Logistics sector: A look at road freight transport I - Views on News from Equitymaster

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  • May 22, 2009 - Logistics sector: A look at road freight transport I

Logistics sector: A look at road freight transport I

May 22, 2009

In our previous article we had highlighted the importance of the logistics sector and had discussed different segments. Now, in this article we would concentrate our discussion on the road freight industry, which accounted for 4.6% of the country's GDP in FY08 (as per data released by CSO). Why does road transport play a dominant role in India's domestic transportation sector? What factors support the growth of the sector? How has the road freight industry growth been? What factors are likely to drive growth of this sector going forward?

These are some of the questions that we would be addressing in this article.

Road freight industry: The industry is highly fragmented and largely unorganised. The unorganised sector accounts for nearly 80% of the market share. However, changing policies with regards to tax structure are likely to give a competitive edge to the organised sector. Road transport comprises of freight and passenger traffic. It accounts for over 60% of goods traffic and over 80% of passenger traffic.

Source : CII, KPMG Logistic report
Road freight transport can be further classified into primary and secondary transportation. Primary transportation is one that covers distance not less than 50 kms and over 1,000 kms. Primary road freight accounts for over 70% of the Rs 1.42 trillion road freight industry. In the past ten years the road freight segment has reported a compounded annual growth rate of 8.9% and is expected to sustain this growth momentum in the coming years. The same has been on account of earlier infrastructural investments. The capital expenditure was primarily focused on building network of roadways to enable transportation, which has resulted in a vast network of roads. It is also well connected in comparison to the other modes of transport. Thus, road transport gains on account of route flexibility that enhances reach.

The growth prospects of the sector

  • In the past the growth of road freight business was supported by ongoing investments in road infrastructure, which will drive growth in the future as well. In the XI five year plan, Rs 3.6 trillion investments have been outlined, which will be utilised to develop and re-develop road infrastructure across the nation. This will reduce the time of transportation. Better road infrastructure will also lower maintenance cost for transporters. Thus, it will lead to enhanced reach and improvement in efficiency in road transportation.
  • Gradual proposed phase out of CST by 2010 is likely to reduce burden of multiple taxes. Taxes are levied both at the centre and state with no provision of set off. This leads to cost and price escalation. This dampens competitiveness of domestic goods. The move to phase out CST will provide competitive edge to suppliers catering to markets across regions. The customers would also stand to benefit as burden of taxes on MR would be reduced.
  • Implementation of VAT would also enable companies to move from a state-wise warehousing system to a hub-and-spoke warehousing system. Currently, companies prefer state-wise warehousing system to reduce tax burden. This also facilitates inter-state sourcing and distribution networks. Multiple warehouses lead to cost inefficiencies in terms of warehousing space, employee costs, IT connectivity etc. Removal of CST would enable interstate transport through centralized warehousing facility, which in turn would consolidate supply chain network. Even though few states have replaced state sales tax by state VAT, it does not provide tax credit for movement of goods across states. Implementation of state VAT has not reduced the need for border check points. With the new tax regime, stocking points would be reduced. While that will involve a one time cost and considerable time and effort, eventually it is expected to lead to cost efficiencies and a better supply chain system. The improved logistics would not only help sustain the quality of products dispatched but would also reduce delivery delays.
  • The growth of the organised retail sector has slowed down to single digits in 2009. However, the long term growth prospects of the sector are intact. The same is on account of expectations of revival in economic growth.
  • India enjoys demographic dividend. The same is likely to boost demand of electronic goods, automobiles etc. Increased demand for these products is likely to uphold growth of the manufacturing sector. Also, the demand is likely to be driven by increasing population. With the increase in population, demand for daily necessities and houses (increase in demand of commodities such as cement, steel and other building materials) would increase. This in turn will necessitate transportation of goods.

While these are a few factors that are expected to drive the growth of the sector, the growth path will not be so smooth. In our next article, we will discuss various factors that can prove to be a snag.

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1 Responses to "Logistics sector: A look at road freight transport I"

Riyaz

May 25, 2009

these articles are very helpful, but it would be added advantage for readers if you can mention the stocks which make up the sector - not any recommendation, but just a mentioning or listing of stocks so that if users wish to do their own research, they can do so.

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