INDIAN ECONOMY

Building a strong foundation to drive inclusive economic

resurgence is an imperative for India in FY2016* if the nation
hopes to launch itself on a double-digit growth trajectory. The
time is right, and expectations are high. With inflation under
control, a trade deficit of about 1 percent of gross domestic
product (GDP), substantive foreign-exchange reserves and an
expanding digitally literate populace, growth stakeholders
government and industrycan now aggressively push a reform
agenda. Key elements of the agenda include:
1. Putting the nations macroeconomic health back on track
2. Commissioning state-of-the-art physical infrastructure and
building a talent pool with the right skills to drive growth
3. Creating a policy environment conducive to attracting
manufacturing investment
4. Raising public participation in decision making and in
execution of socioeconomic policies
Since assuming power in May 2014, Indias new government has
been actively leveraging a range of policy instruments available
at its disposal to achieve such goals. For example, through
proceeds gathered from disinvestment in profitable public-sector
undertakings, auctions of coal blocks and sale of telecom
spectrum, the government is generating revenues for bridging
fiscal-deficit numbers. By moving toward promulgation of a single
goods and service tax (GST) regime across the nation and by
launching programs such as Make in India, the government is
actively wooing long-term inbound investments. In its first budget,
the government has also announced a slew of steps toward
creating legislative and financial mechanisms to develop highquality infrastructure. And the Digital India campaign aims to
promote adoption of digital technologies to deliver government
services and promote scalable e-governance.

But to execute an aggressive reform agenda in a timely manner,

government and industry must work together as a team. They will
need to leverage digital-savvy citizens and digital technologies to
target subsidies for meeting fiscal and governance targets
inclusively. Workers will need to be equipped with skills needed by
industry and an innovation economy capable of crafting novel
solutions for local needs. Collaborative ecosystems that can foster
creation of viable public-private partnerships (PPPs) in Indias
infrastructure sector will need to be carefully nurtured.

MACRO TRENDS FOR 2015-16:

On January 30, 2015, Indias Central Statistics Office released a
new GDP series. This revised series came out of four changes:
1. A shift in the base year from FY2005 to FY2012.
2. A change in the way GDP and GDP growth are measured (from
factor cost to market price)
3. A change in the method for measuring economic activities,
including use of MCA21
4. A change in how the GDP deflator is calculated (base year
changed to 2012 and weights changed per CES 2011-12, the
Consumer Expenditure Survey) As a result of these changes,
GDP numbers as well as sectors contribution to GDP have been
revised. Given these recent changes, and the fact that their
implications are not yet fully clear, we have not provided
forecast numbers for GDP and GDP growth in this edition of the
report.

Foreign direct investment (FDI) flows:

Industrial production:

Macroeconomic targets for FY2016:

Macroeconomic
Target for
indicators
FY2016
Real GDP growth 8.1%-8.5%
rate
Fiscal deficit as a % 3.6%
of GDP
Inflation
5-5.5%

Likely
Probable

Unlikely
Yes

Yes

Current
account 1%
deficit as a % 1%
Yes of GDP

Yes
Yes

INDUSTRY SCENARIO
Indian logistics market is expected to grow at a CAGR of 12.17%
by 2020 driven by the growth in the manufacturing, retail, FMCG
and e-commerce sectors. India spends around 14.4% of its GDP
on logistics and transportation as compared to less than 8% spent
by other.3PL logistics market in India is expected to be worth US$
301.89 billion by 2020. It estimates that the warehouse market in
India is expected to grow at a CAGR of 10% whereas freight
forwarding market is expected to grow at a CAGR of 12% till 2020.
This growth rate is based on the expectation that the new
government will soon implement the GST regime and the logistics
companies can optimize their operations to reduce cost and
increase their margins. With the implementation of GST, the
logistics companies, which are currently forced to set up many
small warehouses across multiple cities can set up just a few, big
warehouses region wise and can follow the hub-and-spoke model

for freight movement from the warehouses to the different

manufacturing plants, wholesale outlets, retail outlets and the
various POS. This growth is also backed by the boom in the ecommerce sector and expansionary policies of the FMCG firms.
This has increased the service geography of the logistics firms but
they also have to meet the demands of quick delivery and tight
service level agreements. Indian logistics sector is estimated to
have grown at a healthy 15% in the last five years. However,
growth in sub-sectors varies, with the lowest being in basic
trucking operations and highest in supply chain and e-tailing
logistics. Some studies estimate the share of Indias logistics
spend in GDP at 13% (versus 7-8% in developed countries),
implying overall size of $180-220 billion (direct costs +wastages
from inefficiencies). A comparison with other countries shows
inefficiencies are high in the Indian logistics sector.
Country
Region

