber of Commerce, Bihar Ofce
11/B, Dumri House, Kavi Raman Path,
East Boring Road,
Patna 800001 BIHAR.
Tele Fax No.: +91-612-2533636
E-mail: rd.patna@indianchamber.net
6
Overview
The logistics sector in India has today become an area
of priority. One prime reason for the same stems from
the reason that years of high growth in the Indian
economy have resulted in a signicant rise in the volume
of freight trafc moved. This large volume of trafc
has provided for growth opportunities in all facets of
logistics including transportation, warehousing, freight
forwarding, express cargo delivery, container services,
shipping services etc. The growth path has also meant
that increase demand is being placed on the sector to
provide the solutions required for supporting future
growth. Going forward it will not be wrong to say that
the strength of the logistics sector is likely to be one of
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1950-51 1978-79 1986-87 2007-08
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Growth in Freight Volumes the key determinant of the pace of future growth of the
economy.
Various estimates put the market size of the logistics
sector in India to be between USD 90-125 billion. Given
that the Indian economy has grown to over USD 1.73
trillion these estimates may already be well below the
actual size of the industry. Sources also estimate that the
industry employs over 45 million people and is growing
at the rate of 15% with sub-sector growing at even
30-40% per annum. Due to its current growth and its
future growth potential the Indian logistics sector is
viewed as one of the most attractive in the world. The
Emerging Market Survey, 2011 conducted by Transport
Intelligence highlights Indias attractiveness as a strong
growth area for logistics in the future. The survey found
that nearly half of its respondents agreed that India
would emerge as a major logistics hub in the future.
Also Indias rapid growth and market size were the key
factors for global players looking at opportunities in the
region.
Despite holding promise the logistics sector in India
remains mired in several complexities which have the
potential of holding it back. These include signicant
inefciencies in transportation, poor condition of
storage infrastructure, a complex tax structure, low rate
of technology adoption and poor skills of the logistics
professionals. The key challenges for the sector are
highlighted in the following section.
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Source: Agility Emerging Markets Logistics Index, 2011
Survey carried out on 338 industry professionals around the world
8
I. Challenges faced by the
Logistics industry in India
Transportation related challenges
In India road has become the predominant mode of
transportation of freight cargo. Estimate of the modal
movement of cargo highlights that In India nearly 61%
of the cargo is moved by road, 30% by rail and rest
by airway, pipelines and inland waterways. This is as
compared to a 37% share of road in the USA and 22%
in China.
It is recognized that movement of long haul bulk trafc
by road is less efcient than by rail. But road is still
preferred over rail because:
Important rail networks are oversaturated: There
has been little investment in track infrastructure since
independence. While route kilometer has grown
only at a CAGR of 3%, track kilometer, incorporating
additional lines on existing routes, has not fared much
better growing at a low CAGR of 6.6%. During the
same period freight and passenger trafc has grown
at a CAGR of nearly 54%. This has led to most high
density corridors becoming over saturated.
Rail freight tariffs are high: Indian Railways follows
a policy of subsidizing passenger tariff by freight tariff.
This has resulted in a sharply rising trend in railway
freight rate over the years compared to an almost
stagnant passenger tariff rate. The result of this has
been that Indian rail freight rates have already become
one of the highest in the world, with freight rates
in India being nearly 4 times that in United States. If
truck overloading is also taken into account then rail
freight rates work out to be higher than road freight
in many instances.
Transit times are long and uncertain: Freight trafc
is frequently subordinated to passenger trafc on the
railway network. This results in a freight train taking
as much as 6-8 days for a journey of 2000 kilometers.
Also there is no guarantee provided on the transit time
for freight trains.
Rail terminal quality is poor: Most rail terminals
(goods shed) used for loading/unloading of freight are
antiquated. They also suffer from issues of access and
evacuation of trafc.
Less exibility in carrying different types of
products: Special wagons are not easily available for
carrying specialized products. For example special
types of steel required for automobile production
have to be carried by trucks as the existing wagons
do not offer the kind of protection that these high
value products require. While customers are allowed
to request for new wagon designs the process of
getting these wagon designs approved by railways is
cumbersome.
