presents

Conference paper
Logistics and infrastructure:
Exploring opportunities
Contents

1. Executive summary 3

2. Macro-economic overview 6
2.1 Indian economy - Impact of global economic decline 6
2.2 The way ahead for Indian economy 10
2.3 Interlinking sustainable economic growth with logistics 10
2.4 The logistics cost factor 12

3. Logistics industry overview 13

3.1 Evolution of the global logistics industry 13
3.2 Opportunity indicators for global logistics sector 14
3.3 The Indian logistics sector 16
3.4 Significance of SMEs in the Indian logistics industry 23

4. SMEs in logistics: Succeeding in the market place 24

4.1 Competitiveness of SMEs in logistics 24
4.2 Assessment of challenges - internal & external 31
4.3 S-W-O-T Analysis 31

5. Transport infrastructure 33
5.1 Transport infrastructure performance 33
5.2 Railways 34
5.3 Roads 36
5.4 Ports 38
5.5 Airports 41
5.6 Infrastructure finance 44
5.7 The PPP approach 45

6. Conclusions 46

Abbreviations 48

Bibliography 49
1. Executive summary
Macro-economic outlook
Contrary to the much talked about theory of
‘decoupling hypothesis’ which held that emerging
economies will remain relatively unaffected by the
downturn due to their substantial foreign exchange
reserves, improved policy framework, etc.; the emerging
economies too have been hit by the crisis and India is no
exception. However the Indian economy has fared much
better than most of its Asian peers in the face of the
global economic recession. The real GDP grew by 6.7
per cent in 2008-09, and expects a revival in the latter
part of 2009. Although domestic demand, the mainstay
of the economy, has held up relatively well, there are
signs that the worst might not be over yet.
History has shown that export-led growth is a crucial
component of sustainable economic growth. There
are many enablers of export oriented economic
growth including facilitating regulatory environment,
establishing export oriented zones like SEZs, elimination
of administrative barriers to FDI in export-oriented
sectors etc. However the most important enabler is the
improvement in transportation infrastructure (mainly
ports, roads, airports and railways), telecommunications
and power. Government incentives aimed at promoting
economic growth can make areas such as infrastructure
i.e., development of greenfield ports, airports, road,
and rail logistics attractive for private investment. This
helps capacity augmentation and thereby encourages
industrial production. In addition, logistics cost is an
important factor that affects the competitiveness of
nations as well as firms. The logistics cost is considerably
high in India (around 13-14 per cent of GDP) than
developed world regions like the U S (9.5 per cent) &
Europe (7.15 per cent). The comparatively high logistics
cost can be attributed to factors such as a complicated
tax regime, fragmented market structure, procedural
bottlenecks and inadequate infrastructure.
Logistics industry overview
The reduction in the logistics cost can be brought about
by improving the national logistics infrastructure to
facilitate smooth transfer of materials and information
from one place to the other. Simultaneously, at the
micro level, the logistics service providers need to infuse
better management practices, employ technology that
facilitates its logistics process to reduce service cost.
As the logistics services industry evolves, competitors are
moving away from asset-based commoditised services
to more strategic, information-based approaches.
Customers are demanding a “single point of contact”
for all logistics services. In one of the global logistics
study conducted by Deloitte, a set of attributes was
developed to identify high opportunity industries
with diverse but complementary product flows for
the logistics outsourcing industry. The attributes were
formulated based on the requirements of the various
aspects of supply chain planning and implementation
including design, implementation and management of
logistics services. Some of the attributes of industries
researched that would offer the highest opportunity/
best fit for logistics service provider include:
• Large logistics spend
• Relatively high value products
• Manage across multiple modes
• Manage complex, time sensitive supply chains
• Diverse supply chain footprints including their own
operations, suppliers and customers
• Maturity in outsourcing cycle (currently managing
3PLs)
• Decentralised management of logistics
• Complementary to current base of 4PL business
• High cube and high weight products
Based on the detailed analysis of the above attributes,
the industries that were identified as potential high
priority areas of focus for marketing opportunities for
logistics services included Auto OEMs and suppliers,
heavy equipment manufacturing, metals, technology
infrastructure and retail.
While the end user industries like auto, consumer
durables, organised retail, etc. are direct triggers for
the growth of the logistics sector in India, some of
the other growth drivers include increased demand
of 3PL services, streamlining of indirect tax structure,
investments in transportation infrastructure, recognition
of logistics management as a strategic tool by
organisations, globalising of manufacturing systems and
infusion of qualified work force. In addition, enhanced
corporate focus on core operations, competitive
pressure, increasing global trade and MNCs investments
in India will provide an impetus to logistics outsourcing.
Some of the emerging growth areas in the logistics
sector include cold chain storage and related logistics,
air cargo, reverse logistics, material handling equipment
segment, etc.
3
Competitiveness of SMEs in logistics
The contribution of SMEs to the nation’s economic
growth is by no means small. As globalisation and
technological change reduce the importance of
economies of scale in many activities, the potential
contribution of smaller firms is enhanced and logistics
SMEs are no exception to this. Today, despite facing
regional, geographical and legislative diversity, the
Indian logistics SMEs reverberate sound local dynamics,
assurance of a personal service and the emergence of
a new genre of integrated solution providers. Since the
Small & Medium Enterprises constitute a significant
percentage of the logistics service providers, it would
not be inappropriate to mention that these SMEs
