1.1 Economic and demographic challenges

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1 Connecting India: Transport Challenges and Opportunities Executive Summary 1. Executive summary 1.1 Economic and demographic challenges While the China factor has captured global attention in recent years, India s growth has been less dramatic but solid, with GDP rising at an average 5.6% pa since While all the other members of the group of emerging economic powers commonly called the BRIC countries (Brazil, Russia, India and China) have been eclipsed by China s phenomenal export led economic performance, India is the most likely to follow in China s footsteps as the next low-cost manufacturing super-power. India has followed a similar path to China (e.g. economic liberalisation, investment in infrastructure, privatisation, encouragement of foreign direct investment FDI), but at a much slower pace one based upon an inclusive, consensual approach. Nevertheless, the economic modernisation has seen the value of India s exports almost double since 1995, and its share of world exports rise from 0.6% in the mid-1990s to 0.9% in By 2006, the government is hoping that the country s share of world exports will have increased to 1%, a process that will be aided by a move up the value chain. Indeed, India s export mix is changing with higher value goods (eg high-tech, pharmaceuticals, engineering and automotive components) growing at a faster pace than resource-based and agricultural products. For shipping lines, this changing mix of cargoes will result in further unitisation of the country s general cargo trades. India is the world s largest democracy (2003 population = billion), and on current trends will overtake China as the most populous nation on earth in 30 years. By 2010 another 80 million people will be added to the India labour pool and if this positive demographic can be integrated productively into the global supply chain, India s economy could be set to grow at still faster rates in the next few years at the same time as the Chinese economy is slowing down. Areas requiring improvement for India to realise its potential as a new manufacturing super-power include reform of the rigid labour market, simplification and reduction of the tax burden, further reductions in import tariffs (still about 15% of landed value, compared to 3% in China), expansion of domestic demand, improvements in productivity and reduction in the cost of basic services. The costs associated with moving cargo in India are some of the highest in the world at 11% of landed cost compared to a global average of 6%. Cost and productivity issues are largely the result of an inadequate physical infrastructure to support India s greater participation in the global supply chain. But with many competing demands for scarce central/state government investment and current account resources, India needs to attract greater participation by the private sector. Recent FDI inflows, though, have been equivalent to just 1% of India s GDP at US$4/5 billion per annum, whereas China has been able to attract US$50 bn pa, and it is clear that the investment climate needs to be improved to capture a greater share of this capital. While India has achieved major advances in the services sector (especially telecoms related/dependent industries), it has fallen well behind China in manufacturing, where the Drewry Shipping Consultants Ltd 1

2 Executive Summary Connecting India: Transport Challenges and Opportunities physical infrastructure is especially crucial. China s recent investment in infrastructure has been eight times that of India in absolute terms ($260 billion (20% of GDP) compared to India s $31 billion (6% of GDP)). In India, everything from roads and rail to water supply and power generation needs improving. Indeed, there is no doubt that the country s poor and creaking infrastructure is raising companies costs and holding back growth, perhaps by as much as 1-2% annually. 1.2 Container ports and shipping Indian container traffic has increased at an average annual rate of 13.4% pa over the last decade, reaching 4.39 million twenty foot equivalent units (teu) in West Coast ports handled almost 68% of traffic. Over the next decade, Drewry expects throughput at India s ports to rise steadily, with total container traffic projected to reach between 8.4 million teu (4.5% pa GDP growth) and 10.8 million teu (7.5% pa GDP growth) by The Far East-India trade has been especially buoyant in the last few years, mainly due to the rise in China trade, although Korea has also become a more important trading partner for India. Westbound growth in each of the last two years is estimated at around 30%, but eastbound (export) growth has been only in the 6-8% range. The Far East trade is now heavily imbalanced with westbound volumes almost 1.5 times the eastbound trade and this from a position of balance as recently as There has