Strengthening Logistics Network

India is in dire need of a long-term national logistics plan that can help minimise gaps reduce costs align developmental projects so we can all reap economic benefits

In today’s world economic climate changes more quickly and countries realise that globalisation has made the world smaller and more competitive. Also customers seek products and services that can respond to their specific needs and firms make effort to create competitive advantages to keep their profit and market share. All of the above trends lead firms and countries to focus on supply chain and integrated logistics. In layman terms logistics basically imply the distribution of products and services from the point of origin to the point of consumption.

Making supply chain activities more effective and efficient is a sustainable competitive advantage for countries. One of the important parts of these activities is logistics activities which can make a significant reduction in costs. Efficient management of logistics activities is a perfect source for creating competitive advantages. Besides it allows firms to respond to their customers’ specific needs which in turn results in customer satisfaction.

In this context it is important to quantify national logistics cost and to identify the sources through which this cost can be reduced so as to increase competitiveness of the nation. Unfortunately estimates of such costs for India based on detailed studies are not readily available. It is generally believed that the cost of logistics is very high in our country. The ball mark figure often quoted in the context of India is about 13 per cent of Gross Domestic Product (GDP) though the methodology of the same is not published anywhere.  Incidentally this is higher than that of US (nine) Europe (10) Japan (11) and Germany (eight).

Inefficiencies have grown over the years from a combination of a non-conducive policy environment extensive industry fragmentation and lack of good basic infrastructure. India’s indirect tax regime discouraged large centralised warehouses and over a period of time led to the fragmentation of the warehousing sector. Extensive disintegration meant the inability of players to develop the industry as a whole and poor support infrastructure such as roads ports and telecom which led to a situation where opportunity to create value is limited.

No doubt high logistics cost reduces competitiveness of Indian goods both in domestic as well as export market. The development of modern logistics is essential for ‘Make in India’ mission and thus would give a boost to both domestic as well as external demand thereby encouraging manufacturing growth and job creation.

However much of this is changing as the Government is now demonstrating a strong commitment towards providing an enabling infrastructure and creating conducive regulations. Recently the logistics sector has been granted infrastructure status which will help it access loans on easier terms. A logistics division has been constituted under the Department of Commerce Ministry of Commerce and Industry to look after the logistics issues. At the same time regulations around rationalisation of tax structures and rollout of the Goods and Services Tax are creating an environment of positive change. Players now have the opportunity to leverage economies of scale complemented with better infrastructure to provide integrated logistics solutions which are cost effective.

Most of the developed countries as well as emerging countries compute performance indicators for logistics activities on a regular basis to measure operational costs and efficiency levels. These indicators provide information on lacunae which needs urgent attention. Measuring operating costs helps identify whether and where to make the changes to control expenses and identify areas for improved performance of assets both at the micro as well at the national level.

Unfortunately similar attempts have not been undertaken for India. In this context we have undertaken a back-of-the-envelope calculation to estimate the logistics costs for our country. Typically the following elements are considered worldwide to estimate logistics costs:

Transportation costs: These include costs for both primary and secondary transportation. Primary transportation is the movement of finished goods from plants and vendors to warehouses. It includes costs for replenishment movement from plants or distribution centers to other plants or distribution centers and inbound freight on purchased finished goods movement to plants or distribution centers for resale.

On the other hand secondary transportation is the delivery of finished goods to customers. It includes payments to carriers pickup allowances truck or rail equipment and operations costs and freight allowed.

Inventory carrying costs: These include the cost of money (opportunity or interest) ad valorem taxes insurance among others.

Management and administration cost of distribution: These include indirect management personnel and support staff including the central distribution staff inventory planning and analysis staff and the traffic department. Nowadays computer software and hardware cost allocations are an important distribution expense.

Ideally estimates of logistics cost are computed from primary as well as secondary data sources. The National Accounts Statistics and input-output tables provide limited information on some of the elements of the logistics costs. Below we provide a tentative estimate of logistics cost using a secondary source of information.

As noted earlier there are three principal components of logistics costs namely transportations costs inventory carrying costs and administration costs of distribution. Out of these one can derive an estimate of the transportation cost from India’s input-output (IO) table. The input-output table of a country provides the cost structure of each sector of the economy by the principal inputs (goods and services) value added (returns to factors of production) and indirect taxes paid to the Government. Since transportation is a principal input in the production process IO table typically provides estimates of such costs.

