Why India needs a new logistics network

An integrated multi-modal approach is necessary for reaping the benefits of GST and Make In India

One of the central promises of the new goods and services tax (GST) that is set to be rolled out in July is that it will allow companies to restructure their supply chains once the domestic market is truly integrated. It is hard to see how the production structure can be improved radically unless India builds a new logistics network to allow inputs, components and finished goods to move across the country seamlessly. The success of the flagship Make in India programme is also critically dependent on a modern logistics network.

The man who will have to put in the plumbing necessary for it all to work is Union road transport and highways, shipping and ports minister Nitin Gadkari.

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—talked up by Gadkari last week—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.

It is an ambitious plan and a necessary one for multiple reasons. For one, 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. Second, 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. Third, efficient logistics networks can reduce divergence in regional growth. Fourth, 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. And lastly, 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.

Gadkari’s integrated policy is thus essential, pulling together the Narendra Modi government’s planned road and rail dedicated freight corridors and suggesting 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. The Bharatiya Janata Party (BJP) government is now looking to deliver on the multi-modal aspect of that recommendation. But it should not lose sight of the unified ministry goal. The BJP’s electoral dominance, and thus reduced reliance upon coalition partners, gives it more scope to consolidate the clutter of ministries gumming up the works—across sectors—than any government has had in decades.

And here’s a thought. This is an opportunity for states to compete for hosting the logistics hubs and reaping the economic benefits. Will it be Nagpur and Varanasi that dominate the network or cities in centrally placed Madhya Pradesh or entrepreneurial Gujarat? The Modi government has made competitive federalism a plank of its economic agenda. This is a chance to see it in action.

Should the Modi government create a unified transport ministry?