As was expected, the removal of inter-state check-posts has resulted in significant reduction in waiting/idle time for trucks, thereby improving their turnaround time and efficiencies, as confirmed by 60% of transporters that we interacted with. As per ICRA estimates, so far there has been about 18-20% improvement in turnaround time because of GST. The impact has been more pronounced in a few states such as Kerala, West Bengal, Maharashtra, Madhya Pradesh and Bihar, which were earlier known for notoriously high waiting time spent at their inter-state borders.
Shamsher Dewan, Vice-President, ICRA Ltd shares insights with Sandeep Sharma about the key challenges before the transport and logistics (T&L) sector in India, initiatives taken to strengthen the rail and metro network, role of technology in the logistics segment, overall fuel saving in percentage terms due to the improvement in turnaround time in the transport sector due to GST implementation. Edited excerpts…
What are the key challenges before the transport and logistics (T&L) sector in India? What's your recommendation to address them?
Some of the key challenges plaguing the T&L sector in India include (i) the weak transportation infrastructure (national & state highways accounts for only 5% of India's total road network), (ii) high congestion on road (40% of road freight carried on just 0.5% of total road network) and rail (close to 60% of rail freight carried on 16% of rail network), (iii) highly unorganised nature of market etc. Additionally, the different modes of transportation compete with each other for market share instead of working towards an efficient modal mix.
To address these challenges, there would primarily be requirements for investments in the road and rail infrastructure to improve the capacity and efficiencies in the systems. These would include investments in improving road infrastructure, double-tracking of rails, development of dedicated freight corridors, multi-modal logistics hubs etc. The current projects undertaken for the Eastern and Western Dedicated Freight Corridors, Multi Modal Logistics Parks etc are steps in the right direction. With the implementation of GST and E-way bills, which increase the compliance requirements for logistics players, there is expected to be a natural shift in the market towards organised players going forward as well. The government has also set up a Logistics division under the Ministry of Commerce, which would develop an Integrated Logistics Plan and is expected to lead collaboration in the industry going forward.
What needs to be done to strengthen the rail and metro network across the country?
To strengthen the rail network in India the government has undertaken the ambitious Dedicated Freight Corridor (DFC) project. Under the DFC the government will construct two freight corridors - Eastern and Western. The Eastern corridor will run from Dadri in UP to JNPT in Maharashtra and will traverse the states of Rajasthan, Haryana, Gujarat and Maharashtra. This corridor will ease the transport for automobiles, cement and container movement. The Eastern corridor will run from Ludhiana in Punjab to Dankuni in West Bengal. These corridors will the ease the movement of coal from coal mines to thermal power plants which will lead to lower electricity outage due to unavailability of coal. The total project cost for both the corridor is expected to be Rs. 82,000 crore. The Western DFC is expected to be operational from Sep 2019.
Do you see technology playing a pivotal role in the logistics segment?
Technology will play a big role in the logistics industry. Technologies such as internet of things (IOT), telematics, blockchain and GPS will become more prevalent in the sector in line with the demand for predictability and visibility of movement of goods. Modern warehouses will require strong ERP systems in order to sort goods efficiently. The penetration of technology will lead to higher efficiencies in the industry.
How can we fast track the development of centralised warehouses and cold chains across the country?
The infrastructure status for warehouses and cold chains will play a crucial role to fast-track the development of these sectors. The infrastructure status will enable the companies to avail financing at better rates, enhanced limits and access to longer tenor funds from institutions such as India Infrastructure Financing Company Limited (IIFCL). Besides the infrastructure status, GST will also play a pivotal role. With the implementation of GST, companies will gradually shift to a centralised warehousing model. This will however be sector specific because sectors like FMCG may continue to have multiple warehouses in order to prevent any stock outs. The shift towards centralized warehousing will be in the medium to long term.
What can be the overall fuel saving in percentage terms due to the improvement in turnaround time in the transport sector due to GST implementation? Do you see any scope for improvement in the tax structure to benefit T&L stakeholders?
