Will the ‘infrastructure status’ for the logistics sector boost investment in India?

In 2017, India jumped 19 places in the World Bank Logistics Performance Index, suggesting that the country’s efforts to improve its logistics sector appear to be bearing fruit. The introduction of the most recent reform measure that grants ‘infrastructure status’ to the logistics sector is likely to improve the country’s standing in the index even further.

The reform measure is part of a larger program to reduce supply chain costs and make Indian-made goods more competitive. The classification change will enable those operating cold chains, industrial parks and warehousing facilities to access cheaper finances for longer periods, as authorities work towards a “hub-and-spoke system” for domestic cargo distribution through private participation. The infrastructure status for industrial parks, warehouses and cold chain facilities is expected to provide a big boost to attracting private investment in this sector as the industry will be able to raise funds at competitive rates. In addition, the companies will have multiple instruments to raise the money through, including insurance companies, pension funds and international lenders.

The need for integrated logistics sector development has been felt for quite some time in India due to the country’s very high logistics costs when compared to developed countries. According to industry estimates, logistics costs in India stand at around 14% of GDP. The same in developed countries with better infrastructure is around 6% to 8% of the GDP. Industry experts anticipate that the change in status of the logistics sector will reduce the cost of capital in transportation and warehousing, thereby reducing cost of logistics. The focus in the latest measure has been placed on cold chain and warehousing facilities because of the severe shortage of this type of facilities in India. While the government has been working on improving the road and railway network, storage and warehousing facilities were not being created at the same pace. By bringing logistics at a par with roads in term of its status, a platform for further development has been put in place.

Investments in the logistics sector are required to boost India’s trade and enable the country’s agenda for economic development and urbanisation. The country has already taken a major step forward in the development of domestic and export markets with the introduction of the goods and services tax which is expected to help integrate the country and transform it into one common market. Relaxed FDI regulations, major investments in infrastructure across all modes of transportation and increased technology adoption were also among the most recent set of measures aimed at developing the logistics sector. It remains to be seen if the latest reform and the improved logistics access to credit will contribute to the development of logistics infrastructure by drawing private investments.  

Source: Transport Intelligence, November 23, 2017

Author: Violeta Keckarovska


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