India’s logistics sector opportunity
India’s logistics sector has emerged as one to watch for this year. It is expected to double in size and become a $300 billion industry in the next five years. This year, India ranked third among emerging markets in Agility’s logistics index, which rates countries based on size, growth, attractiveness and business environment for the sector.
The logistics industry in India is at a nascent stage. It is largely fragmented and unorganized, which presents an attractive opportunity for investors. Apart from inherent advantages in low labor costs and abundant natural resources, India will be the largest consumer market in the world by 2030, dramatically increasing the flow of goods. The government’s push to make India a manufacturing hub and its efforts to invite foreign investment will further drive the sector. Growth in the e-commerce industry has resulted in the emergence of new and more complex logistics service requirements, seen as a differentiator in the race for customer acquisition.
The government’s infrastructure push
To enable the logistics sector to keep pace with India’s growth and improve the competitiveness of the sector, the government has focused on strengthening infrastructure. In 2015, the government allocated an additional $11 billion from the public budget to boost overall infrastructure. Since then, the prime minister has personally intervened to clear more than 60 stalled projects, speed up the approval process, and set up a committee to expedite infrastructure projects and resolve disputes.
The government has taken steps on a priority basis to improve its roadways. Traditionally, the road sector has been fraught with inadequate and low-quality highway availability, thereby limiting the trucks’ size and impacting operations. In 2014-15, the government managed to achieve its target of constructing 11 km of road per day.
Several initiatives have been taken to facilitate private participation and attract private, foreign and multilateral finance to the sector. Though the road sector hasn’t attracted much private investment so far, the government is hopeful of a pickup in public-private partnerships on the back of its new hybrid annuity model. According to the hybrid annuity model, 60% of the project cost for the construction of national highways will come from private investors, and 40% from the government. Apart from increased budgetary allocations, the government will also bear the revenue risk in some projects.
The government’s plans to set up various industrial corridors along dedicated freight routes will have a huge impact on logistics businesses and ensure high-speed connectivity across storage and distribution systems.
Benefits of a unified taxation regime
India continues to work to move forward with the game-changing Goods and Services Tax (GST) bill. Currently, India ranks 130 out of 189 countries in the ease of doing business index, in part because of its complex, cumbersome and expensive taxation regime. The planned GST system seeks to replace around 15 state and federal taxes and tariffs with a single tax at the point of sale.
Apart from creating a unified market across India, the GST will help make India’s manufacturing competitive by cutting high transportation and warehousing costs. According to Crisil research, the GST rollout will reduce logistics costs by as much as 20%. More importantly, the passage of the GST will ensure that logistics businesses will finally be able to take decisions on the setting up of inventory and distribution centers based on operational efficiency rather than the tax regimes in each state. Logistics businesses will be able to move to a hub-and-spoke model where warehousing will be distributed among six to eight major regional hubs and three to four smaller hubs.
Over the last few years, India’s logistics sector has received unprecedented interest among the global and domestic investor community. Specific segments like agriculture logistics and warehousing have received attention from a wide range of global investors.
Businesses in India have become increasingly aware of the competitive advantage that an efficient logistics system can bring. Players in fast-growing industries like pharmaceuticals, food processing, fast moving consumer goods, and retail have begun to demand highly specialized services. For instance, India has less than half of the cold chain capacity it needs. Industries like pharmaceuticals require specialized cold chain management and are underserved.
India’s logistics sector offers a range of opportunities – the sector’s openness to foreign investment, its nascent development and potential for high growth make it extremely attractive for investors.
Snapshot of logistics sector deals
- Global PE firms Bain Capital, Blackstone, Carlyle, JP Morgan, Samara Capital and TPG have bid to acquire a significant minority stake in agri-logistics company National Collateral Management Services Ltd.
- Global venture capital firm Sequoia Capital is one of the leaders in investing in the logistics space. The firm has large stakes in at least seven logistic start-ups across different segments and sub segments like last mile delivery, hyperlocal businesses and reverse logistics, including Peppertap, Grofers and Roadrunnr.
- In 2014, India Value Fund Advisors, the country's largest domestic private equity fund, bought out National Bulk Handling Corporation, a warehousing company, for $36 million from the FT Group.
- In 2015, Warburg Pincus, a private equity firm, committed over $300 million in two big investments in the sector; $175 million to build industrial parks with warehousing facilities across the country and a $125 million investment in Ecom Express, an e-commerce logistics solutions provider.