Ashika Monthly Insight Flip July 2016

JULY 2016
SECTOR OUTLOOK
Colombo, Dubai and Singapore transship the containers,
roads are congested and railways have capacity
constraint. When compared with the international trade
logistics networks, the Indian logistics network lags on all
aspects, be it infrastructure, customs or quality of services
thus, the outcome is high cost, uncertainty in time and
low reliability. India ranks at 54 in the World Bank’s,
Logistics Performance Index, 2014, out of 160 countries,
behind South Africa, Chile, Panama, Vietnam and
Indonesia. China ranks at number nine immediately
behind Switzerland while Germany leads the index.
Government has planned to establish India as a global
manufacturing hub through the program of “Make in
India” and that requires quality logistic infrastructure.
“Make in India” would require more connectivity to
international trade logistic network, so that exporters can
move, store and deliver goods faster and cheaper which
is the only way to retain their competitive advantage
globally. The cost of trading whether by sea, land and air,
play a critical role in determining the price of the end
product, hence poor logistic infrastructure would always
heighten the peril of higher inflation. According to
Mckinsey study, inefficiencies in logistic infrastructure add
an extra cost to the Indian economy by USD 45 billion,
about 4.3% of the GDP every year. Moreover the report
has highlighted the issue that by 2020 freight traffic
demand in India would grow by 2.5 times thus putting
further stress on India’s infrastructure. Thus the scope of
growth in logistic space is very wide and there are
number of logistics companies who have been operating
across several segments in order to provide integrated
solution to the customers. In order to increase the
competitiveness, certain logistic companies have
developed expertise in selected segments of supply chain
such as transportation, dry ports, warehousing, express
distribution and non-vessel operating common carrier
(NVOCC). Many corporate are now outsourcing the logistic
activities to third party in order to improve cost efficiency
& delivery performance and to concentrate on their core
business. Hence with right policies in place, there are
immense opportunities for logistic companies to grow
their business by multifold in coming years.
Sector to benefit from domestic economy revival
Improving Q4FY16 results of corporate and gradual
revival in industrial activities reflected in IIP data, hints
early sign of economic recovery. Logistic sector has strong
correlation with the economic growth, thus any sign of
green shoots in economy would drive the growth for the
sector. One leg of the freight movement belongs to the
primary economy which involves bulk movement of raw
materials (locally sourced and imported) domestically to
production centers. The other leg of country’s freight
movement comes from the secondary economy servicing
the manufactured products. The contribution of the
secondary freight to GDP is greater as the freight is
handled and shipped multiple times and also moves
through networks of terminals and distribution centers. The
recovery in domestic manufacturing sector and
improvement in consumption trend would drive higher
movement in goods which would lead the growth in
logistic companies. Further, Government’s “Make in India”
initiative, which aims to make India a global hub for
manufacturing, innovation and design, can yield success
only if logistics infrastructure in India is developed. There
are tractions in the Indian economy as the global
commodity prices are benign amid economic slowdown in
China and other major consuming nations. Being the net
importer of commodity, India is one of the beneficiaries of
lower commodity prices and is also insulated from global
economic turmoil to some extent. Further, expectation of
above normal monsoon in the current year after two
consecutive drought years would boost rural consumption
which is one of the major driving factors of country’s GDP
growth. Good monsoon is also expected to cool down the
inflation which has just started to head up, thus would
provide room for central bank to reduce the interest rate
in order to propel the growth.
GDP growth on QoQ (%)
8.0%
7.0%
6.0%
5.0%
4.0%
3.0%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2012-13 2013-14 2014-15 2015-16
Source: RBI
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