Logistics
Costs as %
of GDP

Share of
organized
Logistics

India

12-14%

3-4%

China

18%

USA

9.9%

Less
10%
34%

Europe

7.1%

54%

Size of the
logistics
Industry($
billion)

Share of
logistics in
Global
Industry

145-160

2-3%

than 800-950

NA

1200-1400

NA

1100-1300

NA

Infrastructural bottlenecks across modes (rail, road, waterways)

have stifled the sectors growth. Capacity constraints and
inefficiencies can be noted from the high transit time in rail as key
train routes operate at >110% utilization, thus leading to an
average speed of 25 km per hour. The road sector is fraught with
inadequate and low-quality highway availability, thereby limiting
the trucks size and impacting economies of operation.

Despite being an economical mode of transport, railways has lost

market share in freight movement to roads in the last few
decades due to capacity constraints. Compared to other
countries, Indias rail share in goods transport is 31%, which has
come down from 60% in 1980s and 48% in 1990s.
Another key constraint is administrative delays. Despite being a
relatively low-cost country, logistics cost in India is higher due to
administrative delays led by paper workleading to huge
inventory investments and wastageand a complex tax
structure.
Also, low penetration of new technology in the supply chain
process is resulting in damage of goods. India has the least
warehouse capacity with modern facilities, and given the
fragmented industry state (large share with unorganized players),
investment in IT infrastructure is almost absent at required scale.
It would suffice to say that 2015 was the year of logistics for ecommerce in India, with many startups coming up in the space,
and investments flowing into them. Online marketplaces such as
Snapdeal, Flipkart, and Paytm came up with innovative strategies
in logistics and supply chain management, backed by ample
investment.
Following the most significant trend in 2015, Snapdeal took the
hyper local route and launched Snapdeal Instant to allow
delivery of packages to customers within an hour of placing the
order. Having received a whopping $500 million in funding in
2015, Snapdeal also launched four-hour delivery, card-ondelivery, and 90-minutes reverse pickups. At present, the
company is fulfilling 60 per cent of its orders from its own
fulfillment centers, as compared to the seven per cent at the start
of 2015.Amazon added eight new fulfillment centers this year,
increasing their storage capacity to nearly five million cubic feet
across all 21 centers in India. Amazon claims that this is the
largest storage capacity and warehouse infrastructure in India in
the e-commerce industry.
Since the logistics market is highly unorganized in India, underutilization of resources is not surprising. Increasing adoption of
technology in operations is essential to keep up customer

satisfaction. Technological developments in logistics have surely

surpassed manual methods in connecting sellers, third-party
logistics partners and customers. It has also made possible card
on delivery, electronic proof of delivery etc., for these players.
Logistics solutions provider Loginextwhich caters to Paytm,
Myntra and Amazon among otherseven, provides heat maps for
giving information on those areas where maximum delays are
happening. Technological developments in logistics have surely
surpassed manual methods in connecting sellers, third-party
logistics partners and customers. It has also made possible card
on delivery, electronic proof of delivery etc., for these players.

Money will be flowing into developing logistics for e-commerce

this year. Having invested in B2B logistics startup Blackbuck,
Flipkart has announced that it will be putting in $2.5 billion into
logistics needs over the next four to five years. Besides roping in
GoJavas, Snapdeal made six acquisitions last yearmost in
technology and logistics sectorsreducing its delivery times by 70
per cent

EVOLUTION OF LOGISTICS IN INDIA:

The logistics and warehousing sector in India is still in its initial
stage of development and has a long way to catch up with most
of the advanced economies. Managing transportation network
and storage of finished goods, used to define the supply chain
strategy for most of the companies in India until a few years back.
However, integration of the Indian economy with the global
economy and various multi-national companies setting up
manufacturing facilities locally have helped in bringing the global
best practices to the domestic market. This has resulted in a
gradual shift from simply managing transport network and
godowns towards a more integrated supply chain management
system.
In order to understand the evolution of the logistics sector in
India, it is imperative to study the competing markets that have

moved ahead in the value chain. United States of America (USA)

is considered to be the most evolved logistics market in the world
and can be used as a benchmark to compare with the Indian
market. China, sharing a great amount of characteristics in terms
of economy and geography with India, can be considered as
another benchmark for comparison. The comparison of USA and
China with India will help in understanding the various gaps and
the current status of the domestic logistics market.

