This article is part of the special coverage of the upcoming Union Budget 2018 from the lens of Indian startup ecosystem. In this pre-budget series, we’ll shed light on major expectations of the startup industry from Budget 2018 for various industries like logistics, across all the key areas including taxation. To read all the stories of this special coverage of Budget 2018, click here.
In Logistics, it is often said that plan is nothing, planning is everything. And, with the Union budgets, the biggest issue has been the same – it remains a plan which often gets cheated in terms of spending.
Logistics is the lifeline of an economy as it involves the efficient management of forwarding and reverses the flow of goods and services across the country. The sector primarily consists of transportation (via rail, road, air or water), warehousing, cold storage, logistics optimisation and also involves packaging solutions.
Since the last decade, logistics industry in India has been on a roller coaster ride especially due to the mega push given to infrastructure spending to kickstart the economy. As per the ICRA report, Indian logistics industry is bound to grow at the rate of 9-10% per annum.
By global standards also, India’s logistics performance has improved as is evident with the claims of the World Bank Logistics Performance Index (LPI) which showed in its last Index that India has jumped to the 35th rank in 2016 from the 54th in 2014. And, the government expects the logistics industry to grow to $360 Bn by 2032 from the current $115 Bn. The logistics sector is expected to create one million employment opportunities by 2021.
Before delving into the expectations that logistics startups might have from the upcoming Union Budget 2018, let us take a recap of the Union Budget 2017 and some of the other government initiatives.
Union Budget 2017– Logistics Recap
- The Union Budget 2017-18 made massive provisions of $38 Bn (INR 2,41,387 Cr) for the transportation sector as a whole including railways, road and shipping. Out of this, over $15.8 Bn (INR 1 lakh Cr) was allocated to the railways alone and over $10 Bn ( INR 64,000 Cr) for the construction of highways. Better transportation infrastructure was expected to increase the global competitiveness of domestically manufactured products by lowering down the inherent logistics cost.
- The other key announcement which cheered the logistics startups was that the government allowed these startups to use railways for end-to-end solutions. These startups were expected to bring digitally enabled cost-savvy technologies to the platform. The Associated Chambers of Commerce and Industry in India (ASSOCHAM) predicted this announcement as a $300 Bn opportunity for logistics.
- The Finance Minister also announced the Trade Infrastructure and Export Scheme (TIES) to develop export-related infrastructure in states with a view to bridging the critical infrastructure gap in the export sector. This move was also expected to provide a boost to logistics sector as it eyed for providing the last mile connectivity.
- The 2017 budget also allowed 100% FDI in warehousing which could prove to be a big boost to the logistics startups in terms of easier access to foreign capital along with a smooth transfer of the latest technology and managerial know how.
- The logistics sector has witnessed a paradigm shift in terms of taxation related matters after the implementation of GST. The tax reform has been successful in translating India’s multi-layered taxation system into a unified one, eliminating many bureaucratic hurdles and improving the ease of doing business. Apart from tax compliance issue, GST has also reduced in-transit time delay of goods and therefore, helped in ensuring an efficient and smooth flow of goods.
Nishith Rastogi, CEO and co-founder, Locus stated,
“Logistics sector has seen a paradigm shift post the GST implementation. The single & uniform tax reform called for a major re-fashioning of supply chain operations and strategies. Nagpur, for instance, has seen a skyrocketing growth in land prices as the possibility of catering to three major states from one warehouse opens up immense opportunities.”
He further added that the Supply Chain Efficiency can be improved by as much as 30% by utilising the changes offered by GST. Locus, for instance, has helped several major corporations save around 10-25% by applying innovative, technological solutions to the overall supply chain.
Indian Logistics Sector: Current Status And Growth Projections
A report on logistics released by JLL India reveals the fact that while in the US, food processing and ecommerce are the major industrial drivers for logistics, it is the auto components, pharmaceuticals, cement and textiles industries that are the cash cows on which Indian logistics industry have been so far riding on.
However, with the policy thrust given to the food processing industries by the government and the developing ecommerce market in India, these could become the next big thing in the coming future.
