The Role of Transportation and Logistics in India : Emerging Issues and Prospects

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1 The Role of Transportation and Logistics in India : Dr. S. Sriraman Walchand Hirachand Professor of Transport Economics University of Mumbai. Prologue For a country s economy, the transport sector is often viewed as important barometer of growth. And the Indian transport sector is usually perceived to be demand driven. The Author has been writing extensively on the various aspects of transport economics. In this Paper, he examines analytically the emerging issues in transportation and logistics in India. He strongly recommends the development of a multimodal transport system as an integrated nationally consistent multimodal approach. - Editor Backdrop It is virtually inconceivable, in today s economy, to function without the aid of logistics and transportation, which create time and place utility in goods and people. In fact, these two elements form the backbone of the entire supply chain that makes it possible to achieve the well-known seven Rs the right product in terms of the right quantity in the right condition, at the right place, at the right time, for the right customer at the right cost. Their importance should be seen by looking at the impact of transportation on a country s economy. It is understood that in India, the total logistics costs constitute nearly 10 percent of the GNP, out of which nearly 40 percent is on account of transportation alone. In the US, the estimates show that this cost is around 6 percent of the GNP. A key determinant of trade competitiveness (domestic and more so international), is the provision of trade support services, and the extent to which these services ensure that goods are shipped from a factory, warehouse or port from an origin to a destination in a timely and cost-effective manner. With increasing movements at a global level, the supply components need to adjust quickly to a changing demand situation. This has not happened in the Indian context, adequately in terms of the supply side response. Weak responses have contributed to high transaction costs and a limited ability to meet the transport and logistical RITES Journal 18.1 January 2009

2 18.2 The Role of Transportation and Logistics in India : demands of an increasing competitive economy, undermining the competitiveness of their goods and, thus the ability to take advantage of market opportunities. It is against this background, that we make an attempt, in this paper, to highlight the issues that are involved in promoting a more effective transportation and logistics system. We begin with the reasons for the inadequate supply response. Causes for the Weak Supply Response In a study, the World Bank (2002) reported the following key underlying causes responsible for the inadequate supply response: i. Unclear and fragmented responsibilities for different aspects of the supply and management of sector services and infrastructure. ii. iii. iv. Inadequate resource mobilization. Weak asset/system management and sub-optimal allocation of scarce resources. The lack of a proper system to allow users to make the concerned agencies (mostly public sector ones) account for their performance. The major infrastructure required for moving goods from one place to another in India involve the active roles of different agencies, which provide services of Roads, Road Freight Industry, Railways, Ports and Shipping, and Pipelines, all of which are either managed or regulated by the government. According to Vijayaraghavan (2001), the efficient and effective management of relevant infrastructure to enable the smooth flow of goods constitutes Macro Logistics. The situation in India is such that, because of inefficient management of Macro Logistics, the economy is not able to derive the best out of their Micro Logistics. Any improvement in the Micro Logistics will be effective only if the Macro Logistics is effective. Also, Indian companies and the industries have not fully optimized their logistics function, as there is a tendency to live with the lacunae in Macro Logistics and the government s inefficiency. The fragmentation and overlapping of responsibilities basically, as suggested earlier, limits and obscures accountability, and hence puts pressure on agencies to perform. For example, the Indian Railways reflects a clear case of a conflict of objectives wherein, on the one hand, it is expected to operate as a social service while at the same time also required to make profits. Similar situations in regard to other major players involved in transportation and logistics have, according to some informed observers, led to operational inefficiencies, misguided industrial locations, inappropriate modal split and even limited technological innovation. Further, the lack of an integrated approach between the various agencies has had deleterious effects in terms of the impacts. For example, mismatches in both capacity and timing of logistics projects have lead to bottlenecks at the interface between the various

