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Analysis of the Logistics Sector in India & Expectations for Budget 2017

Analysis of the Logistics Sector in India & Expectations for Budget 2017
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Indebted to the recent economic reforms, trade co-operation, improved transportation infrastructure and industrial development, the Indian Logistic Service Providers (LSPs) savored prosperity in the year 2016. While the industry continues with its growth frenzy, last year proved to be a promising year for the sector. Buoyed by the support from several initiatives taken by the Indian Government vis-à-vis trade and industry promotion, infrastructure development and tax reforms, the emergence of e-commerce specific logistics solutions was another crucial benefactor for the industry. The booming e-commerce sector offered strong growth in the warehousing segment as well. At the beginning of 2016, it was supposed that despite of economic uncertainties, the Indian logistics sector would grow above 6% in 2016.

Moving ahead, according to a report published by Frost & Sullivan, the industry is theorized to grow at a CAGR of 8.6% between 2015 -2020, factoring in the 9.7 % growth during 2010 -2015. The key growth drivers conjuring growth rates are growth in infrastructure investment associated with ports, airports and other logistic development plans, domestic demand growth and increasing trade. 

Tapering down the vast logistics industry, sea freight continues to be a major contributor to freight movement with more than 70 per cent of international trade happening through sea ports, the domestic air cargo comprises one-third of cargo volume. It was theorized that during 2016, the industry would grow by 2.3 per cent, while the International air cargo was touted to grow by 12.5 per cent. Under the 12th Five Year Plan (2012-2017), an approximate amount of US$11.4 billion has been allocated for airport modernization and expansion. Furthermore, as per the target set by the Airport Authority of India, the country will witness a surge in the number of airports, which is likely to increase to 250, of which, approximately 13 regional airports have been targeted for infrastructure expansion.

Nevertheless, despite such progressive numbers and noticeable growth in the segment, India’s freight volume is still not in equilibrium with the size of its economy. As compared to other countries with similar economic activities and conditions, currently India is four to five times beneath its actual handling capacity. Such potential directly implies that Indian logistics industry has the capacity to bring in transformational growth further. This can be achieved with firm focus on building this freight volume through enhanced infrastructure capacity, productivity and process efficiency.

Moreover, it should be noted that any industry, irrespective of how nascent or established it is, requires comprehensive infrastructure and strong policies in order to attain growth. For that to happen, the government needs to step up and introduce measures and initiatives that can benefit the industry in the long run. Ensuring Ease of Doing business in India can be a good start towards improving overall infrastructure in the country.

India is currently ranked 130th out of 189 countries in terms of ease of Doing Business. Be it getting electricity, enforcing contracts, or simplified border and documentary compliance procedures, the country has accomplished a great deal. However, it still has a long way to go in terms of simplifying trade practices and improving domestic manufacturing capabilities.

To ensure ease of doing business in India, the government can take inspiration from trade practices in china – currently ranked 78th in the ease of Doing Business is ranking. Being two of the fastest growing economies in the world, Both India and China have gained global prominence owing to their rising economy. However, there are certain areas where these countries have an upper hand over each other. While India has done well in terms of Trading across borders, China has an advantage in terms of Starting a business. While the rankings are not entirely inclusive of other factors, it certainly gives an idea on how India can further improve its infrastructure to simplify the entire process of starting a new business in India.

Emergence of Aggregator model in Cargo and Logistics sector

Nowadays, it is being witnessed that some players in the air cargo industry have begun to utilize the aggregator & marketplace model within this space to make it more organized. These aggregators provide all information related to the air cargo industry like benchmark prices, incentives & spot rates, export/import, and cross-trade & domestic tariff. In addition to these services, they also provide softwares such as airway bill, barcode label, among others.

By addressing all the needs and requirements of the air cargo industry, aggregators in this space are providing information instantly to all concerned parties, and thereby, bringing transparency and efficiency in processes. While still a new concept, many industry insiders affirm that the aggregator & marketplace concept can transform the Indian cargo and logistics sector for the better in future.

The Indian logistics sector has emerged to become globally competitive as it rapidly transforms in to an organized framework. The sector stands at a cusp from where it is all set for its next phase of growth, in which the Union Budget 2017 will have a big role to play.

The Indian economy witnessed a rapid growth, registering GDP growth of around 7.6 per cent. The growth was however interrupted by the sudden and unexpected move of demonetization in November last year. While the move aimed to be a counterstrike on black money, it caused significant liquidity issues in the economy. As of now demonetization is expected to have lasting impact on a number of segments. Owing to that, the masses expect the Union Budget 2017-2018 to be high on ‘feel-good’ quotient.

Income tax reforms

To ease the pain of demonetization, and the anticipated decline in customer spending, this year’s budget is expected to finally introduce a change in the current taxable income tax slab. Many media outlets, perhaps in anticipation, have reported that the government is planning to revise the current 2.5 lakh to 4 lakh per annum as the minimum taxable income. 

The much awaited GST bill

Ever since the announcement of its introduction, GST bill has been a hot button topic for months now between the central and state governments. Post demonetization, this year’s budget is expected by many to feature a much watered down version of GST. The GST Bill is going to be one of the most welcomed reforms in the Indian business ecosystem, as it would make the task of estimating and filing their taxes much easier.

The implementation of the GST tax, along with other government policies could also make the entire supply chain management system more transparent and functional by simplifying inter-state trades, and bring uniformity in the overall logistics segment.

Extension on tax holiday

In a bid to encourage startups and businesses, the Indian government announced 100 per cent tax deduction for three years. Considering the time taken to set up businesses in the logistics segment, we expect an extension on tax holidays further. We believe a minimum of 10 years should be allowed for businesses operating in the segment. 

As the Indian logistics industry awaits the union budget 2017-2018 for further growth, it has managed to attract enough attention from venture capital firms scanning Indian markets for the next big investment opportunity after consumer internet.

Edition: March 2017

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