As per the industry body (ASSOCHAM), the logistics cost in India is one of the highest at 14% of its GDP. While in the developed countries with better quality of infrastructure, the same cost is in the range of around 8-9%.
Key Growth Projections
- ASSOCHAM estimated that India could save a staggering amount of $50 Bn just by reducing the logistics cost to 9% of GDP.
- The ‘Infrastructure’ status is expected to bring down the cost of capital to the logistics sector as it would allow having access to credit in larger amounts, at easier terms, at cheaper rates and with longer maturity period.
- Further, the implementation of Goods and Service Tax (GST) is also expected to have a favourable effect on the logistics sector due to the removal of the multiplicity of taxes levied by the states and the central government bringing about a smoother interstate transportation.
Existing Key Challenges In The Logistics Sector
The key challenge in leveraging the true potential of the logistics in India is integration. The logistics sector in India is currently very much fragmented and therefore, it is grappling with many operational inefficiencies. It is only by providing the right kind of infrastructure with proper forward and backward linkages along with taking the help of evolving information technology, that the logistics challenge can be handled.
In terms of the Indian context, the cargo transportation model mix is currently very much skewed in favour of roads. As per a research report released by Mckinsey, of all the goods transported by volume, roadways constitute 57% of the goods resulting in under utilisation of the other cost-effective modes like railways, coastal shipping and inland waterways.
The poor connectivity between inter-transportation modes made the lead-time of cargo movement go very high. This has resulted in high losses during transportation, especially for perishable goods. In addition to that, finding skilled manpower for the Indian logistics landscape has remained another key challenge.
There is an urgent need to frame clear policy directives. Given the fact that logistics infrastructure is to become a critical enabler for India’s agenda of economic development and urbanisation, clear policy directives with an integrated and cohesive approach to realign the development strategy of each mode of transportation are currently missing from the ecosystem. The policy emphasis should be given to the development of cost-effective modes like railways and coastal shipping. This will help in reducing the overall logistics cost to GDP.
Warehousing is yet another segment which has become crucial and needs a significant attention. Warehousing and storage is the second most important sector of logistics after transportation.
Earlier, manufacturing or supplier houses used to have their in-house logistics support. However, with the evolution of logistics industry, more and more suppliers are transferring their supply chain management to a specialised third party.
Budget 2018: What Logistics Startups Might Get From It?
Infrastructure: “Thoda Hai, Bahut Ki Jarurat Hai”
In a major development last year, the government had granted infrastructure status to logistics. The sector will thus get access to the huge infrastructure funding as external commercial borrowings, benefit from the infrastructure policies and long-term funding insurance companies and pension funds.
Commenting on the budget expectations, Dhruvil Sanghvi, CEO, LogiNext stated, “With the inclusion of ‘Logistics and Infrastructure’ development in the Department of Commerce’s domain, this year, the budget can highlight key initiatives of automation and development in this sector.”
The government has already announced some of the biggest infrastructure projects with a key focus on logistics. The Sagar Mala Project of $130 Bn is targeted to set up six mega ports and develop 14 Coastal Economic Zones and at least 29 Coastal Economic Units. Megaprojects such as Mumbai Trans Harbour Link project, are to be completed by 2019 and hence, will demand some huge fund flow from the government in the budget 2018.
Nishith believes that the upcoming budget will bring in some significant turnarounds in reforms, rules and taxes framed for the entire ecommerce industry which, if done properly, can boost the whole sector, as it has happened across the world.
“With an allocation of $10.2 Bn (INR 64,900 Cr) towards the development of National Highways, infrastructure is the top priority in the year 2018. With the introduction of GST and thrust towards infrastructure development, manufacturers now expect a reduction in overall logistics costs and GDP to 7-10%,” he added.
The infrastructure, food and agri-business projects along with huge infrastructure funding are poised to create an unprecedented opportunity for logistics startups particularly startups pertaining to IoT, AI, cold chain and deeptech.
According to government estimates, the Bharatmala road building programme is expected to reduce supply chain costs from 18% to 6% which will eventually benefit the logistics sector.