3 Dr. S. Sriraman 18.3 agencies. Essentially, these have hampered the growth of intermodal transportation and affected asset utilization because of the mismatch between capacity creation and demand. All these problems have been basically due to differing priorities of the multiple agencies. Implications of a Weak Supply Response A. Results of a Case Study in Transport in the Indian Context High transport costs for exports undermine competitiveness in foreign markets. The major elements accounting for high freight costs include inefficient management of transport facilities, poorly managed infrastructure and equipment and cumbersome government regulations. An analysis of bilateral trade data confirms the importance of infrastructure, and gives an estimate of the elasticity of trade flows with respect to the transport cost factor. Limao and Venables (2001) have found that elasticity of trade flows, with respect to transport costs, is large with a 10 percentage point increase in transport costs reducing trade volumes by approximately 20 percent. Lata (2005) made an attempt to examine the effect of transport impediments on the transport cost of India s exports. More specifically, an attempt was made to examine the incidence of transport costs on India s exports. In this study, the impact of distance on trade, the type of commodity and the hinterland distance on the cost of transportation was made. Further, the various transport cost elements were analysed with a view to examine which element of transport was significant. Also examined were the possibilities of reducing some of these elements. Building up on a simple Microsoft Excel model to reflect the various elements, a simulation exercise was conducted to see how changes in the share of each mode (element) of transport affect the total cost of India s export. For the purpose of the empirical analysis, the costs relating to the complete transport chain including hinterland transport, port and ocean transport i.e. transportation from factory to the port of export and then to the port of destination, were factored in. Traditionally, studies have focused on the ocean freight and the insurance element of transport only due to lack of data on the other elements. Even UNCTAD estimates of transport cost as a percentage of import values are based on ocean freight tariffs. The results of the simulation study revealed that the there is a significant impact of reduction in inland transport costs, especially in the case of low-value goods. The results also reveal possibilities of growth in exports as a result of a decrease in the incidence of transport costs. B. Performance Index In 2007, the World Bank ranked India at 39th in global trade logistics. In other words, India held the 39th position on the Logistics Performance Index (LPI) that is based on the ability to transport goods reliably and in a cost-effective manner to and from a country. The list of 150 countries that were considered in the study was topped by Singapore, followed by Netherlands (2 nd ), Germany (3 rd ), Sweden (4 th ) and Austria (5 th ). Others in top-ten include

4 18.4 The Role of Transportation and Logistics in India : Japan, Switzerland, Hong Kong, UK and Canada. India has been ranked below the US (14 th ), China (30 th ), Finland (15 th ), Australia (17 th ), France (18 th ), New Zealand (19 th ), Italy (22 nd ) and South Africa(24 th ). However, India has found a place higher than as many as 111 nations including Saudi Arabia, Poland, Qatar, Cyprus, Pakistan, Bangladesh and Sri Lanka. Further, India is ranked 46 th in terms of logistic costs. These costs are much higher in the country compared to China (43 rd ) but less than Sri Lanka (47 th ) and Bangladesh (48 th ). In terms of timeliness, India is ranked at the 47th place while China is at the 36 th position. On a scale of one to five, India has been given an overall score of 3.07 points on LPI reflecting parameters like customs, infrastructure, international shipments, logistics competence, tracking and tracing of shipments, domestic logistics costs and timeliness. Countries that top the LPI ranking, are typically key players in the logistics industry, while those at the bottom are often trapped in a vicious circle of over-regulation, poor quality services, and under-investment. Among developing countries, logistics over-achievers are also those experiencing economic growth led by manufactured exports, the Report observed. The study also pointed out that policy-makers should look beyond road infrastructure and technology in customs and make reforms in logistics services markets, especially in reducing co-ordination failures involving public agencies active in border control. This demands a more integrated, comprehensive approach all along the supply chain. It noted that despite progress in telecom and IT, most of the logistic professionals are not satisfied with the quantity and quality of physical infrastructure in many developing countries. Efficient Transport and Trade Facilitation Developing countries need to consider new developments in the area of transport, logistics and trade facilitation when identifying their priorities and formulating related policies. Lack of transport connectivity and trade facilitation, and high transport costs increase the risk of marginalization of many economies especially in developing countries. Enabling legal and regulatory frameworks, and access to global transport networks, are paramount to transport, logistics and trade facilitation. We now examine the possibilities that can enable seamless movement and distribution. For a country s economy, the transportation sector is often viewed as an important barometer of growth. As more goods are consumed within a country, the transportation sector must grow accordingly in order to accommodate the transport of additional goods. And, as the wheels of commerce turn with ever greater speed, so does the volume of passenger traffic. As a corollary, the location of manufacturing facilities and distribution centres can have a major impact on the growth of a country s transportation sector and transportation infrastructure. The relative location of these manufacturing facilities and distribution centres can dictate whether the country becomes a hub within a logistics network or a spoke in the wheel, serving in effect as a transit corridor. Such matters are of particular importance to emerging economies where transport and logistics infrastructure is in a process of rapid development. Logistic service providers