Railway carriage not easy for industries which
cannot provide full train loads: Railways have a
preference for customers who can provide full train
load as unlike in some other countries, railways in
India no longer run mixed trains which can carry
different types of cargo. Operational efciency is cited
as the major reason for the same. While containerized
rail movement can provide for freight movement for
industries with smaller rake loads domestic container
movement has not taken off in a big way- with one
of the issues being a lower priority being accorded to
container trains on the railway network.
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Sources: RITES
Railway Highway
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Source: Indian Railways
Route and Track Km. Growth
Route kilometers
Track kilometers
Logistics Sector Present situation and way forward 9
While road movement is preferred to rail, road
movement has its own fair share of issues. These
include:
Inadequate road network coverage: Freight
movement in India is dependent on National
Highways. While National Highways constitute only
about 2% of the road network of India they carry
nearly 40% of the total trafc. As a result most of
these highways are severely congested- resulting in
freight travelling only a third of the distance compared
to developed countries.
Poor road quality: The road quality in India, on
the National Highways as well and other roads, is
improving but is still poor in many locations. Estimates
suggest that motorable roads are still less than 10%
of the total road network. Large stretches of National
Highways are also two laned in many stretches
reducing their capacity to handle large trafc loads.
Expressway network will take time to develop: In
many developed countries expressways have been
developed to facilitate high speed freight movement
through linking of important cities, ports and industrial
centers. In India the expressway network is still largely
at a planning stage with a target of development of
around 15,000 kilometers of expressways only by the
end of the 13th plan period.
High level of fragmentation of the trucking
industry: The trucking industry in India is largely
fragmented and in the hands of small truck operators.
Estimates suggest that nearly 70% of the truck owners
in India own between 1-5 trucks. As a result of
disaggregated ownership there is erce competition
amongst operators leading to truck owners resorting
to overloading to recover investments. Also due to
the limited investment capacity of these operators
technology in terms of better vehicles (average age of
trucks in India is over 10 years), tracking, safety etc.
has been slow to percolate.

Multiple check points: Trucks in India have to pass
through multiple check points in their journey. Trucks
have to stop at state borders, for payment of toll
taxes, for RTO inspections, Octroi etc. An estimate
of the time taken at the check points shows that in
a journey of 2150 kilometers between Kolkata and
Mumbai a truck had to stop for as much as 32 hours
at various checkpoints on 26 different locations.
1

In addition to roads and railways which carry the bulk
of freight trafc in India other modes of freight carriage
also suffer from their own issues.
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Source: Indian Railways
Freight rate increase
Average rate per passanger km. Average rate per ton km.
1
Presentation by Mr. K Rajkira
on Logistics in India on 10th
August, 2009
10
The ports sector in India suffers from several issues:
High turnaround times: Data from Indian Ports
Association shows that ports in India suffer from high
turnaround times for ships. JNPT, which is the premier
port in India, has more than 2 times the turnaround
time of Colombo and Singapore ports because of
congestion on berths and slow evacuation of cargo
which are unloaded at the berths.
Inadequate depth at ports: The depth at many ports
in India is not enough and dredging tenders take a
long time in getting awarded. As a result with the
existing depths many ports are not able to attract very
large vessels.
Costal shipping has not taken off: Costal shipping
in India is hampered by inadequate port and land side
infrastructure which hampers large scale use of it for
freight movement.
Finally Air cargo has also not taken off signicantly in
India. With increased volumes of cargo major airports
are getting congested resulting in long waiting time. The
waiting time for exports in India is 50 hours compared
to a World average of 12 hours while the waiting
time for Imports in India is 182 hours compared to a
World average of 24 hours. Also the airfreight sector
suffers from high fuel costs and tariffs as well as several
manpower issues.
Logistics Sector Present situation and way forward 11
Storage infrastructure related challenges
In addition to the poor transportation infrastructure
the storage infrastructure in India also needs signicant
improvement.
State of ICD/CFS is poor: The ICD/CFS infrastructure
available for EXIM trade is inadequate. The land
requirement for setting up ICD/CFS at an appropriate
place is difcult to come by as several hurdles have
to be cleared in the consolidation of land. As a result
many logistics companies with an interest in setting up
ICD/CFSs eventually fail to do so, mostly on account
of lack of land availability at an appropriate place.
While it is difcult to set up a facility, at the same
time, the existing facilities themselves are plagued
with several issues:
Many of the older facilities today are located
within city boundaries restricting day movement of
trucks
The approach roads to the facilities are poor
making evacuation of cargo difcult
Most facilities have issues of inadequate parking,
lack of available land for expansion, paving etc.
