Logistics-to-GDP set to fall in India
An infrastructure focus is driving lower logistics costs and will create a multiplier effect in India this decade
Global Logistics Market
Logistics refers to the flow of goods, services and information from origin to source, according to the needs of customers. The industry facilitates trade between two or more parties by transporting, storing, and delivering goods through B2B, B2C, or C2C supply chain networks.
Given the trend towards increasing deglobalisation, friend-shoring, diversity and the acceleration of these themes post pandemic, the focus on efficient and robust supply chains has intensified. Management of logistics within this environment refers to the building efficiency and effectiveness of supply chain.
The global total logistical costs soared to US$9tn in 2020, which was 10.7% of Global GDP of US$85tn in that year[1].
India’s Logistical Issue
Whilst India is sometimes touted as the main beneficiary of the China + 1 thematic, it remains in distant 5th place at present, when it comes global manufacturing (when last measured in 2019, China stood at 29% of global manufacturing, with India just above 3%). One of the major obstacles for India’s economic progress as a manufacturer to the world has been its lagging infrastructure and the high cost of logistics in the country. India's logistics costs are valued at around US$350-400bn, or approximately 13-14% of GDP. The same costs amount to 8-10% of GDP in US/Europe and 9% in China.
A report by the Confederation of India Industry (CII) and Arthur D Little in 2020 earmarked a gap of some US$180bn, compared to the supply chains of advanced nations, to become a significant player globally. At a CII leadership conclave in September 2020, supply chain experts presented on transformation of supply chains to enhance efficiency and capability.
Why improving logistics is important
According to an Economic Survey conducted in 2021[2], the logistics industry employs over 22 million people, making it one of the largest employers in India in industries like transportation, warehousing, packaging amongst others. The industry plays a significant role in India's manufacturing and export capability, efficiency and cost. India is a significant exporter of textiles, pharmaceuticals, and agricultural products.
Efficiency and cost are critical in gaining any comparative advantages
Significant Infrastructure Development and Spend
A sizeable and growing logistics industry in India has required the acceleration and development of infrastructure. The Government has focused on developing new ports, upgrading existing ones, and constructing new highways and railways. The Government budgeted an Infrastructure Plan of US$1.4tn from 2020-2025 for infrastructure.
- Road Network – India’s total road network is 6.4m kilometres, which is the second largest in the world. National highways (NH) account for 2% of the road network and carry over 40% of traffic. In the last 7 years the length of has increased by more than 50% to 140,152 kms, with the pace of construction increasing from 12kms a day in FY15 to 30kms a day in FY23 (and accelerating in the month of February to 42km per day).
- Railways - The Government of India has allocated a record US$32.9bn for rolling stocks and fleet modernisation in FY24. This includes high-speed rail links, intra-state metro projects, hydrogen powered fleet. There is also significant allocation for line projects also dedicated freight corridors.
- Ports – India has a coastline of 7,517kms and maritime transport handles 70% of India’s trading by value. The country has 30% global market share in the ship breaking industry. In a program launched in 2017 called Sagar Mala, there has been US$123bn invested in India’s ports to modernise and develop, increase connectivity and enhance, industrialisation and coastal community development. The result has been significant increase in traffic, efficiency and capacity.
- Airports – India has become the third largest domestic aviation market in the world and is set to overtake the UK by 2024 to be third overall. The Airports Authority of India (AAI) plan to invest US$3.6bn in the next five years to improve facilities and infrastructure at airports, with 100 new airports planned by 2024. Despite India's largest carriers placing significant orders with Boeing in the last year, the Modi Government is now seeking to build aircraft locally. Its largest carrier, Air India has been privatised in 2021.
The Productivity Effect
The investment in infrastructure has helped reduce costs for businesses in India. The increasingly efficient movement of goods is helping to reduce transportation costs, which is significant for the country's pricing power when it comes to manufacture and export of goods, services and information. This is increasing India's engagement and opportunity with the rest of the world by being more competitive from a proposition and value perspective.
A report released post the 2021 Economic Survey which outlined a Vision for 2030 for Indian Supply Chains, with a focus on reducing logistics costs by digitising 80-90% of operations, developing platforms and channels and moving towards a "greener economy". This will require increasing collaboration between Industry, State Governments and the Centre, with a focus on building a globally competitive supply chain and facilitating India’s transition to being a leading economy[3].
The logistics sector contributes immensely to GDP growth as rising trade, with less friction, has a multiplier effect on the Indian economy. Faster, less expensive, and more efficient transit of goods and services throughout India is rapidly evolving and as the backbone of the India’s economic growth. As per the National Logistics Policy, the country aims to be ranked in the top 25 in logistics performance by 2030 and achieve cost-to-GDP at similar levels to global peers.
Improvements Occurring
India has gained six spots to reach the 38th rank on the World Bank's Logistics Performance Index (LPI), owing to significant investments in logistics infrastructure and technology. This ranking has been improving since 2015 due to the focus of the Modi Government on infrastructure spending and investment to drive efficiency. India scored 3.4 out of a maximum possible score of 5 on the 2023 index, which considers six factors: customs, infrastructure, shipments, competence and quality, timeliness, and tracking and tracing.