been a move from transhipment over SE Asian hubs to direct call services. At an estimated 1.05 million teu in 2004, the European route is now about 80% the size of the Far East route, having historically been the larger trade. Trade between North America and India is estimated at just over 0.5 million teu in 2004, with Indian export volumes 2.5 times the size of imports. The Indian government has turned to the private sector to address infrastructure shortfalls in the port sector, through Build, Operate, Transfer (BOT) schemes, outright privatisations and a variety of joint ventures with public authorities/agencies. The most noteworthy example to date has been the development of Nhava Sheva International Container Terminal (NSICT) at Jawaharlal Nehru Port (JNP) by P&O Ports, which has subsequently invested in Chennai, most recently at Mundra and potentially at Kulpi. Additionally, PSA Corp is investing at Tuticorin and Kandla; Dubai Ports at Cochin, Visakhapatnam and Gangavaram and APM Terminals at Pipavav and JNP. Port productivity levels are improving, but congestion particularly affected JNP in 2004/05. In fact, labour is probably the biggest single issue in India s ports, with working practices still seen as being highly restrictive. Despite the improving investment picture, India still lacks deep water in many ports with only Mundra having depths in excess of 14m (Pipavav and JNP have up to 13m), and the draft situation is at its most acute in the upper Bay of Bengal area, with Haldia having the deepest water at just 12.2m. In the south, Chennai offers 13m, while deeper water facilities are planned for Cochin and Tuticorin, the ports which are India s closest to the East-West route and best placed to prise Indian transhipment cargo away from foreign hubs, most notably Colombo. Despite the rising number of Indian main-line services, Drewry estimates that only 45-50% of India s containerised imports and exports are carried on direct call, main-line vessels. 2 Drewry Shipping Consultants Ltd

3 Connecting India: Transport Challenges and Opportunities Executive Summary In line with its standing as the highest volume Indian port, JNP is by far the most frequented port by main-line deep-sea services, commanding 27 calls per week across the three main trade routes (Far East, Europe and N.America). Mundra has established itself very quickly as a viable call for deep-sea services, with an especially strong position in the European trade, and a total of 10.5 calls per week on these three trade routes, while Tuticorin receives 7 calls per week. For Indian ports to develop a significant hub role, more than capacity and efficiency will be required there will also have to be a change of mindset and regulation on the part of the Indian government. Coastal shipments, whether international feeder or pure domestic cabotage, have to be undertaken in Indian flag vessels a restriction that is deterring international carriers from becoming involved in the sector while high port costs and the duty drawback payment system are also serving to promote the use of foreign hubs. This could represent a missed opportunity, as India s poor landside infrastructure and the country s geography would naturally promote North-South coastal shipping and feeding of international traffic, while the country s port capacity is set to expand and improve. Over the next seven years, India s container terminal handling capacity is expected to more than double, rising from an estimated 6 million teu in 2004 to 15.2 million teu in In 2004 more than 1.2 million teu of new container handling capacity came on stream, an increase of almost 30%. This should be the decade when India s port infrastructure comes of age if projects can remain on schedule. Capacity growth through to 2012 is projected to be similar in all three zones. West Coast ports will have a total handling capacity of 9.4 million teu, giving the region a 62% share of total national capacity, while South India s share of capacity should also be virtually unchanged at 28.5%, but with a low of 22% in 2006, as its main expansion projects are set to come on line in Major schemes are planned at Cochin, Chennai, Vizhinjam and Colachel. On the East Coast the major expansion will be at the green-field site of Kulpi. The new developments should result in India having sufficient container handling capacity to process the expected increase in trading volumes, with utilisations in 2012 of 71% under the high growth scenario, but only 55% with the lower growth forecast. The new projects will also give ocean carriers and shippers more choice and should allow for a more competitive freight transport environment to prevail. In turn, this should encourage both greater efficiency (with consequential lower costs) and greater trading volumes. 1.3 Road, rail, waterway and air The low priority accorded to investment in Indian transport infrastructure has: Extended journey times Produced a high number of accidents Increased the risk of cargo being damaged, lost and/or stolen Caused enterprises to maintain higher levels of inventory Retarded the development of multi-modal/integrated transport services Held back economic development, particularly of the smaller private sector Drewry Shipping Consultants Ltd 3