would be acting as the catalyst in reducing the national
logistics cost component.
Deloitte’s survey of Small & Medium logistics players
aimed at bringing to the fore, developments in the
Indian logistics space and more importantly the broad
level challenges that the industry is currently facing,
particularly from the perspective of a Logistics Service
Provider (LSP). The survey covered players across a
wide spectrum of logistics segments such as freight
forwarding, shipping, customs booking, container
freight stations, warehousing, and multi-modal
transportation and thus aimed at offering them a
platform to share their varied concerns.
The analysis of industry’s internal factors suggests that
moving to higher value added services is perceived as
the biggest growth opportunity by the Indian LSPs.
Besides, in today’s situation, optimising operations is
viewed as the best means of surviving in business and
competing effectively. In a way, this would also assist
the individual players in accumulating sufficient profits
to be ploughed back in business, as a means to tide over
the problem of limited access to affordable credit. The
trend of consolidations by way of mergers and forging
alliances with other players is fast picking up in the
logistics community and would address the fragmented
nature of industry. Given these opportunity areas, a
focused training approach and extensive implementation
of advanced technologies could boost the international
competitiveness of Indian LSPs.
Other logistics cost inflators are variable vessel charter
costs, fluctuating fuel prices, exchange rate risks,
4
non-availability of return loads and high haulage rates.
Further, the LSPs are typically resorting to initiatives
like negotiating and renegotiating contracts, load
optimisation, efficient route scheduling, working capital
management and inventory cost control among others,
to overcome the burgeoning logistics cost. While
a likely boom in construction and pharmaceuticals
spell opportunities for the logistics sector in terms
of increased potential for multi-modal movement of
raw material & manufactured products, progressive
reforms such as introduction of a singular Goods
and Service Tax (GST) and the Government’s push to
infrastructure expansion are equally encouraging. On
the other hand, major threat is posed by competition
from large foreign players and price sensitive nature
of Indian markets. There is yet another impediment,
although short term, i.e., the impact of slowdown
in terms of decline in international trade. This can
be curtailed by concentrating on domestic markets,
which are still quite promising. On the external front,
infrastructure and regulatory bottlenecks are the prime
cause of transportation delays and cost overruns, which
consequently hamper the quality of logistics services.
Transportation infrastructure outlook
The 11th five year plan Approach Paper calls for the
investment in infrastructure to increase from a current
level of 4.6 per cent of GDP, to between 7 to 8 per
cent. The Capsule Report on Infrastructure sector
performance by Ministry of Statistics and Program
Implementation, the year-on-year rate of growth in
cargo traffic has considerably declined in FY 2008-09.
The freight loading by Indian Railways of 833 million
tonnes in the year 2008-09 did not meet the target
of 850 million tonnes. The Railway Ministry has
outlined many measures to generate revenues from
non-traditional sources to bolster the Railways’ balance
sheet. The Railways are also working out the details
of a premium service for movement of containers
with assured transit periods for time-sensitive cargo.
Permission has also been provided in the recent budget
to container train operators to access private sidings
to help attract piecemeal traffic that are at present
not being carried by the Indian Railways. Further, the
Railways is also expected to unlock its land resources by
holding an auction for private real estate developers to
build malls, cineplexes and shopping arcades.
The major ports in the country handled 530.35 million
tonnes of cargo during 2008-09, which was 7.9 per
cent lower than the target set for the above period but
nearly 2.1 per cent more than that the traffic handled
in the corresponding period last fiscal. There has been
a drastic decline in augmented capacities at major ports
during the last four years. In addition, lack of proper
facilities, deeper drafts, good connectivity and necessary
equipment/technology has contributed to high logistics
costs. On the positive side, with the Government
encouraging private participation in port development,
non-major ports have begun contributing significantly
to the economy. The new Government’s ambitious
agenda to award 6 concessions for ports and initiate for
20 others through PPP totaling to more than Rs. 3300
crore, within a span of 3 months, is being regarded as a
welcome move.
While there are a lot of new avenues in aerospace
services in the coming decades, the constraints
associated need to be addressed to enable the smooth
growth of the sector. Some of the issues faced by
the sector include mounting losses of the airlines,
volatile aviation fuel prices, congestion at airports,
shortage of qualified technical manpower, need for
upgradation of security, land acquisition problems,
high taxation, high airport charges etc. Indian aviation
space offers promising opportunities in the areas of
airport infrastructure, airport and ground support
equipment, MRO facilities, ground handling services,
trained manpower and air cargo along with tapping the
potential stream of non-aeronautical revenues.
It has been established that spending in road sector has
a multiplier effect in terms of job creation and increase
in per capita income. Hence any spending, whether
by government or by a private partner, definitely helps
in economic stimulus. Accordingly the government
plans to invest around Rs 1,00,000 crore to build about
12,000 kms of roads for the F.Y 2009-10 mainly through
the toll-based model, with options to bring in foreign
investors. Infrastructure projects being capital intensive,
with long gestation periods; the Financial Institutions
(FIs) and the banks need to create new structures to
facilitate the funding. New ways of structuring like
take-out financing, roll over financing etc. are also
being offered for funding of long gestation projects.
The user’s willingness to pay for the services availed
