India: GST, Digitization Are Key Drivers For The $260 Billion Indian Logistics Sector

Last Updated: 7 August 2017
Article by Ashoo Gupta

Strap: The sector can be catapulted into mega growth if adequate investment is made in digitization and e-commerce

Logistics is the mainstay of any economy and a vital driver of economic progress as it encompasses the management of flow of goods from the place of initiation to the place of consumption. The sector, estimated to be worth $260 billion in India and growing at 14 per cent  over the past five years, consists of shipping, port-services, warehousing, rail, road and air freight, express cargo and other value-added services. According to a study by The Associated Chambers of Commerce and Industry of India (Assocham), the logistics market in India is expected to grow to $397 billion by 2020. 

Inducements provided by the Government, e-commerce diffusion and Goods and Service Tax (GST) will help the sector grow further, with a shift from high-cost to a leaner-cost alternative through streamlining of expenses, purging of intermediaries and technology implementation. This is likely with substantial development and upgrading envisaged in infrastructure, reworking of technology and reinforced by a varying regulatory situation.

Over the last two decades the Indian logistics sector has evolved from mere transportation services to fully-cohesive service providers. Going forward, the drift towards assimilation of these service providers is expected to continue and new players/trade models are expected to materialize within the digitization and automation of business processes, implementation of GST and growth in the third party logistics and/or fourth party logistics service scene.

Issues and challenges

Logistics in India is characterized by an incompetent system, sheathing infrastructure, lower average trucking speeds, congestion and blockages in surface transport, and other issues. Transportation costs in India are high on account of a combination of factors such as vehicle quality, stressed drivers, overloading, poor road infrastructure, low average speeds and excessive taxes and toll.

The core issues currently faced by the logistics sector in India are as follows:

  • Absence of digital culture

Absence of a digital culture, requirement to have clear vision and guidance from top management about the direction of digital operations, hesitation in initiating high financial investments in  digital operations and data security, training personnel are the top challenges.

  • Upgrading IT systems

Outdated IT systems, processes, and technological proficiencies are the key hurdles and require upgrading in many organizations. It is essential to enhance IT astuteness and develop infrastructure to realize functioning competencies. Prevailing systems do not have proficiencies to handle more refined information trends, systematic procedures and processes that can be used to deliver advance business acumen and prudence required in the logistics industry.

Investments in digitizing the logistics industry will benefit both market players and the end users. E-commerce is the future of logistics. With customers moving towards digital services, the logistics sector needs to offer pioneering solutions to meet customer demands at competitive prices.

  • Establishing data analytics

Data analytics is crucial to logistics companies. The volume of data assembled by transportation and logistics companies has commercial and strategic value. For instance, data bank of customers ordering taxis could be considered in forecasting varied public transportation facilities, information can be leveraged for evolving cost efficacies, assuring timely delivery, anticipating hitches and having back-up strategies.

Data analytics is also pertinent to the security concerns that all companies face in the sector. The assimilation of data from multiple sources such as surveillance cameras, passenger data, and biometrics into the systems enables risk identification and avoidance which is vital for setting up robust organizations and establishing governance structures. 

  • Connectivity bottleneck

The transit time for movement of cargo through road and shipping set-ups is sluggish. In terms of transportation through shipping channels, the extensive custom sanction procedures and number of intermediaries required for carrying goods in/out of the country. The road network is affected due to poor infrastructure as national highways comprise only two per cent of the total road network. Toll collection, interstate checkpoints and other stoppages lead to higher transit times.

  • Uncomplimentary modal mix

The movement of goods is tilted towards road networks as there is under investment in railways, resulting in redundant railway sliding, capacity constraints and unavailability of cargo centers in the vicinity of trade pivots.

Further inland waterways are affected due to insufficient passage access between inland waterways and linkages to coastal shipping. Although air is the fastest transportation mode, it continues to have a diminutive share in the transportation pie and has insufficient connectivity and lack of cargo terminals. The incapacity to offer last mile connection leads the organizations to prefer road as a mean of transportation of goods.

  • Inferior calibration

The logistics sector in India has been impacted by inferior calibration of goods and containerization of logistics traffic, impeding the swiftness and swelling the transportation costs.

Key Progress Drivers

  • GST

The Goods and Services Tax will streamline the tax structure and improve turnaround time for trucks, expediting cargo movement resulting in enhancement of operational efficiency through quicker and enlarged number of deliveries and reduction in logistics costs incurred due to stoppage at various check-posts and tolls. GST is likely to result in (i) consolidation of warehousing network and shift towards a 'Hub & Spoke' model; (ii) higher degree of tax compliance; and (iii) creation of a level playing field between express and traditional transport services through input tax credit.