4 Executive Summary Connecting India: Transport Challenges and Opportunities The Indian highway network is limited and many of the roads are in poor condition. A World Bank Report (India s Transport Sector 2002) identified only 2% of the national highway system as being 4 lanes the rest being double, single or intermediate. In the regional network, no state highways were 4 lanes and only 23% comprised 2 lanes. Annual maintenance spending needs on the existing road network are in the order of Rs70 billion pa (US$1.6 billion), which is three times the actual current expenditure. The backlog of years of under-maintenance is consequently huge. Expenditure on road maintenance has been virtually flat and has been falling in real terms, even though the World Bank makes it a priority area for India for every Rupee spent on road maintenance, the Bank assesses a Net Present Value of over Rs 7. Roads account for under 2% of government recurrent expenditure and about 12% of capital expenditure. Most recently, however, capital expenditure on roads has been increasing, reflecting increased investment on connections to rural villages and improvements to the national highway system. Within the next ten years there will be a need to widen 15,000kms of national highways from two to four lane, and a further 16,500km from intermediate to two lane at a total cost at 2003 prices of Rs1,098 billion (US$25 bn). Furthermore, about 25,000km of state highways will need widening to two lanes, at a cost of some Rs 623 billion (US$14 bn). Even with all the revenue from road user charges allocated to highways, the cumulative funding shortfall over the 10 year period is estimated at Rs1,048 bn (US$24 bn). If only the current proportion of road user charge revenue were to be allocated to highways (56%), then the funding gap would rise to Rs1,760 bn (US$40 bn). Moreover, the regulatory environment and the reliance on regional/provincial operating agreements and licences has produced a very fragmented road haulage industry, characterised by the presence of many small companies employing just a few trucks. The sector is also characterised by a shortage of modern/specialised freight transport equipment. Full ownership by foreign private entities is to be allowed in the trucking & warehousing sectors, and this will help generate both operating and cost efficiencies. In turn, this should enable significant rationalisation and consolidation to occur, with the result that bigger and better organised companies will emerge. Such a process should also result in more innovative services and transport packages being developed, with customer-interfacing projects taking precedence over operational issues. Indian Railways is a vast network the second largest in the world under a single management. The importance of rail to the Indian container port market, especially in the Western region, cannot be overstated. Good rail connectivity is essential as a large volume of cargo is moved inland and currently it is the Mumbai port complex that is the most important rail cargo transfer centre in India. However, congestion in this region (lack of track capacity), plus a shortage of railcars and capacity limitations in some of the depots, has meant that ocean carriers have been looking for alternative port gateways, with Mundra, Hazira and Pipavav all offering routeing options. The rail system is also multi-gauge and this can make through transport and seamless services difficult to maintain. 4 Drewry Shipping Consultants Ltd

5 Connecting India: Transport Challenges and Opportunities Executive Summary Nor is rail a low cost transport option in India figures from Tata Iron & Steel Co (TISCO) place the tonne/kilometre costs at three times those in China. The provision of rail services is being liberalised, with the Indian Government ending Concor s monopoly on moving containers by rail in Several companies are now looking at options in this sector (e.g. Pipavav Rail Corp Ltd) but to date progress is slow, with potential operators wary of the special relationship between Concor and Indian Railways. Concor now moves more than 1.3 million teu of international containers a year (up 60% in 4 years), compared with domestic flows of just over 351,000 teu. This would indicate that 30% of India s international container traffic moves by rail. Meanwhile, Concor s investment programme includes the expansion of its inland intermodal and container depot (ICD) network, with the company planning to build at least 25 new facilities over the next five years. (Currently, Concor operates