affects the cash flow. The strength and experience of
the promoters, concession framework, tax benefits to
the project, inputs/off-take arrangements add to the
bankability of the project.
Public Private Partnership (PPP) offers a distinct possibility
for increasing total investments by using a limited
amount of public resources to leverage a much larger
amount of private investment. Given the bottlenecks
and inefficiencies often encountered in public
infrastructure investment, such PPPs could also increase
economic efficiency and lower the capital requirement,
provided that regulatory mechanisms are adequate.
Conclusions
Globalisation, consolidation, technology advancements
and outsourcing have only led to growth in the logistics
services market and this industry will continue to evolve
in the coming years. Firms can enhance their market
competitiveness by reducing their logistics costs, thus
lowering the total costs of goods and services. Any
impetus to improve the competitiveness of the firms
at the national platform would enable the nation
to register a dynamic economic performance in a
global environment. India has got a huge opportunity
of reducing its national logistics cost by emulating
successful business models. This would include
upgrading the macro logistics infrastructure to world
class standards and by providing a facilitative role to
the SME players in the logistics sector to improve their
service level competitiveness. The effect of the referred
improvement would substantially provide a ripple
effect in the larger canvas of the country’s logistics
development thereby acting as a catalyst in reducing
the national logistics cost.
5
2. Macro-economic overview
2.1 Indian economy - Impact of global
economic decline
Many investors living today have never really had to
weather really tough financial times, such as the Great
Depression of the 1930s. Although there have been
recessions since, none has been of such a disturbing
magnitude as the current crisis. The current crisis is
unique not only in its severity and its projected length,
but in how far-reaching its effects will be felt worldwide.
Contrary to the much talked about theory of
‘decoupling hypothesis’ which held that emerging
economies will remain relatively unaffected by the
downturn due to their substantial foreign exchange
reserves, improved policy framework, and robust
corporate balance sheets, emerging economies too have
been hit by the crisis and India is no exception.
The extent to which Indian economy is affected can be
assessed by gauging the magnitude of changes in the
following key parameters:
• Industrial Production: Close on the heels of global
cues, India’s industrial production rose by 2.6 per
cent in 2008-09, down from 8.5 per cent in 2007-08.
It fell by 0.75 per cent year on year in March 2009.
Manufacturing output also dropped by 1.4 per cent
year on year to Rs.1.25 trillion in January-March 2009,
after rising by just 0.9 per cent in the fourth quarter
of 2008. In contrast, the month of April witnessed
a rise in industrial production by 1.4 per cent from
a year earlier. This happened for the first time after
three consecutive declines over the trailing four
months. The corresponding manufacturing output for
April also recorded a rise of 0.7 per cent from a year
earlier. This upside can be attributed to improvement
in domestic demand. However, some economists
relate this to election spending by way of increased
construction and electricity production over recent
months. If this is true, then the pick-up in growth may
be just a temporary phenomenon.
A flare up in petroleum prices in 2008 led to a sharp rise
in import bill, thereby adding to the trade deficit
6
• Trade Deficit: As the global economy shrank, so
did the growth in India’s external trade. The dismal
industrial growth was partly caused by a weak
external demand. Further, a flare up in petroleum
prices in 2008 led to a sharp rise in import bill,
thereby adding to the trade deficit. India’s cumulative
value of exports for the period 2008-09 was US
$ 168.7 billion as against US $ 163.1 billion in
2007-08, thereby registering a growth of 3.4 per
cent in dollar terms. On the other hand, the country’s
cumulative value of imports for 2008-09 was US $
287.8 billion as against US $ 251.7 billion in 2007-08,
registering a growth of 14.3 per cent in dollar terms.
It is being increasingly felt that unless we take some
fundamental steps to diversify India’s export basket,
most fiscal incentives may only benefit the profitability
of the few exporters in the short term and not give a
big thrust to the overall export performance of
the country.
India’s EXIM trade trends in billion US $
$ bn
300
250
180
120
60
0
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
Export Imports
Source : Directorate General of Foreign Trade
• Fiscal deficit: Fiscal deficit is an economic
phenomenon, where the Government’s total
expenditure surpasses the total receipts (excluding
borrowing). It signals the government about the
total borrowing requirements from all sources.
India’s combined fiscal deficit of the Centre and the
States is close to 9.5 per cent of GDP in 2008-09
which is among the highest in the world. It has risen
by almost 4 per cent points in a span of just one
year (i.e., 2008-09 vis-à-vis 2007-08). The change
in economic environment between 2007-08 and
2008-09 and corresponding fiscal stimulus packages
by the Government during this period to deal with
the economic slowdown has contributed to widening
of this deficit. To add to this, the Finance Minister, as
expected, has announced a budget keeping the “Aam
Aadmi” in mind.
economists are of the view that the centre’s gross
fiscal deficit in 2009-10 is likely to over-shoot the
budgeted estimate of 5.5 per cent on account of an
increase in expenditure and slow pace of increase
in tax revenue. According to some policy makers,
following an aggressive disinvestment policy can help
the Government mobilise enough proceeds to contain
the country’s fiscal deficit.
• Inflation: Consumer Price Index (CPI) - based
inflation tracks the year-on-year rise in prices paid
by consumers to retailers. Typically, high liquidity
injection by the RBI to tackle the effects of global
turmoil, rising food prices, and the increase in oil and
commodity prices have contributed to a high CPI -
based inflation.
Consumer price inflation (average %)

