India's Logistics Challenge

As a percentage of GDP, logistics spending in India is estimated at 13%. This compares to around 10% in the United States and Europe. Such inefficiency reflects a transportation infrastructure that hasn't been able to keep pace with economic growth.

The Indian economy grew at a compound annual growth rate of 6.4% from 2000 through 2006, and by 8% over the past two years, according to the Center for Monitoring Indian Economy (CMIE). The country's economy is expected to grow from 7% to 8% over the next three to five years.

From 2000 through 2006, Indian exports grew at an annual rate of 18.6%, driven by growth in the manufacturing,automotive and textile sectors. Total imports grew at a similar rate over the same period, with non-petroleum imports increasing by 17%.

The Indian logistics industry is highly fragmented. Carriers with fleets of less than five trucks account for over two-thirds of the total trucks owned and operated in India, according to market research firm Datamonitor in a recent report, "India Logistics Outlook 2007"over 70% of the country's freight travels by road, and while the National Highways account for 2% of India's road network, they carry over 40% of the freight. As an indicator of road congestion, Datamonitor reports that commercial vehicles in India run at average speeds of 20 mph, compared to over 60 mph in Western Europe and the United States.

Rail transportation in the country is a monopoly managed by Indian Railways, with container movement managed by its subsidiary, the Container Corporation of India (Concor). Rail cargo accounts for approximately 30% of cargo transported in terms of volume, and 11% of cargo in terms of value, reports SSKI, an investment bank headquartered in Mumbai.

Despite a cost advantage, rail transportation has been slowly losing market share to roads, which SSKI analysts attribute to capacity constraints on key routes and better point-to-point service and better turnaround times offered by trucking companies. In an effort to improve the sector's competitiveness, the Ministry of Railways has begun to allow private companies to move containers by rail.

One major development that promises to change the face of logistics in India is the introduction of a value-added tax (VAT) structure, replacing a Central State Tax (CST). The present tax structure forces companies to set up warehouses in each state where they sell goods in order to reduce their tax burden. The change in the tax law would allow companies to set up more efficient hub-and-spoke distribution networks with larger regional warehouses. As a first step toward a complete phase out targeted for April 2009, the CST was reduced to 2% in April 2007.