Comparison with the USA Logistics Sector:

Overview: The USA has the largest and one of the most
developed logistics markets in the world. Its logistics sector
accounts for nearly 8.5% of its GDP. Although the USA is a heavily
service driven economy, this number is still very low in
comparison to China and India that have logistics cost as a
percentage of GDP at 18% and 13% respectively.
Evolution: Tracing the evolution of the sector, the USA has
managed to decrease the logistics cost as a percent of GDP from
16.2% in the 1980s to its current levels of 8.5%. Most of this
reduction in cost has come about because of efficiency in the
warehousing industry. The warehousing cost as a percentage of
GDP has steadily declined from 8.3% in the early 1980s to its
current level of 2.8%. However, the countrys transportation
expenses on the other hand have been relatively constant since
the 1980s at an approximate value of 5% of the countrys GDP.
India on the other hand spends 8.2% of its GDP on transportation
and 3.8% on warehousing. Two things stand out immediately
when we juxtapose India and the USA. Firstly India spends 8.2% of
its GDP only on transportation, which is almost as much as the
USA spends on its entire logistics sector. Secondly Indias
proportionate expenditure on transportation is nearly double that
of the USAs despite having only one-third of its landmass. The
USA logistics sector has a value of almost 10 times that of the
Indian logistics sector. Yet the USA logistics sector employs only
one tenth the numbers of people that the Indian logistics sector
does. Primary reason for such a stark contrast is that the logistics

sector in the USA is highly mechanized and uses automation

extensively unlike in India where it is largely dependent on labor.
Transport: Trucking and railroads are the main modes of
transportation in the USA. Trucking is more expensive as a mode
of transport and is generally used for either shorter routes or to
transport expensive cargo. The USA relies heavily on trucking
than on rail. Of the total share of transportation (tonnage)
handled by roads and rail, trucking accounts for 86% whereas rail
accounts for a mere 14%. This is very similar to India which has
roughly the same proportions.

USA Road vs Rail

14%

Road
Rail

86%

 FOREIGN AND PRIVATE EQUITY INVESTMENTS IN

THE SECTOR:
The growth story of the Indian warehousing and logistics sector
has indeed lured foreign investors and private equity firms in
recent times. Further, conducive policy environment-such as
allowance of 100 percent foreign direct investment (FDI) in
warehouses and food storage facilities under automatic routes
and tax-free zones such as free trade warehousing zones
(FTWZs)-has attracted many foreign and private equity
investments in the sector in the last few years .

2011

2012

2014-15

Investment of around INR 1179 crores

by Private Equity firms around the
world

Investment of around INR 1350 crores

by Private Equity firms around the
world

Investment of around INR 1658

crores by Private Equity firms around
the world

DEMAND DRIVERS OF INDIAS LOGISTICS SECTOR

The need for logistics arises when there is a gap between the
time a product is initially manufactured and then finally
consumed. The larger this gap, the higher the need for storing the
product. Since each product is uniquely placed depending on who
consumes it and where it is consumed, the need for logistics is
different for each product category. For example, a TV unit that is
manufactured in India and sold in the domestic market will have a
different requirement for logistics compared to the same TV unit
sold in the export market. For domestic consumption, the TV unit
will have to be warehoused close to one of the urban centres from
where it can be delivered to the final point of consumption.
However, in case of export, it will have to be stacked in a
container that will be warehoused in a Container Freight Station
(CFS) close to one of the ports from where it can be exported.
Taking into account such varying needs for each product, demand
drivers of logistics can be broadly classified into four categories
namely:
1.
2.
3.
4.

Manufacturing led demand

Consumption led demand
Exim (Export - Import) led demand
Agriculture led demand
MANUFACT
URING

CONSUMPTIO
N

EXIM

BASED ON
INDUSTRY WISE
SPENDING ON
LOGISTICS

BASED ON
MODERN RETAIL
SPACE

BASED ON
CONTAINER
TRAFFIC

THE "MAKE IN
INDIA" INITIATIVE IS
EXPECTED TO
BOOST THE
MANUFACTURING
SECTOR TO 10%

E-COMMERCE
INDUSTRY TO
REACH USD 20
BILLION TO USD 25
BILLION BY 2017

EXIM CARGO IS
EXPECTED TO
INCREASE TO 2,800
MMT BY 2020

TRENDS IN THE LOGISTICS INDUSTRY:

World exports as a percentage of global GDP showed a continuous
growth trend from the mid-eighties of the last century, until 2008.
Since then the growth stopped. Another indicator for trade, global
capital flows between countries, achieved its highest point seven
years ago. But times are changing. Growth will still be there, if
you know where to find it.
According to McKinsey, approximately 600 cities are likely to
realize 65% of the global GDP growth by the mid-twenties. By
then, the growing cities are predicted to add up to $30 trillion to
the world economy. Incomes in developing economies never rose
faster or at a greater scale in history, and about a billion people
are becoming part of consuming classes in roughly ten years
time.
Macro-economic changes and shifts in trade patterns have their
impact on global supply chains. They provide opportunities as well
as challenges. Lets have a closer look at some developments in
logistics that are directly or indirectly caused by changes in trade
patterns, in GDP growth or in customer behavior.
Growth patterns: Growth in the logistics industry is no longer
driven by exports from Asia to North America and from Asia to
Europe. It will come from elsewhere, and will be more fragmented,
more unpredictable and more volatile. Economic and population
growth will be increasingly centred in cities. Infrastructure is
becoming a major determinant for growth.
Flexibility: Meeting consumers requirements at multiple
locations with multiple transport modes at different times requires
a flexible supply chain that can adapt easily to unexpected
changes and circumstances.

Globalisation: International, mature and emerging markets have

become a part of the overall business growth strategy for many
companies. Going international has become the standard and
logistic solution providers need to enable that trend.
Near shoring: As labour costs in Asia and transportation costs
rise, increasing amounts of manufacturing are being brought
closer to the end user.
Multi-channel sourcing: End-consumers increasingly source via
multiple channels, ranging from brick & mortar shops to ecommerce. The logistics industry needs to support multi-channel
strategies of their customers.
Information technology: The growing complexity and
dynamism of supply chains requires increasingly advanced
Information Technology solutions.
Continuity: To be able to secure speed to market and to reduce
risk of delays, alternative transport modes and routes are
required to support the continuing trend of outsourcing of logistics
services.
Sustainability: Customers increasingly prefer products that are
made and sourced in the right way; minimising business social,
economic and environmental impact on society and enhancing
positive effects.
Compliance: Anti-bribery and corruption legislation is having an
increasing impact on supply chains, since multinational
companies demand that no facilitation payments are made during
the export of their goods, yet still seek to source from low cost
countries, which are often also at the bottom of Transparency
Internationals global corruption index.
Partnerships: Manufacturers continuously search for supply
chain innovations and gains through partnerships with logistic
service providers.

End-to-end visibility: Complete visibility of the entire supply

chain aspires to achieve true demand-driven planning, allowing
efficient response to changes in sourcing, supply, capacity and
demand.
Complexity: Supply chains are becoming increasingly complex
and dynamic with sourcing locations being changed increasingly
quickly and purchase orders becoming smaller and more
frequent.
These developments will have their effect on day-to-day logistics,
and companies will need to prepare for the new normal in supply
chain management. With all these changes, staying up-to-date on
the latest trends in logistics is more important than ever

FUTURE OUTLOOK OF LOGISTICS SECTOR:

Like in a hurdle race, Indian logistics is in a path of overcoming
hurdles. While it has left certain hurdles behind, some still lies
ahead.

REGULATORY IMPROVEMENTS: Indian governments urging to

improve the regulatory and taxation regime for a globally
competitive environment.
Rolling out of much anticipated and debated Goods and Service
Tax (GST) in India.
Single Window along with easy and simple clearance
procedures
MANUFACTURING THRUST: Current thrust in manufacturing to
strengthen and re-configure Indian logistics sector all the more to
live up to global standards.
Make in India initiative to strengthen the manufacturing base
in India
Delhi Mumbai Industrial Corridor (DMIC) - infrastructure driven
industrial investment corridor.

 Country specific investment regions and industrial parks on

Public Private Partnership (PPP) model - (Eg. Japan to invest USD
35 billion - Nimrana, Bechraji, Supa; China to invest USD 20 Billion
in next 5 years; UK - Belgaum)
CONNECTIVITY PUSH: Large scale investments in infrastructure
sector are deemed to improve connectivity to nook and corner of
the country.
Road: Develop a total of 66,117 km of roads i.e. building 30 km
of road a day from 2016.
Rail: Heavy duty, high speed, extra-wide, doubly stacked
Dedicated Freight Corridors (DFC) in west and east India
Seaports: Target capacity of over 3,130 MT by 2020 with over
50% anticipated to be generated at privatized non-major ports.
Airports: Plans to develop 200 low-cost airports in Tier II and Tier
III towns
With the economy transforming itself, mega infrastructural
projects, modifications in regulatory regime, the Indian Logistics
sector is definitely taking giant leaps ahead in its endeavor to
become future-ready and globally competitive.