Combined fiscal deficit (as a % of GDP) 10

10%

8
8%

6% 6

4%
4

2%

2
0%
2005-06 2006-07 2007-08 2008-09
0
Source : Ministry of Finance, GOI
2004 2005 2006 2007 2008 2009 2010
A number of social sector projects have been
announced which, while facilitating employment World Asia (excl Japan) India
creation and infrastructure development, will further
worsen the state of the fiscal balances. Furthermore, Source : Economist Intelligence Unit Estimates

India’s combined fiscal deficit of the Centre and the states

at close to 9.5 per cent of GDP in 2008-09 is among the
highest in the world

7
Consumer price inflation only marginally slowed
and stood at 9.6 per cent year on year in February.
According to recent data, it is now ruling around 8 per
cent. Although this is expected to average around 6
per cent in 2009 and 4.7 per cent in 2010, it will be
significantly above the Asian & world averages.
The slowdown in India’s economy is not only due
to the impact of the global recession, but also due
to the bursting of a real estate bubble following an
unprecedented economic boom between 2003-04
and 2007-08.
It grew more than expected in the quarter ended March
2009, boosting the confidence of both the corporate
sector and the newly formed government. This reiterates
the belief that the Indian growth story remains and is
still by and large domestic driven. A spending spree by
the government and robust growth in agriculture and
service industries helped the economy grow 5.8 per cent
year-on-year in the quarter ended March 2009.
The real GDP grew by 6.7 per cent in 2008-09, and
expects a revival in the latter part of 2009.
Real GDP growth (% change)

Notwithstanding the earlier, the Indian economy has 10

fared much better than most of its Asian peers in the
face of the global economic recession. 6

Percentage Y-o-Y GDP change

2

Vietnam -2

Thailand
-6
Malaysia
2004 2005 2006 2007 2008 2009 2010

Indonesia World Asia (excl Japan) India

India Source : Economist Intelligence Unit Estimates

China

Singapore
Quarterly estimates of GDP for 2008-09 (at 1999-2000 prices) % chg

Korea
Industry Q1 Q2 Q3 Q4
Hong Kong
Agriculture 3.0 2.7 -0.8 2.7
Japan Mining & quarrying 4.6 3.7 4.9 1.6