about 50 ICDs.) And the individual failings in the road and rail sectors are exacerbated by the lack of any co-ordinated policy for intermodal traffic. According to the World Bank, the result is that rail pricing and road user charges tend to encourage too much road freight, and too many rail passengers. India s navigable (and potentially navigable) inland waterways comprise almost 14,500 km, of which 5,200 km of major rivers and 485 km of canals are suitable for mechanised craft. But inland water transport (IWT) commands less than 1% of total inland cargo activity million tonnes and 1.5 billion tonne km out of 900-1,000 billion tonne km pa. It will be some time before inland waterways become a realistic competitive mode for the transport of container cargo, but in the near-term, development of the system/network could remove substantial volumes of bulk cargo from the road and rail networks to the benefit of all. India s gradualist approach to deregulation and liberalisation is also evident in the air cargo sector e.g. international air freight has been brought under an open skies policy, but still only four airports (Mumbai, Delhi, Chennai and Kolkata) are licensed to handle such traffic. It is hoped that private sector led developments at Bangalore and Hyderabad will shortly see them also become international air freight gateways. Privatisation has also proved a difficult path, with plans to dispose of Air India having been dropped and the proposed sale of Delhi and Mumbai airports progressing only slowly. The international air freight market is export oriented, with outbound traffic exceeding imports by a factor of 1.7. Growth over the last ten years has averaged 6.2%, well below what could have been expected in an expanding, trade oriented, industrialising economy. Again, the conditions appear not to have been provided to encourage the private sector to take on the infrastructure investment role which the public sector is unable to fund. 1.4 The cold chain While agriculture remains a mainstay of employment in India, absorbing 62% of the working population, it accounts for only 21% of GDP. In the high value end of the market Drewry Shipping Consultants Ltd 5

6 Executive Summary Connecting India: Transport Challenges and Opportunities ie amongst the refrigerated meat, seafood and fruit commodities India has a distinctly limited role in international trade, despite the enormity of its resources and production:- Fact 1 India is the world s largest producer of bananas (16.8 million tpa) but exports only 0.1% of the crop. Fact 2 India is the world s largest producer of mangoes (10.8 million tpa) but exports only 0.6% of the crop. Fact 3 India s cattle herd numbers 94 million head, but production is only 2.9 million tpa (and exports 344,000 tonnes) whereas Texas s 14 million head of cattle yield annual production of 3.5 million tonnes. It is only in the seafood sector that India has developed a significant export trade on a global scale. Exports are over 500,000 tpa and account for some 60% of India s estimated 90,000 teu pa reefer export trade. Total reefer exports have risen to about 1.1 million tonnes pa, with annual growth of c14%, but there is potential for considerably enhanced trade volumes. Imports are very low (under 40,000 tpa) and so the reefer sector is, and will remain, heavily imbalanced which will naturally impact transport costs and the ability of carriers to supply expensive equipment for a one-way trade. Infrastructure and regulatory failings have held back India s reefer trade. The cold chain supply system is inadequate in areas such as specialised equipment in the trucking and rail sectors, while there is a shortage of cold stores and of more specialised chilled and humidified facilities for holding and packaging fruit and food products. Compared with other developing economies, such as Thailand, Brazil and Malaysia, cargo spoilage levels are high and the shelf life of products tends to be much shorter. Additionally, controls on product quality (crucial in the export sector) have been found wanting in the past, with both seafood and grape exports having been badly affected at times by issues relating to antibiotics and pesticides respectively. These problems have led to a tightening up of monitoring, sampling and approval procedures, but give the image of a sector that is not yet entirely geared to international standards and processes. The Government realises that the country s cold chain infrastructure needs improving and since 2004 a series of financial concessions have been granted to investments in cold storage, distribution facilities and perishable products transport services. This has encouraged farms and co-operatives to build their own facilities to raise quality and extend product life a particular problem in the fruit sector, and one which has resulted in mango exports largely moving by air. 6 Drewry Shipping Consultants Ltd