5 Dr. S. Sriraman 18.5 are confronted with clients, who wish to source out of low-cost countries or access these new markets. They need to ensure that they can help their clients meet their objectives, understand the emerging markets environment, and expand their competencies and resources. Thus, it is necessary that location of activities is based on considerations that help achieve minimum transactions costs. Infrastructure services are a significant part of the Indian economy. They are key inputs for business growth and their costs, reliability and quality have a major bearing in India s international competitiveness. Basically, affordable and reliable infrastructure services are central to growth of the economy. It is recognized that economic infrastructure is very capital intensive, requiring major investment expenditure on long-lived assets. Poor investment decisions or under investments in the past have been major constraining factors. But equally constraining has been the sub-optimal use made of assets that have already been built up. Rao and Sriraman (1985) observed this in the context of an attempt to understand the extent and nature of disequilibrium prevailing on the Indian Railways in regard to the provision of services. Sriraman (2000, 2002) pointed this out more emphatically while trying to examine the revenue implications of a sub-optimal utilization of existing capacity. Fortunately, during the past decade, attempts have been made by the railways to increase asset utilization as a result of which the tonnage lifted and thereby the revenues have gone up substantially, providing a basis for the expansion of the asset base which is badly required in certain parts of the system. The railway budgets for and have reflected a certain determination to enable this to happen within the framework of restructuring process that has been in motion for nearly 5 years (Sriraman, 2007, 2008). The past few decades have seen a major shift in modal split in favour of the highways with the road transport system emerging as dominant part of India s transport system (Sriraman, 1997). However, the industry has been finding it increasingly difficult to meet emerging requirements. A major problem has been the sheer inadequacies (both in terms of quantity and quality) of the road network. With the up gradation of the major arteries in the country, it is expected that the sector would handle requirements adequately. However, one important index for measuring the efficiency of a transport system is its adequacy of use of a facility. Adequacy is not merely influenced by the size of the fleet in operation and the size of the network, but much more importantly, by whether a given fleet moves freely without restraint so that its effective capacity is utilized and, hence, productivity enhanced during a given period of time. In the Indian context, the smooth flow of road goods traffic is hampered by frequent detentions of vehicles for one reason or the other at various check points and mid way. Vehicles are detained for checking essential documents such as registration book, driving license, permits, etc. (RTO checking). They are also detained for checking payment of commercial taxes such as sales tax, octroi, other local levies, etc. In addition, detentions take place for booking traffic rule violations (Police checking) and also at State borders (Border Post checking).

6 18.6 The Role of Transportation and Logistics in India : The consequences of detention of vehicles are loss of time leading to under utilisation of truck capacity, avoidable consumption of fuel (due to deceleration and acceleration, stopping and restart of engines) and lastly, corruption and graft. GOI (1950), while pointing out to the delays due to octroi levies observed, the delays that occur while goods are being examined and weighed at octroi posts are as harmful or even more harmful to the economy of the country than the levy made on the goods themselves especially when these levies are relatively light (p.23). GOI (1967) pointed out, Octroi and similar check posts which detain vehicles frequently are impediments to the growth of the economy and the time they consume is a serious obstacle in the way of quick turn round (p.83). The Committee also observed that octroi was a fertile source of corrupt practices, and concluded that octroi is one of the greatest hindrances in the way of commerce and economic development of the country. NCAER (1979) noted that considering the total time wasted at the various detention points which were of the order of 20 to 35 per cent of the running time, carrying capacity equivalent to nearly trucks or capital investment equal to Rs.650 crores is locked up due to check posts. Further, there was a huge wastage of fuel as a result of idling. In terms of gratification and other social costs, the study revealed that the incidence of gratification on different routes was almost as much as the total fees levied on those routes. CIRT (1994) surveys revealed that detentions on the different routes ranged between an average of 2 hours and more than 24 hours. In the course of the surveys, most operators emphatically pointed out that problems arising out of exploitation by an intermediary in the trade were of no consequence to them when viewed in relation to those they faced on the road on a day-to-day basis. Every time the issue of exploitation by the intermediary was raised, it was observed that : The broker is a much lesser evil than the police or the RTO official. The implications are many. One of them, as pointed out earlier, relates to low utilisation that results from less movement in a day. It is estimated that at a higher lever of operations in terms of more movements per day, say, 350 to 400 kilometers, operator s returns turn out to be positive even with legal loads. With less to be paid by way of wayside expenses, the returns could be higher. Debroy and Kaushik (2001) conclude that on the basis of personal interviews with transporters, if all the additional costs were eliminated, the delays could be reduced by approximately 3 days and transportation costs halved. The World Bank (2005) pointed out that though the cost of movement by trucks was low, at the same time movements were not performed efficiently. If inefficiencies could be reduced, the cost to the user could go down further which means rates would be more competitive. In the context of an attempt made to understand the nature of competition in the road goods transport industry in India, Sriraman et al (2006) emphatically pointed out that there are a number of barriers to free inter-state movements of trucks in India. As a result of these barriers, which result in huge delays, transport and transactions costs have increased which further increase the cost of production distorting competition in the domestic market as well as our competitiveness in the international market. There are a number of legal barriers arising mainly from the legal framework governing indirect taxes imposed by States.