State of warehousing is poor: Various estimates put
warehousing costs to be between 20-25% of the total
logistics cost. Despite this the state of warehousing
in India is largely dismal. On the warehousing front
80-85% of warehouses are traditional with sizes
of less than 10,000 square feet. Most of these
warehouses are not leak proof, equipped with security
systems, racking facilities and other facilities. Majority
of the operators of these warehouses are also small
to mid-sized entrepreneurs with limited investment
capacity. The only really large warehousing owners are
government agencies including Central Warehousing
Corporation and State Warehousing Corporations, but
the focus of a signicant majority of the government
warehouses is food grain storage.
Not only are the existing warehouses of poor quality,
there are also not enough of them. This is because
land availability for warehousing at an appropriate
place and at an appropriate price is a concern.
The magnitude of the problem in this regard was
highlighted in a recent CII conference on warehousing
where it was highlighted that Delhi alone has a
decit of 9000 acres of land for development of
warehousing facilities!
0 10 20 30 40 50
Colombo
Rotterdam
Hongkong
Singapore
JNPT
Source: IPA data
Turnaround time at ports in hours
12
State of cold storages is poor: Despite the
signicant requirement of cold storages from the retail
sector, pharmaceutical and chemical sector and the
farm sector, where it is estimated that upto 40% of
the fruits and vegetables grown in India gets wasted,
the sector needs to grow much faster to meet the
needs. Estimates on cold chain facilities in India put
the number of cold storages at around 5400 with a
capacity of 24 million metric tons. However nearly
60% of these facilities are meant for storage of potato
crop. Also with the poor electricity condition in the
country the cost of operating such facilities is very
high. With government intervention and various sops
the situation is slowly improving but many challenges
remain.
Multimodal Logistics parks yet to take off: With
emerging requirements of integrated logistics,
provision of transportation hub, value addition etc.
large logistics parks were sought to be developed.
However as with other areas the number of such
facilities continues to remain much less than the
requirement. Consolidation of large land parcels is a
signicant issue hampering their development. Other
issues include the lack of recognition of the concept of
logistics park by state government thereby obtaining
permission for setting up one cumbersome.
Tax structure related challenges
A complicated tax regime is in place which places
several challenges on the logistics industry. Payment of
multiple state and central taxes results in:
Considerable loss of time in transit for road freight in
order to pay such taxes
Fragmentation of warehousing space especially for
low margin products thereby providing a disincentive
to create large integrated warehousing spaces
A uniform tax structure to be introduced through the
GST is being highlighted as a panacea for the existing
situation. If implemented in spirit GST will enable
logistics services to be provided without consideration
for tax boundaries. However while the introduction of
GST looks fairly certain several companies have already
started raising doubts about the nal shape the bill will
take, given the deep divisions between several state
governments and the central government on the issue.
Technology and Skills related challenges
The logistics industry is also hampered by low rates
of technology adoption and poor skill levels. On the
technology front the industry now seems to be paying
serious attention with use of RFID, vehicle tracking
technologies, warehouse management systems etc.
However while acceptance is perhaps not an issue any
more, the marriage between IT and domain requirement
needs to be resolved. Automation in processes is still
only in its infancy. Further progress is dependent on a
certain level of standardization which is made more
difcult by the high level of fragmentation in the
industry. This is a drawback that needs to be tackled
early.
In addition to technology-related issues the skill levels
of in the logistics industry also require to be upgraded
urgently. As of now courses focusing on logistics
industry remain few and far between. Also logistics
industry is still not looked at as the industry of choice
for young graduates thereby making hiring of quality
professional manpower challenging. On the ground
level too there are challenges. A recent study has
found that a variety of skills are required in the sector.
These include technology skills, driving skills including
safety procedures, industry understanding and multi-
operations skills. The present state of affairs is illustrated
by example of truck driver in India, who is a critical point
of contact for the logistics company with its customers
where the truck drivers today nd it difcult to
accurately record delivery records, understand delivery
documents, negotiate for return business, handle
queries etc.
Logistics Sector Present situation and way forward 13
II. Impact of challenges faced
The various challenges faced by the logistics industry
lead to high logistics cost incurred by the Indian
Economy. This is despite the fact that the cost of labor,
one of the most signicant contributors to logistics cost
in developed countries, is signicantly cheaper in India.