Tax And Policy-Related Issues: Need A Bit More Focus
Dhruvil stated, “The 2018 budget should focus on digitisation of logistics processes, just like the e-way bill in GST. The GST’s implementations have incentivised cost-based optimisation of logistics. Companies aren’t focusing on tax savings while setting up hubs. Centralised taxation has done away with this practice. However, in the budget of 2018, the government should further the implementation and adoption GST with clear technology intervention.”
“One way of such digitisation would be the inclusion of Electronic Logging Devices (ELDs) which have now become a mandate in the United States. These ELDs can record truck movement and driving hours which can help automating the taxation and billing processes, further bringing down turnaround times for trucks,” added Dhruvil.
Also, apart from funding, the government needs to resolve tax and policy related issues. The Finance Minister must cater to the demand of logistics sector and formulate an integrated transportation policy with a balanced multimodal mix apart from ensuring better connectivity with logistics hubs like warehouses, logistics parks and cold storage.
To Continue Pushing The Digital Drive
The upcoming budget is expected to continue the push to digital drive plans by the government as technology inclusion and promotion can play a larger role in ensuring transparent and efficient delivery of public services. ‘Logistics Startups’ could be one of the direct beneficiaries of the digital technology and innovation agenda of the government.
As per Nishith, in spite of the focussed efforts towards large-scale infrastructure projects (dedicated freight corridors and logistical parks), there exist many challenges such as bureaucracy, a complicated structure for land acquisition, lack of funding, environmental compliances and much more that prove to be the discord between federal and state government policies.
Besides, more than 75% of India’s logistics industry remains unorganised and fragmented leading to an unfair competition from small and multi-level entities due to lack of uniformity and transparency in their process.
The government has been bullish on reforming the logistics and infrastructure sector, which is evident from the 10% increase in transport infra budget allocation in 2017-18. Besides, with an allocation of $94 Mn (INR 600 Cr) for the Sagarmala project – building multimodal logistics parks and developing coastal roadways, has given a massive boost to the shipping industry and will lead to around 20% YOY growth.
According to Nisith, the 2017-18 budget was sensible, a well-balanced budget which did not cater to just the populist demands. However, if the fear of a populist budget being passed comes true in the FY18-19 budget, then we can expect an increase in indirect taxes, huge waivers of Agriculture and SMEs loans, increase in government spending on agriculture, textile industry, etc.
Other Issues To Cater To
Undoubtedly, the mega infrastructure projects, access to end-to-end railway solutions and funding will help bolster logistics startups in the country. However, startups are also looking up to the government to pave way for technology-oriented solutions in these projects.
For instance, the logistics startups have been urging the government of India Electronic Proof of Delivery (e-POD) to release blocked credit for transport providers in the freight transport industry.
As per the report, while the government has already issued notifications regarding E-way bill on August 30, 2017, after the GST implementation, the startups are still woeful owing to the huge amount of funds being locked up as credit because of the prevailing system of producing a ‘proof of delivery’ in hard copy.
Last year too, despite the big announcements, the logistics startups failed to encash the opportunity. This was precise because the technology-oriented startups failed to meet the end-to-end requirements of this brick and mortar sector.
As a result, last year, many of the logistics startups such as TheKarrier, Truckmandi, Trucksumo, Loadkhoj, Zaicus and Sastabhada had to shut down their operations. However, according to Dhruvil,
“With the recent increase of consumerism through retail and e-commerce boom in the country, logistics movement has once again become the value-creation sector that can help boost the economy. The key expectations from the Budget of 2018 then would be about increasing transparency in the regulation of logistics movement and taxation (with technology), increasing focus on developing logistics hubs and increasing investment towards removal of bottlenecks in logistics movement.”
Further, with the government following the ‘lowest bidder wins the tender’ process, most startups are unable to meet the requirements. Thus, to enable access to government projects for startups, the centre must provide a special window for these startups, where logistics startups could directly play a significant role in these mega projects.
[The article is written by Gaurav Agrawal, Suprita Anupam, And Meha Agarwal.]
In the coming parts of the pre-budget series, we will be providing a detailed analysis of expectations from Union Budget 2018 accompanied with commentaries and diverse views of multiple stakeholders including views from the leading startups of India from different sectors. To read more articles on this series click here.