India’s logistics cost is not 13-14 percent of GDP : NCAER

Dec 28, 2023 India Shipping News

NEW DELHI : At no point in time, in recent memory, India’s logistics cost is a steep 13-14 percent of the gross domestic product or GDP as top government functionaries, including Prime Minister Shri Narendra Modi, have led the nation to believe.

Two reports written by New Delhi-based economic think tank National Council of Applied Economic Research (NCAER) for the Department for Promotion of Industry and Internal Trade (DPIIT), in the space of four years, have concluded that India’s logistics costs as a percentage of GDP is already in single digit, and more importantly, tantalisingly closer to a level seen in developed nations, which India is seeking to emulate to make it’s goods competitive on the global stage.

India’s logistic costs ranged between 7.8 percent and 8.9 percent of the GDP during 2021-22, down from 8.7-9.9 percent during 2011-12, the NCAER said in a report written for DPIIT and released on 14 December.

According to the report, ‘Logistic Cost in India: Assessment and Long-term Framework’, India’s logistics costs saw a dip during 2014-15 to 2016-17, from 8.3-9.4 percent to 7.8-8.8 percent, due to a faster growth in nominal GDP than in logistic costs, and a fall in fuel prices compared to the earlier period.

Rajesh Kumar Singh, DPIIT Secretary, said on 14 December that the report will help develop a framework which will be used to calculate credible logistics cost estimates.

India’s logistic costs as a percentage of GDP is 8.35 percent on an average, the NCAER had concluded in a 2019 report. That study, “Analysis of India’s Logistics Costs”, based on surveys, had also calculated the logistics costs for different commodities and sectors, which in some cases, was as low as 6.05 percent.

The high logistics costs of 13-14 percent, first propounded by Shri Nitin Gadkari when he was holding the portfolio of the then Ministry of Shipping along with the Ministry of Road Transport and Highways, in the first NDA government led by Modi, soon caught the imagination of his cabinet colleagues and went viral. It became the ‘mantra’ or premise on which many policy decisions and initiatives pertaining to the transport infrastructure sectors were scripted, including the PM Gati Shakti National Master Plan for Muti-modal Connectivity and the National Logistics Policy, to name just a few.

“The National Logistics Policy has not come out of the blue and there are 8 years of hard work behind it,” Modi said while launching the policy on 17 September 2022.

“From 13-14 per cent logistics costs, we should all aim to bring it to single digit as soon as possible. This, in a way, is a low-hanging fruit, if we have to become globally competitive,” the Prime Minister asserted.

The National Logistics Policy seeks to tackle issues of high cost and inefficiency by laying down an overarching interdisciplinary, cross-sectoral and multi-jurisdictional framework for the development of the entire logistics ecosystem with the aim of improving the competitiveness of Indian goods, enhancing economic growth and increasing employment opportunities.

The compelling need to cut India’s high logistics costs even reverberated in the investment announcements made by private firms.

The debunking of the 13-14 percent logistics costs theory has now put the government’s policy managers on the defensive.

“We have not been banking on that number, we were only knowing that there are high logistics costs in India and it has to be reduced,” said a government official involved in the exercise.

“This is also what the National Logistics Policy says. That doesn’t refer to the 13 or 14 percent anywhere. We never considered that number as a valid number for that matter. But, yes, the fact is, the logistics costs were relatively higher, and it is still higher and therefore we have taken a policy initiative to bring it down progressively in whatever way possible, be it through infrastructure inputs or through improving the services, adopting digitalisation and promoting skill development and education in the logistics sector which are the cost factors. That remains and the pursuit of reducing the logistics costs and making our trade, both international and domestic, more competitive, making the supply chain more cost effective and making the products more competitive, that’s what is the pursuit basically,” he explained.

How did the 13-14 percent number come about in the first place?

“Since we did not have any number to refer to, there have been obvious references to that; it is also very indicative and very vague. Now we have a number to talk about with reference to which we would be looking at improvement or deterioration. Whatever happens, we are open to that,” the official continued.

“See you have to have some reference right and reference which is footed in this country. Otherwise, personally if you ask me, I did not consider 13 or 14 percent as a number at all. It was just a phrase; it is so subjective,” he quipped.

Even logistics companies were sceptical about the authenticity of the 13-14 percent logistics costs touted by the ministers and government officials.

“This was done on a very empirical, small basis and extended, multiple assumptions and might not be the correct figure,” said the Chief Executive Officer of a listed logistics company.

“When we go and talk to very large customers, for instance, Hindustan Lever says that their logistics costs are 6.5 percent and it’s a large company, they are way efficient. Even if you were to add a couple of more percentage points to HL, then somebody not as efficient as HL might have 8 to 8.5 percent as logistics costs. It is still far away from the 13-14 percent that we hear,” the CEO said, asking not to be named.

“Reliance also talks exactly the same language. They say that their logistics cost overall must be anywhere between 6 to 8 percent and they squeeze us for rates. They get the best possible rates from everybody; because of their size and scale they can do that,” he said.

“So, when large organisations are at this level, why would the economy be at 13-14 percent logistics costs to GDP, even I don’t understand,” he added.

The latest study by NCAER and its previous report of 2019 have both pegged the logistics costs a few points over 8 percent. But is there a difference between the two studies?

“It’s not like that. Anything logical and rational, even if it is repeated it doesn’t lose that value. It’s better than those numbers which are drawn on a non-mathematical, non-statistical and non-rational basis. At least there is some sanity in this exercise, which is based on objective parameters, some numbers, even if it is drawn from the secondary sources, a lot of it is also drawn from primary sources,” he said.

“So, there is a difference in the sense that it’s a little more comprehensive and new data sources have been also included, from the government sources and the private industry sources. Again, it’s an indicative exercise but it’s more rational, more methodical and more objective compared to any other number which has been drawn about the logistic costs for India,” the official said.

Referring to a survey that was carried out earlier on logistics costs, the official said it was just a number drawn based on some statistical model called the artificial neural network method which was done by some external agency who did not have much of a foothold or footprint in India. “They have calculated the logistic costs for many countries, and that was having a lot of biases which you can call as statisticians biases or bias of the person who is doing the assessment. So, in that sense, this report of NCAER is more logical and rational and that’s why it is different from the earlier report or study,” he stated.

The latest report is also an “improvement” on the previous study.

“Some of the concerns raised in the earlier report of NCAER have been addressed this time, one of which is making it a combination of primary and secondary data. The earlier study was probably a limited survey, the sample size would have been relatively smaller because it was just based on surveys. This time, in addition to the surveys, they have also considered the so-called secondary sources of data, so it’s a kind of a hybrid approach which has been adopted,” the official remarked.

“It’s a continuous exercise. We will keep on improving and again we are not saying this is the final number. This is just an indicative number and there again, we have given a range based on industry sectors or maybe regions across the country. We may have high logistics costs in the northeastern region and relatively lesser costs in a coastal region of peninsular India. So, it varies, therefore the range has been talked about, earlier it was just one number for different sectors,” he noted.

While the earlier study was done solely by NCAER, multiple agencies collaborated on the latest report.

“In fact, we have taken help from the Asian Development Bank, the Ministry of Statistics and Programme Implementation, Niti Aayog, and also consulted the World Bank. So, we have had more than one perspective this time. That gives a little more credibility to it and acceptability also,” the official said, adding that the logistics sector is “moving in the right direction”.