With regards to cost of spends on logistics, Indias
logistics sector accounts for 13% of the GDP of India.
This is much higher than that in the US (9%), Europe
(10%) and Japan (11%) but lower than in China (18%)).
Major elements of logistics costs typically include
transportation, warehousing, inventory management
and other value added services such as packaging.
What is worrying about the logistics costs in India is the
distribution of costs across various heads. As can be
seen from the accompanying chart, in India, as much as
31% of the logistics cost is attributable to the others
category, which primarily includes various types of
losses.
If looked at from the perspective of logistics cost as
a percentage of the total product cost India again
fares poorly. The logistics cost as a percentage of total
product cost in India is in the range of 4-5 times that
in developed countries, to the tune of 20% of product
cost. This is at a time when the quality of logistics
services provided is not of the highest standards. Also,
worryingly, these costs have been showing a rising
trend. Fuel price hikes have sharply increased the cost
of freight transport. Ever increasing congestions at ports
are resulting in high levels of ground rents required to
be paid at CFSs near the ports. High levels of inventories
are being required to be maintained to guard against
sudden disruptions in supply chain, all of which adds to
the cost.
The high levels of logistics cost in the economy adversely
impacts the competitiveness of the Indian economy as
well as the nancial well-being of the individual citizen.
Additions to product cost due to inefcient logistics
adds to ination. Wastages lead to scarcity. This makes
efforts for reducing logistics costs a critical goal to
pursue.
The rewards of reduction in logistics cost are many.
As has been shown for other parts of the world,
decrease in logistics cost leads to signicant increase in
employment opportunities in the economy. Also it helps
in increasing the trade ows in a country by increasing
the inherent competitiveness of the economy. Finally,
and importantly for India, decrease in logistics costs
leads to a decrease in poverty levels in the country
through increasing earnings for the poor. Therefore
stringent and coordinated efforts need to be made for
logistics cost reduction.
50%
49%
35%
15%
24%
25%
25%
9%
9%
10%
18%
31%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
USA
China
India
Transportation Inventories Warehousing Others (Including Losses)
Source: Cygnus Consulting
14
III. The way forward
The growth in the Indian economy in coming decade
is likely to be driven by the increased activity in the
manufacturing and retail sectors. To enable these sectors
to contribute effectively to Indias growth the logistics
sector will have to step up to provide value-enabling
solutions for these sectors. This would require action on
three fronts:
Creating an environment for graduating the Indian
logistics market to provide value propositions in
logistics solutions
Increasing the capability of the Indian Logistics
Industry to provide such solutions
Requiring Government and other regulatory
mechanisms in the country to provide an enabling
environment for value propositions in logistics services
Due to decades of growth and increasing globalization
of the Indian economy Indian entrepreneurs become
active participants in business strategy issues which
can take their business forward and make them
competitive. However old habits die hard. Therefore
we still see numerous instances where little premium
is put on service delivery, quality and transparency in
logistics services. Demand for logistics solutions still
gets conditioned by an undemanding, quality-neutral
client used to a non-standard product and service
deliveries. Large logistics departments have come up
within companies to manage this chaos and lowest
price frequently becomes the watch word for many
companies rather than quality of the solution provided.
For instance, dust-proong at a storage place still does
not command the kind of premium in India that it
should, and as a result, the logistics service provider
does not invest in such provisions. After-sales service
gets lost in a retail logistics maze, and the client nds
local suboptimal solutions. This is routine today. Some
change in certain specic product ranges do seem to
be happening, but at a very high price. Once such value
additions begin to get recognized and priced in value
terms, the logic of the Logistics industry will undergo a
sea-change.
The Logistics industry assesses client needs in practical
terms. Most logistics companies do not have the
nancial wherewithal to put in world class facilities
upfront and wait for the returns to be realized at a later
date through an education of the customer. Therefore
a logistics service provider today gives exactly the service
that is demanded of him. This is perpetuated by the
fact that today a logistics company can set up business,
offer base level service and make money, albeit with
low margins because there is limited differentiation.
Capabilities and skills are neither available nor do the
customers currently demand them. The vicious circle of
inadequacy and incompetence in supply and demand is
self-propagating. There are stray instances of one supply
chain streaking out of its orbit, but the risk perception in
such ventures is high and generally discouraging.