7 Dr. S. Sriraman 18.7 Legal definitions regarding the incidence of taxes vary significantly from State to State. Legal procedures for compliance with State tax law are cumbersome and vary widely from State to State. Physical barriers such as check posts as well as legal rights to stop vehicle to check on payment of indirect taxes, operate as major sources of delay in the flow of goods across state barriers. All these features afford important rent-seeking opportunities for State officials. With an economy dominated by roads and road transport, it is increasingly important that truckers have much the same right as the railways to travel interstate with a minimum of delays. Legal and administrative reforms in this area are needed in India for it to function effectively as a single market. At the national level, Some States like Gujarat have taken up the matter seriously and have initiated measures to have Computerised Inter-State Check posts. With the use of computers and other electronic devices at 10 remote inter-state border check posts in Gujarat, a team of savy public officials have reduced corruption and significantly increased the State s tax revenue by automating the highway toll and fine collection system. The system was a good investment. Within one year the system had paid for itself, illustrating how strategic investments, properly planned can lead to long-term benefits (ADB, 2003). This new system could be used by the sales tax department of the State, which would monitor the movement of goods in the State, as well as transshipments. Future plans include integrating payment of sales tax on the goods carried on the vehicles. At the international level, the European Union has introduced a range of policies that underpin the single market and boost trade. As a measure of competition advocacy, Sriraman et al, emphasized the importance of elimination of regulatory and physical barriers which can pave the way for a seamless national (single) market to begin with. In this connection, it was necessary for the State Governments to carry out competition audit of existing regulations especially those providing for the present system of checkpoints administered by the States and involve a number of agencies (which resulted in restrictions on smooth flow of commodities, the fiscal regime, etc.) to determine the need for their continuation. A further advocacy measure in this regard, to begin with, would be to designate Trade Corridors along the Golden Quadrilateral that has been developed under the National Highway Development Programme which connects the four metropolitan centers and the three major ports of the country. This is an idea that needs to be developed more systematically in the Indian context. Some literature, that reports some of the experiences in other countries, can be reviewed in Lakshmanan and Anderson (2000). The lack of capacity at some of the major Indian ports has impeded exports providing a good example of what can happen when the supply of, and the demand for infrastructure, are out of balance. The establishment of new ports in the private sector, though in a very limited way, and the use of the private sector in operations under public-private partnership arrangements, has resulted in better performance on the trade handling front. However, here again, the lack of efficient intermediaries in aiding effective movement contributes to the