Manufacturing 5.5 5.1 0.9 1.4

-10 -5 0 5 10 Electricity 2.7 3.8 3.5 3.6

2010 2009 Construction 8.4 9.6 4.2 6.8

Source : IMF, WEO database Trade, transport, comm. 13.0 12.1 5.9 6.3

Finance, insurance 6.9 6.4 8.3 9.5

Community 8.2 9.0 22.5 12.5

GDP at factor cost 7.8 7.7 5.8 5.8

Source : Ministry of Finance, GoI

8
2.2 The way ahead for the Indian economy
India’s relatively less dependence on merchandise
exports, its smooth functioning financial system, and
comfortable forex reserves are believed to aid swift
recovery from the slowdown. Although domestic
demand, the mainstay of the economy, has held up
relatively well, there are signs that the worst might
not be over yet. Forecasts by the Organisation for
Economic Co-operation and Development (OECD), the
Asian Development Bank (ADB) and the Economist
Intelligence Unit (EIU) for the current year are markedly
more pessimistic than that forecast by the Central
Government. The OECD projects a further deceleration
in 2009 as a whole, to 5.9 per cent. The ADB also
forecasts that growth will slow again this year,
to 5 per cent.
Neither organisation expects economic activity to
bounce back until mid-2010. Looking at a broader
time frame, India’s economic think tank Centre for
Monitoring Indian Economy (CMIE) predicts a 5.8 per
cent growth in 2009-10 and expects that economy
will bounce back to 9 per cent growth by 2011, when
impact of poor exports demand would be overcome.
World Bank’s recent projections of an 8 per cent growth
for India in 2010, ahead of China’s expected growth of
7.7 per cent further add to this optimism.
The new government already has its task cut out. On
an optimistic note, the industry anticipates a growth
rate of around 6 per cent in the current fiscal, and with
the government keen on introducing reforms in its first
few months in office, the situation can get even better.
The challenge before the new government is to initiate
measures aimed at bringing about fiscal consolidation
within a reasonable span of time. With the revenue
growth expected to decline significantly, the only way
to bring down the revenue and fiscal deficit would be to
drastically cut down the subsidies, particularly non-merit
subsidies that never reach the intended target groups
or the poorer sections. It will also be necessary to curtail
wasteful expenditure in several areas.
The government should also induce some of the
better-performing PSUs, particularly those engaged in
infrastructure, such as power, transport, construction,
etc., to expand and speed up their investment
programmes. Finding resources for infrastructure
development and speeding up investment in this sector
should receive top priority, for, as the World Bank has
observed, infrastructure is a key factor in improving the
lifestyles of the masses and addressing the pressing
issue of poverty.
2.3 Interlinking sustainable economic growth
with logistics
Typically, export-led growth has been a crucial
component of sustainable economic growth. There
are many enablers of export oriented economic
growth including facilitating regulatory environment,
establishing export oriented zones like SEZs, elimination
of administrative barriers to FDI in export-oriented
sectors etc. However the most important enabler is
the improvement of transportation infrastructure,
telecommunications and power. A booming economy
generates higher purchasing power, which in turn
accelerates domestic demand. This leads to an increase
in production as well as EXIM trade, which necessitates
increase in need for cargo movement both locally as
well as internationally .
Government incentives aimed at promoting economic
growth can make areas such as infrastructure i.e.,
development of greenfield ports, airports, road, and
rail logistics attractive for private investment. This
helps capacity augmentation and thereby encourages
industrial production.
Although several headways have been made in
the infrastructure sector over the last few years,
shortcomings still exist in almost all the segments, be
it highways, railways, ports or airports. Infrastructure
developments like the railway dedicated freight
corridors, road development projects and
modernisation of over 37 operational airports will
increase India’s handling capacities, thereby enhancing
logistic performance.
9
A snapshot of the Eleventh Five Year Plan for the various
categories of logistics infrastructure is indicated in the
table below. However, with a mid-term review of the
plan in face of the slowdown, there is a likelihood
that these targets being softened. But again, with
Transportation infrastructure - Deficit, eleventh plan targets, & permissible FDI
Sector Deficit
Roads/highways 65,590 km of existing national
highways:
• Comprise only 2% of network
• Carry 40% of traffic
• Of which 12% is 4-laned; 50%
is 2-laned; and 38% is single
laned
Ports Inadequacy of
• Berths
• Rail/road connectivity
Airports Inadequacy of
• Runways
• Aircraft handling capacity
• Parking space and terminal
buildings
Railways • Outdated technology
• Saturated routes
• Slow speeds (freight: avg
22kmph; passengers: avg
50kmph)
• Low payload to tare ratio (2.5)
Source: Planning Commission, IBEF
10
infrastructure being the key to sustain the nation’s
growth, it will be left to policymakers’ to strike a
balance between review of growth targets and
infrastructure development.
Eleventh plan targets FDI Envisaged
investment size
• 6-lane 6,500 km in GQ 100 % FDI under automatic route US$ 78.5bn
• 4-lane 6,736 km NS-EW
• 4-lane 20,000 km
• 2-lane 20,000 km
• 1,000 km expressway
New capacity: 100 % FDI under automatic route US$ 22 bn
• 485 million MT in major
ports
• 345 million MT in minor
ports
• Modernise 4 metro and 35 • 100% FDI for existing airports US$ 7.74 bn
non-metro airports (FIPB approval for FDI beyond
• 3 greenfield in North Eastern 74%)
Region (NER) • 100% FDI under automatic
• 7 other greenfield airports route for greenfield airports
• 49% FDI is permissible in
domestic airlines under the
automatic route, but not by
foreign airline companies
• 8132 km new rail 100% FDI permitted in railway US$ 65.45 bn
• 7148 km gauge conversion infrastructure under automatic
• Modernise 22 stations route
• Dedicated freight corridors
2.4 The logistics cost factor
Logistics cost is an important factor that affects the
competitiveness of nations as well as firms. However, it
is considerably high in India than first world regions like
U.S. & Europe, thus affecting the cost competitiveness
of India’s exports. It is estimated that transportation and
warehousing costs constitute a major chunk i.e., around
60 per cent of the logistics cost. In India, the logistics
cost is expected to be around 13-14per cent of GDP as
against 9.5 per cent in the US and 7.15 per cent
in Europe.