However the ray of hope is that perceptions seem to be
changing. The reason behind the changing perceptions
appears to be mainly that supply side pressure seems
to be growing faster than the demand side in so far as
logistics services are concerned. Increasing competition
is forcing manufacturers and retails to increasingly
differentiate their products. One of the way through
which differentiation is being made is through the
Logistics Sector Present situation and way forward 15
supply chain strategies. Today for example, mastering
the rural supply chain and making company products
available in every corner shop in a rural area is becoming
a business imperative for most retail products. This
is because the pace of growth of markets in rural
areas is handily beating those in urban centers. With
such pressures the customers of logistics services are
becoming ever more demanding. This is resulting in
the capability and the inclination of the Indian Logistics
industry to experience a change, which might be
slow but is deliberate. The Indian market still remains
extremely cost-conscious, and tolerant towards logistical
mishaps, even misdemeanors but positive signs are
being seen.
However this change may still be nipped in the bud
if no efforts are made by the Government and its
associated regulatory mechanisms to provide an
enabling environment to facilitate a paradigm shift in
how logistics industry can grow unfettered. It is well
recognized that government is making efforts to make
improvements to correct the infrastructure decit- be
it in physical transport, warehousing and terminal
infrastructure etc. However while physical capacity
creation is being facilitated, albeit slowly, there are other
softer changes that are required to be made along with
the capacity creation drive to realize the full impact of
such changes. These include:
Coordination in infrastructure planning: Today
there seems to be no coordination amongst the
various agencies of the government in creation of
infrastructure. If creation of additional port capacity
for container handling is being planned little thought
is given to evacuation logistics. When main network
roads are developed the links remain of poor quality.
To improve the situation requires a change in our
planning mindset. Coordination in infrastructure
planning will need to happen not only to truly
remove bottlenecks, but also to avoid overlap and
attendant extra costs. Such resultant integration of
facilities will help to reduce the high transaction costs
prevalent in the economy.
Improvements in tax regimes: Tax regimes and
recovery procedures continue to be cumbersome
and time consuming. There remains great
uncertainty about the actual coming in of GST and
the nal shape in which it will come. However for
improvement in logistics it is critical that tax regimes
need to be simplied and reduced to a one- window
/one- time levy across regions so that administrative
processes do not hinder physical free ow of
movement.
Reforms in urban planning: Urban planning
today does not appear to factor in the enormous
volumes of goods distribution catering to urban
conglomerations in terms of road and peripheral
infrastructure resulting in trafc restrictions and
serious bottlenecks and logjams. This needs to be
paid special attention by our planners.
Improving dialogue with industry: Finally the
regulatory agencies do not facilitate proactive and
participative dialogue with the industry. Blueprints
and policy regulations today are a largely one-sided
affair with some industry representations sought.
This makes policies prone to avoidable trial and error
events.
The future Of the Indian Logistics Industry lies ultimately
in value propositions for the customer. Value solutions
can be engineered only if the complex strands of
supply-chain mesh together seamlessly. These solutions
are expected to command a premium but also come at
a cost. The cost conscious Indian Market rst has to
be made to appreciate the value of premium services.
In a supply driven market, supply chain solutions need
to unlock the cost -saving aspect of efcient logistics
services rst. This would result a reduction in cost
down the line, which can only happen when most
of the deciencies mentioned above are removed.
Logistics companies can leverage further economies
of scale when operations are expanded. This may
require industries to collaborate with logistic service
providers to nurture their businesses, possibly in a
way the automobile industry in India nurtured the
auto-component companies. The future is bright for
the logistics industry in India- the expectation is that
a tipping point for the industry will soon be reached
which will propel it to greater heights.
16
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18
Websites
www.businessworld.in
www.business-standard.com
www.commerce.nic.in
www.dfccil.org
www.economictimes.com
www.eiu.com
www.expressindia.com
www.nancialexpress.com
www.nmin.nic.in
www.ibef.org
www.imf.org
www.indiainbusiness.nic.in
www.indianrailways.gov.in
www.livemint.com
www.morth.nic.in
www.nhai.org
www.planningcommission.gov.in
www.shipping.gov.in
www.thehindubusinessline.com
Logistics Sector Present situation and way forward 19
Contacts
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E-mail: vudgirkar@deloitte.com
Peeyush Naidu
Director Consulting
Direct: +91 124 679 2401
E-mail:pnaidu@deloitte.com
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