To some extent the second component of logistics cost (inventory carrying cost) is also documented in the IO table. However the last component of logistics cost is subsumed in other inputs. As a result it is difficult to arrive at the estimate the logistics costs from IO table. In Table 1 we have shown our estimate of logistics cost (primarily first two components) from the latest published IO table of India which refers to the year 2007-08. Our estimate comes to about 8.9 per cent of Gross Domestic Product (GDP).

It may be noted this is a crude estimate of logistics cost in the production process and excludes the logistics cost of delivery from the points of production to the final demand. It must be mentioned that neither the inventory carrying cost nor the management and administration cost is fully accounted for here.

The insurance cost shown in the Table is an overestimate as it reflects total insurance cost and not specific to logistic activities. Our estimated transport cost (7.4 per cent) is on the higher side compared to that of South Africa (6.8 per cent) or Brazil (6.3 per cent) in 2010. The management and administration component of logistics cost is about two per cent in South Africa. If we assume the rate to be of the same magnitude in India our estimate of logistics cost as per cent of GDP turns to be near 11 per cent of GDP. This is a back of envelope estimates and dated sometime back.

Like other countries there is urgent need to track national logistics cost to increase the competitiveness of India.

(The writers Dr Sanjib Pohit and Dr Rajesh Chadha are Senior Fellows at NCAER)

Delhi, TN, Gujarat are best States for doing business: NCAER study

Delhi has emerged the most-attractive State for investors improving its position on the think-tank National Council for Applied and Economic Research (NCAER)’s 2018 State Investment Potential Index. Gujarat previously No 1 slipped two places to the third position.

The surprise elements in the index named N-SIPI was Tamil Nadu which moved up four places to No 2.
West Bengal jumped 11 places from last year to emerge the 10th most attractive State for investors.
Andhra Pradesh saw a decline in its attractiveness falling from the third position in 2017 to the seventh in the 2018 index while Punjab moved up four places to No 12. N-SIPI now in the third edition ranked 21 major States including Delhi on various parameters.
In the overall rankings Delhi Tamil Nadu Gujarat Haryana Maharashtra and Kerala emerged the most attractive States to do business while Odisha Uttar Pradesh Assam Jharkhand and Bihar were at the bottom.
Key constraints
N-SIPI was constructed with six pillars that were classified under four broad categories: Factor-driven (land and labour) efficiency driven (infrastructure) growth-driven (economic climate political stability and governance) and perceptions-driven (responses to the survey). Researchers at NCAER contacted 1049 business enterprises of different sizes in manufacturing and services sector for the survey.
Respondents to the perception survey said the law and order situation was a major issue almost 55 per cent identifying that as the primary constraint. In the 2017 round of survey almost 57 per cent of the respondents had identified corruption a major constraint.
Surprise factor
This time the proportion of respondents identifying corruption as a major constraint declined 46 per cent. Other significant constraints identified by the respondents include difficulty in getting approvals for land transition to GST quality of skilled labour and getting all approvals before starting business.

Disaggregated assessment of individual pillars of the N-SIPI showed Telangana was the best performer on the land pillar followed closely by Madhya Pradesh and Tamil Nadu. Assam and Kerala displayed significant improvement over the year moving up the rankings by seven and six places respectively.

On the labour pillar Tamil Nadu and Andhra Pradesh retained their first and second positions and on the infrastructure pillar Delhi retained its top position. Punjab moved up to the second position improving its ranking by two places.
On the economic climate pillar Delhi retained the No 1 position while Telangana moved up four places to the second spot.
On the governance and political stability pillar Tamil Nadu moved up four places to No 1 displacing Haryana which moved down to the second.
However it was the perceptions pillar that threw up some surprises. Gujarat retained its number one position Haryana moved up two places to number two and West Bengal jumped 18 places to the third position. Uttarakhand was another State that saw vast improvement on perceptions moving up 10 places to the sixth position.