  • Technology reforming delivery systems

Logistic sector depends on the seven Rs which are as follows: Right Cost, Right Place, Right Product, Right Quality, Right Condition, Right Customer, and Right Time. The internet is funneling a new age of outstanding evolution in supply chain swiftness and cost decline through data sharing and logistics harmonization between trading partners and service providers. The logistics opportunities are driving a market revolution from customary logistics concepts to a new era of digital logistics.

The Internet of Things ("IoT") and big data analytics are streamlining supply chain functions of organizations for just in time inventory and provide predictive analysis to manage procurement processes.

The accessibility to information anytime in any place is one of the foremost benefits of digitization and the IoT. Technology is enabling logistics firms to enlarge partnerships and communication which in results in better flexibility, steadfastness and efficacy and eradicates ineptitudes to enhance the processes.

Digitization drive in logistics sector is in motion and set to fast-track moving forward. In view of rising customer demands, increasingly cost competitive market, every company in transportation and logistics sector requires implementing digitization and data analytics so as to not loose opportunities for refining its costs and returns point compared to its market peers.

  • E-commerce and evolving logistics networks

Initiation of e-commerce has led to establishment of multisource networks for sellers. E-commerce trades pose a distinctive challenge to the traditional logistics channel. In e-commerce inventory arrives in bulk but needs to be disseminated into different stock keeping units. The delivery to forward channels is varied and in smaller lots. The intricacy of this procedure increases with thousands of dealers, numerous warehouses and widespread sales network across continents, increasing the risk of erroneous orders. Logistics network companies are also expected to process the payment through delivery and manage the complex converse logistics in case of return of merchandise.

Handling these actions involves skill and standardization to coordinate business processes with real time access and acumen to inventory management.

With extreme competition in the e-commerce sector and emphasis on swift supply of merchandises the supply network has been put under enormous stress in all key types of freight movement. For meeting this growing demand of e-commerce logistics new networks and companies have arisen with diverse commercial simulations and catering entirely to e-commerce.

  • Infrastructure development

Government has augmented its speed of road construction to improve a robust road infrastructure linkage. Pursuant to enactment of The National Waterways Act, Government is desirous of evolving new national waterways as greener and more cost effective options and starting routes in which adjoining vicinities can be serviced. 

  • Dedicated freight corridors

The Government has sanctioned erection of steadfast freight corridors for increasing freight handling capability. Government is committing to developing additional freight corridors such as the East-West Corridor, North-South Corridor and East Coast Corridor. Completion of these corridors will increase logistics adeptness, reduce costs and transit time.

Plan for success

  • Make over into a digital enterprise

Logistics and transport sector companies require nurturing a digital culture. Assess digital maturing and set clear short-term and long-term targets. Top management, financial stakeholders as well as employees require discerning and performing like digital communities ready to try out innovative know-how and absorb new techniques of working. Re-formulating its competencies at faster rates is the key to stay ahead in the game.

  • Upgrading skill and knowledge

Plans need to be developed for attracting persons and refining methods as well for executing new technologies. The future of logistics industry is expected to change tremendously with adoption of new innovations using IT, big data, and advanced analytics. Logistics providers require continually developing, keeping up with the latest developments, employing and training manpower, enhancing IT capabilities, setting up and applying digitization and upgrading their services to ensure competitiveness, satisfy demands and consumer expectations.

  • Develop data analytics expertise

Consider how best the data analytics can be consolidated to derive value that can be used to (i) understand consumer behavior; (ii) improve services being currently offered;  (iii) develop new product and/or services that can be offered; and (iv) provide innovative end to end solutions  to end users at competitive prices.

  • Development of infrastructure and multimodal logistic parks

Infrastructure development should be planned to enhance appropriate linkages of diverse means of transport and attain complete and secure multimodal combination. Further, for improving storing facilities, decreasing transportation overheads and boosting efficacy of complete logistics set-up, multimodal logistic parks be developed and unified throughout the country with focus on last mile connectivity linkage.

Conclusion

The leaning towards digitization is evolving and unlikely to inverse. New preferences and strategies across enterprise logistics processes, augmented by adoption of new innovations using IT, digital interfaces and data based innovative services is  fundamentally changing  the market dynamics in logistics sector.

Digital competencies are very vital. These require time and attention and a stage by stage methodology to be adopted and implemented with considered swiftness. Companies that recognize this changing scenario and invest prudently in process change and support digital logistics technologies will realize immense benefits. Those that falter may find themselves in the next few years at competitive disadvantage that may be very difficult to overcome.

(The author is a partner of Shardul Amarchand Mangaldas.Views expressed are personal.)

Reference:

PwC- Industry 4.0: Building the Digital Enterprise

IMAP Industry Report – Logistics –India 2017

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