Insights into Editorial: Why India needs a new logistics network
The need for new logistics network has always been felt in the country. Yet to be introduced GST and Make in India programme also demand a new modern logistics network that integrates the domestic network, and allows inputs, components and finished goods to move across the country seamlessly.
An integrated efficient logistics network is needed for the following reasons:
- Efficient transportation and logistics are important for boosting India’s competitiveness. They reduce transport time and costs, of course—but they also reduce cost of production by minimizing the need for large inventories. This means less capital required for warehouses, insurance and the like.
- While the conventional view of demand in the logistics sector states that it is derived demand, growth in transport and logistics enterprises can create markets for other goods.
- Efficient logistics networks can reduce divergence in regional growth.
- As the last Economic Survey points out, inter-state trade flows in India stand at a healthy 54% of GDP. Reducing friction via improved logistics could boost this.
- While the demand for transport grew at around 10% annually in the 1990s, it has accelerated since. Failing to keep pace will hamstring everything from the manufacturing push and attempts to boost farmer earnings to the benefits of urban agglomeration economies.
The main hurdle so far has been that India’s logistics and transport sector has developed in silos. This has resulted in overly complex regulation and administrative procedures as well as missing modal links and an inefficient modal mix.
- As of 2008, the mix was 50% of total freight flow via roads, 36% by rail, 7.5% by pipelines, 6% by coastal shipping, 0.2% by inland waterways and 0.01% by airways. The ratios may have shifted somewhat since then but they are unlikely to have changed substantially.
- This is a pity: Transport by rail and inland waterways is far more cost- and time-efficient than transport by roads, for instance, and should account for high proportions of the freight flow.
Proposal in this regard:
In his last budget speech, Union finance minister Arun Jaitley said: “An effective multi-modal logistics and transport sector will make our economy more competitive. A specific programme for development of multi-modal logistics parks, together with multi-modal transport facilities, will be drawn up and implemented.”
- This programme aims to shift from India’s current point-to-point logistics model to a hub-and-spoke model. This will entail setting up 35 multi-modal logistics parks at a cost of Rs50,000 crore, developing 50 economic corridors and inviting investment from the states and private sector.
- Crucially, this will all be done with an integrated approach that will utilize railways, highways, inland waterways and airports to create a transportation grid that covers the country.
Significance of this move:
The new integrated policy pulls together the planned road and rail dedicated freight corridors and suggests a solution to the long-running lack of last-mile connectivity for India’s ports.
It also offers more scope for boosting the use of technology than development in silos would. Containerization, for instance—shipping freight across modes in standard containers—would enable live tracking via chipped containers. This in turn would enable greater security and predictability, as well as providing the granular data that is important for business projections and policymaking alike.
An integrated multi-modal policy is not a new idea. In 2014, the national transport development policy committee had written in its report to the erstwhile Planning Commission that India should have “a single unified ministry with a clear mandate to deliver a multi-modal transport system that contributes to the country’s larger development goals”—standard operating procedure for other large economies and India’s major emerging economy peers. Now, this is an opportunity for the government to make competitive federalism a plank of its economic agenda. This is a chance to see it in action.