The NCAER State Investment Potential Index (N-SIPI) 2018

NCAER-State Investment Potential Index or N-SIPI is an evidence-based index that combines published secondary data on key relevant parameters with an extensive industry survey conducted by NCAER across twenty states and the Union Territory of Delhi. The Index is designed to provide a systematic and reliable “go-to” reference for policy makers, existing businesses and potential domestic and overseas investors. N-SIPI 2018 ranks the competitiveness of Indian states on six pillars: land, labour, infrastructure, economic climate, political stability and governance, and business perceptions. These six pillars are classified under four broad categories: factor driven (land and labour), efficiency driven (infrastructure), growth driven (economic climate and political stability and governance), and perceptions driven (ranking of business climate built on firm surveys). A unique feature of the N-SIPI index is the integration of industry perceptions of the investment potential and business climate of a state along with the fundamentals likely to drive investment decisions in that state. Another unique feature of the 2018 N-SIPI is the inclusion of GST specific questions in the survey questionnaire for the perception pillar of the index.

Delhi tops the N-SIPI 2018 rankings, followed by Tamil Nadu, Gujrat, Haryana and Maharashtra.

India’s Growth Story

India has attained much economic success in the last three decades. Yet economic deceleration in the recent years has generated worried commentaries about India’s growth outlook. In this paper, we offer a long-term macro perspective on India’s growth experience. Analyzing past five decades of data, we note that growth has slowly but steadily accelerated over this period, become less erratic, and has been well diversified across sectors and states. Assessing the period since the early 1990s more granularly, we note three distinct phases of growth. A period of slow acceleration from 1991 to early 2000s; a period of rapid growth with several features of unsustainability during 2004–08; and a corrective slowdown that started with the Global Financial Crisis in 2008. The slowdown was reflected most profoundly in investment, credit, and exports. Even as the economy recovered to a 7–7.5 percent growth rate, durably accelerating it to a higher level will require concerted policy momentum that succeeds in reversing the slowdown in investment, credit supply, and exports, and the support from the global economy. Maintaining hard-won macroeconomic stability, a definite and durable solution to banking sector issues, and realization of the expected growth and fiscal dividend from the Goods and Services Tax are some of the factors that can help attain a higher growth rate. The paper also includes a short annex on India’s new GDP series and comparisons with the old.

Possibility of three instead of four GST rates, a useful debate: Arvind Subramanian

Chief Economic Adviser Arvind Subramanian Wednesday said that it is not possible for the diverse Indian economy to have one uniform Goods and Services Tax (GST) across the country. The useful debate in fact can be whether there can be three GST rates instead of the present four rates with the possibility of reevaluating the 28 per cent rate he said at the India Policy Forum 2018 organised by The National Council of Applied Economic Research.

“Overtime we will see simplification. Once revenues stabilise 28 per cent rate can be reevaluated. We can also relook cesses” he said. While the system is stabilising the task now is to simplify the direct tax system and to increase the taxpayer base he said

Subramanian said implementation of GST Insolvency and Bankruptcy Code (IBC) and effective public provisioning of private goods such as toilets and banks accounts have been key achievements of the government. While early recognition of the twin balance sheet challenges helped in containing the non performing assets in the banking system future capital infusions in banks should be linked to reforms he said.

He said there are mainly two kinds of state-owned banks fundamentally unviable banks and the other set of banks that are moving towards viability. The unviable banks are shrinking their business and doing narrow banking while the viable banks will help support growth. He highlighted the need for moving towards a private sector ownership of banks for a new set of reasons — such as public sector banks being handicapped in many ways in terms of recruitment and public to private sector lending being very toxic.

While pitching for private ownership of banks the CEA said it is difficult to amend the Bank Nationalisation Act because of political reasons. The legislation bars the government from reducing its stake in PSU banks below 51 per cent. The government is planning to reduce its stake below 50 per cent in IDBI Bank which is not governed by the Bank Nationalisation Act.

Bank Nationalisation Act is the original sin and overtime originals sins become lasting virtues Subramanian said.

To a query on employment situation in the country he said: “I honestly don’t know what is happening to employment” because we don’t have reliable consistent data for many years.

Subramanian who will be leaving the CEA post in a few weeks said that his job as the government adviser has been supremely satisfying and he is going to have withdrawal symptoms.

 

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