8 18.8 The Role of Transportation and Logistics in India : high freight costs in the context of developing countries. It is being widely recognized that transport and logistics intermediaries play a critical role in international commerce and the development of the market place. Freight intermediaries link the international supply chain by facilitating market access for exporters. Presently, nearly eighty percent of the world s cargo passes through the hands of freight intermediaries. The market for freight intermediaries determines the number and type of agents as well as their efficiency. Movement of goods between ports and remote regions requires freight intermediaries that are intermodal savvy and capable of integrating domestic and international forwarding services. However, it must be admitted that an effective intermodal system has hardly emerged. This is true of developing countries to a great extent and also to developed ones, though to a lesser extent. A part of the problem has been the division of policy responsibility between different levels. Such a situation has contributed an array of inefficiencies in service delivery, and in the interface between different services and, above all, retarded the development of the sort of institutional arrangements needed to support a more integrated approach to reform. When the reform process began in many countries, in the context of the transport sector, it was felt that a lot could be achieved by simply focusing on improving the efficiency and productivity of individual transport modes. However, given rapid increases in international trade movements, it was felt that only an integrated strategy involving all modes could be effective. In the absence of such an approach, there were major impediments including lack of competitive neutrality across transport modes, low quality and capacity of inter-modal connections etc. It has been further pointed out that current institutional arrangements do not appear to have provided the level of coordination and cooperation between modal jurisdictions needed to address certain issues. The traditional compartmentalized approach has, it is held, left a legacy of distortions that have created modal biases. The most commonly cited example is overuse of and excessive investment in road transport at the expense of rail. This point hardly needs to be emphasised here in a detailed way in the context of transport development in India. What needs to be emphasised is a required focus on development of a multi-modal freight transport system which can lead to improved productivity through eliminations of the bottlenecks. In other words, we must move away from development and investment decision-making based on segmented modes and many tiers of management to an integrated nationally consistent multi-modal approach. This is an important measure which would help ensure that the mix of transport modes reflects the intrinsic efficiency of the different modes compared to current Government policies and regulations that favored one mode to other. The current compartmentalized approach to decision making, that has characterized much of India s transport and related policies, has left a legacy of distortions with the most striking one being the overuse and excessive investment in road transport at the expense of rail though the extent and significance of such distortions can be debated. This trend needs to be reversed.

9 Dr. S. Sriraman 18.9 References 1. Case Studies, Asian Development Bank, Manila, Debroy, B. and Kaushik, P.D. : Barriers to Inter- State Trade : the Case of Road Transport, Paper submitted to the Ministry of Law, Justice and Company Affairs, Government of India, Road Goods Transport in India - A Study of its Structure and Organisation, Central Institute of Road Transport, Pune, December Report of the Motor Vehicle Taxation Enquiry Committee, Ministry of Transport, Government of India, Delhi, Final Report of the Road Transport Taxation Enquiry Committee, Ministry of Transport, Government of India, New Delhi, Lakshmanan, T.R. and Anderson, W.P. : Case Studies in Trade and Transport Integration, Centre for Transport Studies, Boston University, Report prepared for the World Bank Group on Infrastructure, March Lata, M. : Infrastructural Impediments and Rising Costs of International Trade : A Case Study of India s Export Competitiveness in the Global Market, Ph.D. thesis submitted to the University of Mumbai, Limao, N and Venables, A. : Infrastructure, Geographical Disadvantage and Transport Costs and Trade, World Bank Economic Review 15, pp , Road Transport Industry, National Council of Applied Economic Research, New Delhi, Rao, T.V.V.S.R. and Sriraman, S. : Disequilibrium in Rail Freight Services, Ajanta Publications, New Delhi, Sriraman, S. : Road and Road Transport Development in India, Asian Transport Journal, December. 12. Sriraman, S. : Indian Railway Finances, Economic and Political Weekly, Vol. XXXV, No. 12, March Sriraman, S. : Indian Railway finances: A Critical Review of Basic Issues and Emerging Options, Journal of Indian School of Political Economy, Vol.XIV, No.3, July-September 2002.

10 18.10 The Role of Transportation and Logistics in India : 14. Sriraman, S. : Railways: On Path to Permanent Recovery?, Economic and Political Weekly, Vol. XLII, No.10, March Sriraman, S. : Indian Railways on a Fast Track, Economic and Political Weekly, Vol.XLIII, No. 11, March Sriraman, S. et. al. : Competition Issues in the Road Goods Transport Industry in India with special reference to the Mumbai Metropolitan Region, Final Report submitted to the Competition Commission of India, New Delhi Vijayaraghavan, T.A.S. : Micro Logistics and Macro Logistics, Proceedings of Logistics Engineers, India s Transport Sector: The Challenges Ahead, Volume 1, World Bank, Washington, DC, Road Transport Service Efficiency Study, Mimeograph, World Bank, Washington D.C., ***** Time and space time to be alone, space to move about these may well be the greatest scarcities of tomorrow. Edwin Way Teale