At present, the Indian logistics sector is fragmented.

Despite being a major contributor to the nation’s
economic development, it is still not awarded the
much needed status of an independent sector so
as to warrant an exclusive budgetary allocation and
corresponding focus on development. The major players
can be broadly categorised as pure transport providers,
transporters providing certain value added services such
as warehousing, and completely integrated players
providing 3PL services. The major elements of logistics
costs for Indian Industries include transportation,
warehousing, inventory management and other value-
added services such as packaging. The comparatively
high logistics cost can be attributed to factors such as a
complicated tax regime, fragmented market structure,
procedural bottlenecks and inadequate infrastructure.

While several factors like these go against India’s

logistics industry, there are indeed many growth factors
and opportunities enumerated in the subsequent
sections that suggest its steady transformation.

11
1 1
Globalisation,
consolidation, technology
advancements and
outsourcing have led to
growth in the logistics
services market. The
capabilities of logistics
service providers are
growing along with the
changing expectations of
their clients
3. Logistics industry overview
Logistics has always been a central and essential feature
of all economic activity. Despite this importance,
organisations traditionally concentrated their efforts into
manufacturing products and considered the movement
and storage of materials as an uninteresting errand
that formed part of the overheads of doing business.
However, over the years, the status of logistics has
continued to improve, primarily due to recognition by
the organisations of the following critical factors:
• Appreciation of high logistics cost and opportunities
for major savings
• Increasing competition for both users and providers of
logistics, who have to continually improve operations
to remain competitive
• New types of operations, which can force changes
to logistics - such as just-in-time, total quality
management, flexible operations, time
compression etc.
• Need for improved technology for identifying,
locating and tracking materials
Recession in many markets, combined with new
sources of competition, has raised the consciousness of
customers towards value of service delivered to them
by their service providers. Accordingly, the logistics
industry has consciously strived to be at the focal point
of strategy formulation and operational excellence
to continue in its endeavour for providing maximum
contribution in value creation.
3.1 Evolution of the global logistics industry
Globalisation, consolidation, technology advancements
and outsourcing have led to growth in the logistics
services market. The capabilities of logistics service
providers are growing along with the changing
expectations of their clients. As the logistics services
industry evolves, competitors are moving away
from asset-based commoditised services to more
strategic, information-based approaches. Customers
are demanding a “single point of contact” for all
logistics services and are looking for “one-stop logistics
shopping” unable to cope with complexities across their
supply chains.
Evolution of the logistics model
5PL (electronic co-ordination of
supply-chain-information ownership)
Increased information intensity
Reduced asset intensity
4PL (SCM limited asset provision)
3PL (Supply chain expertise
with some asset provision)
2PL (pre-dominatly
asset provision)
Source : Deloitte Research
The models in logistics industry have evolved over
time to address the changing needs of the market and
vary based on scope of service offerings, degree of
collaboration, levels of asset intensity and IT capabilities
across the supply chain. The logistics model has been
evolving from a specialised function to fourth party
Logistics (4PL) and fifth Party Logistics (5PL) companies .
First and Second Party Logistics handle all logistics
functions, such as trucking and warehousing, which
face low returns and high levels of asset intensity but
low barriers to entry. With the increasing need for
“one-stop solutions”, many 2PL have evolved into 3PL
by adding new logistics capabilities and integrating their
operations. They are asset light and usually tend to have
high returns; they contact most of their capacity needs
to 2PLs. While the 2PL puts in hard cash tangible asset,
the 3PL puts in intellectual property.
Fourth party logistics is an integrator that assembles
the resources, capabilities, and technology of its own
organisation and other organiations to design, build
and run comprehensive supply chain solutions. The
figure below illustrates the gamut of services that a 4PL
provider can offer.
13
 4PL Provider managed services
4PL
Order to deliver supply chain services
Transition & support services
Provider managed services
3PL provided services Distribution operations
Carrier services Transportation routing
and scheduling
Forwarder services Transportation execution
Brokerage services Warehouse management
Source : Deloitte Research
As the “orchestrator” of this broad set of providers, a
4PL must comprehend broad and deep expertise and