Outlook
Given the significant spend on infrastructure, India's logistics costs to GDP should reduce and make business more competitive. It should also improve the cost of doing business - a critical aspect for foreign direct investment, which can then create a multiplier effect for economic growth and productivity (as measured by GDP-per-capita). India today is around 15 years behind China when it comes to this measure and is set to accelerate as driven by exports, manufacturing and infrastructure, it launches itself towards a consumer economy.
This should be highly beneficial to India's equity market through the compounding earnings growth available from the "productivity loop" of markets of significant scale, rising efficiency and lower costs.
[1] The National Economic Survey is run by the Ministry of Finance
[2] Statista – Martin Placek, Feb 2023
[3] Pushpank Kaushik, The Contribution of Shipping and Logistics Industry in Indian Economy – Times of India, March 16, 2023
Never miss an update
Enjoy this wire? Hit the ‘like’ button to let us know.
Stay up to date with my current content by
following me below and you’ll be notified every time I post a wire
Mugunthan Siva is Managing Director of India Avenue, an Australian based boutique investment management company, domiciled in Sydney, with a presence and advisory network in India. He has over 30 years experience in Australia and is lead portfolio manager for the two long-only equity funds managed by the firm; the India Avenue Equity Fund and the India 2030 Fund.
........
This document (‘Document’) has been produced by India Avenue Investment Management Limited (‘IAIM’) ABN 38 604 095 954, AFSL 478233 and has been prepared for informational and discussion purposes only. This does not constitute an offer to sell or a solicitation of an offer to purchase any security or financial product or service. Any such offer or solicitation shall be made only pursuant to a Product Disclosure Statement, Information Memorandum or other offer document (collectively ‘Offer Document’) relating to an IAIM financial product or service. A copy of the relevant Offer Document relating to an IAIM product or service may be obtained by writing to us on info@indiaavenueinvest.com or by visiting www.indiaavenueinvest.com. This Document does not constitute a part of any Offer Document issued by IAIM. The information contained in this Document may not be reproduced, used or disclosed, in whole or in part, without the prior written consent of IAIM.
Past performance is not necessarily indicative of future results and no person guarantees the performance of any IAIM financial product or service or the amount or timing of any return from it. There can be no assurance that an IAIM financial product or service will achieve any targeted returns, that asset allocations will be met or that an IAIM financial product or service will be able to implement its investment strategy and investment approach or achieve its investment objective.
Statements contained in this Document that are not historical facts are based on current expectations, estimates, projections, opinions and beliefs of IAIM. Such statements involve known and unknown risks, uncertainties and other factors, and undue reliance should not be placed thereon. Additionally, this Document may contain “forward-looking statements”. Actual events or results or the actual performance of an IAIM financial product or service may differ materially from those reflected or contemplated in such forward-looking statements. Any trademarks, logos, and service marks contained herein may be the registered and unregistered trademarks of their respective owners. Nothing contained herein should be construed as granting by implication, or otherwise, any license or right to use any trademark displayed without the written permission of the owner.
Certain economic, market or company information contained herein has been obtained from published sources prepared by third parties. While such sources are believed to be reliable, neither IAIM or any of its respective officers or employees assumes any responsibility for the accuracy or completeness of such information. None of IAIM or any of its respective officers or employees has made any representation or warranty, express or implied, with respect to the correctness, accuracy, reasonableness or completeness of any of the information contained in this and they expressly disclaim any responsibility or liability therefore. No person, including IAIM has any responsibility to update any of the information provided in this Document.
Neither this Document nor the provision of any Offer Document issued by IAIM is, and must not be regarded as, advice or a recommendation or opinion in relation to an IAIM financial product or service, or that an investment in an IAIM financial product or service is suitable for you or any other person. Neither this Document nor any Offer Document issued by IAIM takes into account your investment objectives, financial situation and particular needs. In addition to carefully reading the relevant Offer Document issued by IAIM you should, before deciding whether to invest in an IAIM financial product or service, consider the appropriateness of investing or continuing to invest, having regard to your own objectives, financial situation or needs. IAIM strongly recommends that you obtain independent financial, legal and taxation advice before deciding whether to invest in an IAIM financial product or service.
3 topics
Mugunthan Siva is Managing Director of India Avenue, an Australian based boutique investment management company, domiciled in Sydney, with a presence and advisory network in India. He has over 30 years experience in Australia and is lead...
Expertise
Mugunthan Siva is Managing Director of India Avenue, an Australian based boutique investment management company, domiciled in Sydney, with a presence and advisory network in India. He has over 30 years experience in Australia and is lead...
Expertise
Comments
Comments
Sign In or Join Free to comment
most popular
Equities
The 7 zombie companies lurking on the ASX 300
Livewire Markets
Equities
18 stocks backed by a fund that returned 42% in 12 months
Livewire Markets