The fuel savings for fleet owners post GST implementation would largely be on account of reduced fuel burn when waiting for clearance of taxes at interstate check posts; however, the quantum of the same is difficult to estimate. The various T&L stakeholders and fleet owners in particular, would benefit if fuel is brought under the purview of GST, enabling companies to claim ITC on the same. As diesel prices account for half of a trucker's expense and the same is not available for ITC, currently, truck owners are not able to realise the full benefit of GST. Additionally, many LSPs have not opted for the 12% tax under forward charge mechanism, and choose to remain under the 5% bracket under Reverse Charge Mechanism, on account of the same.
Going forward, where do you see Transport and Logistics sector heading in the medium term?
The T&L sector is India is expected to report healthy growth momentum over the medium term. The underlying growth in the economy and core industries, as well as increasing preference for outsourcing non-core activities like logistics to specialised players would buoy the growth going forward. Additionally, multiple trends prevailing in the sector would shape the industry dynamics over the longer term. These include increased use of technology in the sector, emergence of multi-modal players, increased interest by PE players in the space, specialised requirements of e-commerce logistics, increased focus on cold-chain and warehousing etc. Furthermore, GST would also be having a long-term impact on the industry, with a general shift in preference towards organised players, changes in warehousing strategies of companies etc. Commissioning of DFC from 2020 would also have a significant impact on the rail network and transportation modal mix within the country.
ICRA: One year on, impact of GST positive for the Road Logistics sector; although full benefits to be realised over longer-term
It is almost a year since the implementation of the Goods and Services Tax (GST) which was implemented in July 2017. The effect of the GST has been largely positive for the Roads Logistics sector and has led to several benefits. As per ICRA’s comprehensive survey covering approximately 50 transport companies pan-India and 15 consumer-oriented companies across various sectors, the findings have been encouraging, though a lot remains to be achieved. The rating agency conducted a comprehensive check to understand the on-ground impact of GST on the sector.
Further enumerating on the impact, Shamsher Dewan, Vice-President, ICRA Ltd says, “As was expected, the removal of inter-state check-posts has resulted in significant reduction in waiting/idle time for trucks, thereby improving their turn-around time and efficiencies, as confirmed by 60% of transporters that we interacted with. As per ICRA estimates, so far there has been about 18-20% improvement in turnaround time because of GST. The impact has been more pronounced in a few states such as Kerala, West Bengal, Maharashtra, Madhya Pradesh and Bihar, which were earlier known for notoriously high waiting time spent at their inter-state borders.”
As for the trends in warehouse consolidation, the trend has been mixed. While logistics efficiency is certainly a key factor influencing the location of warehouses, other sector-specific nuances have also influenced the extent and pace of consolidation in each sector. Sectors like FMCG and consumer durables have reported limited consolidation, as maintenance of decentralized warehouses remains necessary to ensure product availability and timely customer servicing. On the other hand, sectors like tile manufacturing, which have a more predictable demand which can be served from a centralized location, have already consolidated their warehouses.
Overall, close to 50% of the consumer-oriented companies that ICRA interacted with indicated that their warehousing network has not been consolidated, while the remaining indicated that consolidation has either happened or is in process. Furthermore, many companies are also interacting with supply chain management companies and taking their assistance in redesigning and revamping their networks.
The E-way bill, which got implemented from April 2018, too has been received positively by the transporter community. Around two-thirds of transport companies that ICRA interacted with reported that operations have become more systematic, and there is significant time savings and paperwork reduction due to the digitization of processes. A few companies though faced difficulties due to teething problems like technical glitches, limited awareness etc. the overall response to E-way bill has been positive.
The full benefit of GST on the road logistics sector and the costs savings due to reduced transportation, warehousing costs and the associated efficiencies are only expected to be realized over the longer-term. About 10% of the transporters indicated that their overall costs have reduced post GST implementation, while more than 40% suggested that costs were increasing. Higher compliance costs related to GST due to technological upgradation, up-skilling of workers, penalty charges etc. have added to the cost-burden of transporters, which coupled with the increasing diesel prices, have taken a toll on their profitability.
Adds Mr. Dewan, “In spite of these short-term pains, in the long-term, it is certainly expected that truck turn-around times would reduce and the set-up of efficient warehousing networks would improve the overall efficiency in the system. This would bring about a reduction in logistics costs.”
*Image used for illustration only
Disclaimer: The above article is attributed to ICRA, an independent and professional investment Information and Credit Rating Agency. The views expressed herein above do not necessarily reflect the views of Project Reporter.