capabilities. Since the advent of the 4PL service, the
international logistics industry has been researching on
the development of the fifth-party logistics service i.e.
the realisation of full-scale operation of e-procurement.
A key function of the 5PL is to aggregate the demands
of the 3PL into a bulky volume for negotiating more
favorable rates with airlines and shipping companies
regardless of which generation of logistics solution
belongs to all.
3.2 Opportunity indicators for global
logistics sector
In one of the global logistics study conducted
by Deloitte, a set of attributes was developed to
identify high opportunity industries with diverse
but complementary product flows for the logistics
outsourcing industry. The attributes were formulated
based on the requirements of the various aspects of
The 4PL will serve as the single point of contact for
customers, managing a comprehensive set of supply chain
and logistics services that are executed by other providers
14
Claims management
Freight pay and audit
Trade management
Others
supply chain planning and implementation including
design, implementation and management of logistics
services. The set of attributes derived were to focus
attention on those industries that offer greatest
opportunity for logistics service providers. The attributes
of industries that would offer the highest opportunity/
best fit for logistics service provider are provided below:
• Large logistics spend
• Relatively high value products
• Manage across multiple modes
• Manage complex, time sensitive supply chains
• Diverse supply chain footprints including their own
operations, suppliers and customers
• Maturity in outsourcing cycle (currently
managing 3PLs)
• Decentralised management of logistics
• Complementary to current base of 4PL business
• High cube and high weight products
The description of the logistics requirements for each of the attributes, is mentioned below:
Large logistics spend
Relatively high value products
Manage across multiple modes
Manage complex, time sensitive
supply chains
Diverse supply chain footprints,
including their own operations,
suppliers and customers
Maturity in outsourcing cycle
(currently managing 3PLs)
Decentralised management of
logistics
Complementary to current base
of 3PL/4PL business
High cube and high weight
products
Based on the detailed analysis of the above attributes, the following industries were identified as potential high priority areas of focus for marketing
opportunities for logistics services.
Auto OEMs & suppliers
Heavy equipment manufacturing
Metals
Technology infrastructure
Retail
• Industries whose logistics spend is significant relative to the value of its products naturally place a high
degree of importance and priority on logistics
• Industries with high value products place a high degree of importance on logistics which can impact macro
inventory levels
• Logistics functions operating multiple modes of transport face significant issues in dealing with the
resulting complexity and present greater opportunities for logistics service providers
• The more complex a supply chain, and the more important it is to manage time across it, the more likely
companies are to look to a logistics service provider for help
• Diverse and wide spanning supply chains are complex and difficult to manage. Companies with such
supply chains are more likely to struggle with these complexities and may therefore seek help
• History has shown that outsourcing is an evolutionary process and that industries that have a longer
history of outsourcing are more receptive to advanced stages of outsourcing such as contracting with third
and fourth party logistics providers
• The logistics function is difficult to manage across geographic boundaries. Companies with decentralised
management tend to offer ripe opportunities for logistics service providers to add immediate value
• Industries whose logistics and/or product attributes are complimentary to the 3PLs/4PLs base of business
(macro flow patterns, etc.) offer opportunities to increase efficiencies of logistics resources (e.g., increased
utilisation of transportation equipment) and thereby reduce rates and total spend
• Industries with these product attributes offer greater opportunity to leverage and better utilise common
transportation equipment
• This industry offers obvious synergies, large market potential and the most immediate opportunities for
3PL / 4PL
• However, auto suppliers are highly fragmented with very few having large logistics spend
• This industry is similar to the auto industry in terms of shipment attributes
• However there are challenges to penetrating this industry, due to the smaller size and regional focus of
most companies
• Logistics flow balance opportunities exist within the industry; majority shipments flow to automotive and
industrial equipment manufacturing applications
• However, these industries are fairly vertically integrated and traditionally manage logistics operations
in-house
• This industry is attractive in terms of majority shipment attributes including complex supply chains with
short order-to-delivery cycles
• This industry offers tremendous opportunities from synergies in shipment attributes; large players are
