Freight volume in India is projected to grow over 9 per cent year-on-year in FY19, supported by a recovery in rail freight volumes—which are likely to contribute 50 per cent-55 per cent to the incremental volume in FY18-FY19. However, road freight and transport players may face headwinds from a higher quantum of rail freight volume between FY18-FY19.
Between FY15-FY17, logistics expenditure in India ranged between 13 per cent-15 per cent of the nominal GDP—in relation to an average of 8 per cent across G8 nations. This is primarily attributable to two factors. First, supply chain designs in India are based on tax optimisation requirements as against bringing about operational efficiencies. Second, the absence of a uniform and integrated national market has led to skewed development of logistics infrastructure and hence has delayed the onset of economies of scale. While logistics expenditure may remain in the same range through FY19-FY20, economies of scale are likely to facilitate a decline in total logistics expenditure as a proportion of GDP over the long term, said an analysis on the Indian Logistics Industry by India Ratings and Research (Ind-Ra).
Iron and steel, cement and construction materials, oil refineries and auto and related components sectors account for over 60 per cent of the total freight expenditure by the BSE 500 companies. Ind-Ra, therefore, believes that an improvement in overall capacity utilisation in the manufacturing space and infrastructure push by the government would augur well for Indian freight players. Commensurate with the agency’s outlook on steel players, gradual consolidation in the steel industry, coupled with a recovery in domestic and export demand, rationalisation of capacity across major steel producing nations, including China, is likely to boost freight volumes globally. However, rising trade protectionism in the form of tariff wars could have a moderating effect on the commodity prices—especially metals—and delay the recovery in freight volumes.
Furthermore, sustained growth in the e-commerce space has continued to support logistics volume growth over the last five years. Ongoing consolidation in the e-commerce space could result in rationalisation of the traditional logistics services availed by these players. Various e-commerce players are expanding their own logistics networks. Integration of logistics, delivery and last mile connectivity services into the business model are likely to result in lower outsourced logistics spending (as a proportion of net revenue) by e-commerce players in FY19-FY20. However, the sustained growth in the e-commerce space is expected to outpace the growth of in-house logistics solutions substantially. This is likely to result in sustained growth in outsourced logistics volumes—despite a fall in logistics expenditure as a proportion of net revenue, Ind-Ra has said in its report.
