Logistics industry to grow at 9-10% on back of economic recovery, says ICRA

Railways' competitive position is expected to improve on the back of the commercialisation of DFCs

The domestic logistics industry is likely to grow at nine to 10 per cent over the medium-term on the back of higher demand due to economic recovery.

The trend towards outsourcing of non-core activities like logistics, warehousing, and associated activities to integrated players is likely to drive the share of the organised segment.

Ratings agency ICRA, in its note on Monday, said that the implementation of the Goods and Services Tax (GST) will also support organised players as it would lead to the consolidation of the warehousing network, higher degree of tax compliance, and the creation of a level playing field between express and traditional transport services providers by virtue of access to input tax credit.

An increasing shift is also being seen from pure transportation business to becoming end-to-end service providers, facilitating the growth of third-party logistics and supply chain management industries in India.

"The domestic logistics sector is currently in a transformation phase with game-changing trends like the implementation of GST; increasing focus by foreign investors across the logistics value chain; growing demand for end-to-end solution providers; and the emergence of new avenues such as e-commerce, logistics parks, cold chains and new start-ups. The government's thrust towards building multi-modal transportation infrastructure is also likely to have a significant influence on the logistics industry over the longer term," the note said while quoting Subrata Ray, senior vice-president and group head- corporate sector ratings.

Also, the railways' competitive position is expected to improve on the back of the commercialisation of dedicated freight corridors (DFCs) and augmentation of the existing network.

The Indian Railways accounts for 30 per cent of the total freight movement in India and is a preferred mode of transportation for long-haul and bulky commodities such as coal, iron ore, fertilisers, steel, and cement. Despite its dominance in the transportation of select commodities, it has gradually lost its market share over the past few decades due to a confluence of factors, including under-investment in infrastructure, limited private sector participation, better service and reliability offered by road transport segment, and an increase in freight charges by railways.

Among ongoing projects to improve rail competitiveness, the completion of the DFCs would be a game changer as it would possibly remove several inefficiencies in freight movement. After many delays, the DFCs are now expected to commence operations from 2019. On both the eastern as well as western corridors, the railways will stand to gain traction from road segment.

Improvement in modal mix and reduction in logistics costs with increased focus on the development of cost-efficient modes like waterways remains to be seen, said ICRA.

The government's other major emphasis is on improving India's transportation mix by developing inland and coastal waterways. With an attempt to improve integrated logistics, the government also plans to develop about 35 strategically located multi-modal logistic parks situated close to major manufacturing and consumption centres. These initiatives have significant potential to bring down the logistics costs in the country over the medium term.

Overall, the domestic logistics industry is at the crossroads, poised for growth on the back of economic recovery and changing industry dynamics. Towards this end, the ability of existing players to withstand, adopt, and adapt to these emerging trends would be critical. While organised players are likely to increase their share in the road logistics pie, multimodal logistics are also expected to gain increased acceptance with a shift towards more cost-efficient modes of transport like waterways and railways. "However, the shift towards these alternate cost-efficient modes is likely to be a gradual phenomenon," said Ray, adding, "...And would be more pronounced in certain bulk commodities. For transportation of non-bulk commodities, last-mile delivery, express logistics etc are likely to prefer the existing road logistics. Nonetheless, these trends are likely to improve the efficiency and reduce the costs of logistics in India over the long term."