looking to cut logistics costs dramatically
15
3.3 The Indian logistics sector
3.3.1 Background
The logistics sector in India has evolved over the
past two decades from being a pure transportation/
warehousing functional service to provision of more
value added offerings like customs clearance, domestic/
international freight forwarding, cross-docking, reverse
logistics, freight consolidation, warehousing of modern
standards etc. India with a GDP1 of about Rs 31,297
billion is estimated to spend 13 per cent of its GDP on
logistics creating an industry size of around Rs. 4,068
billion. The sector has been witnessing double digit
y-o-y growth rate since 2002 and is expected to be
more than USD 120 billion (Rs.5,400 billion approx.)
by 2015.
While there has been a growing recognition of logistics
in India as a strategic tool for enterprise cost reduction
and improvement of organisational efficiency on the
flip side however, the logistics sector is characterised
by dominance of a disorganised market. Transporters
with fleets smaller than five trucks account for over
two-thirds of the total trucks owned and operated
in India and make up 80% of revenues. The freight
forwarding segment is also represented by thousands
of small customs brokers and clearing & forwarding
agents, who cater to local cargo requirements.
In order to reduce logistics costs and focus on core
competencies, Indian companies across verticals are
now increasingly seeking and using the services of
third-party logistics service providers. Traditionally LSPs
(Logistics Service Providers) concentrated mainly on
transportation and logistics as they form a major share
in logistics. However, in order to keep up with rising
demands and customer expectations, companies now
also concentrate on value added services like packaging,
custom clearance, inventory management and labeling.
Transporters with fleets smaller than five trucks account
for over two-thirds of the total trucks owned and operated
in India and make up 80% of revenues
16
3.3.2 The growth drivers
The evolving business landscape and increasing
competition across industries, is creating the need for
more efficient and reliable logistics services than what
exists today. For example, rapid growth of organised
retail and the need to reach out to the large untapped
rural markets in India are necessitating development of
strong back end and front end supply networks.
While the end user industries like auto, consumer
durables, organised retail etc. are direct triggers for the
growth of the logistics sector in India, some of the other
drivers are described below the logistics sector in India:
Key growth drivers for the logistics sector
Streamlining of Investments in
indirect tax transportation
structure infrastructure
Increased demand Infusion of qualified
of 3PL services Growth Drivers work force
Recognition of logistics Globalisation of
management as a manufacturing
strategic tool systems
• Rise of 3PL services - The logistics cost is directly
correlated to the quality of the national transportation
infrastructure and professionalism of the logistics
services offered. In addition, the level of maturity of
the logistics industry of a nation is co-related to the
share of 3PL service providers vis-à-vis the share of
first and second party logistics service providers.
In the developed economies like Japan, the United
States, Canada and the European Union, business
 customers have very similar high expectations for
logistics system performance, regardless of where
in the developed economies they’re operating.
The professionalism and maturity has indeed been
derived from the share of the 3PL service players in
the referred countries. Hence it is not surprising to
note that the logistics cost of the developed countries
is comparatively less than that of emerging world
nations (India, China and Brazil).
National logistics cost vis-à-vis the share of 3PL in the
logistics market
Country Logistics cost as a Share of 3PL
% of GDP
India 13.0 – 14.0% Less than 10%
China 18.0% Less than 10%
USA 9.9% 34%
Europe 7.1% 54%
Source : Various
The table reflects that there is an inverse relationship
between logistics cost of a nation and the share of
3PLs in national logistics market . The greater the
share of 3PL, the lesser is the national logistics cost
thus highlighting the importance of 3PLs in logistics .
Many Indian companies are realising the importance
of their supply chain network and are increasingly
calling upon logistics managers for their professional
inputs into corporate and marketing strategies.
Consequently there has been an uptrend in the
requirement of specialised Third Party Logistics
Service Providers to whom companies are looking to
outsource their logistics requirements. As per industry
estimates, it is expected that 3PL solutions in India
would grow at a CAGR of more than 20% during the
period 2009-15.
• Investments in infrastructure - A well-knit and
coordinated system of logistics infrastructure plays
an important role in the sustained economic growth
of the country. India’s infrastructure deficiencies
have become more visible because of high growth
witnessed during the past few years. The most
visible indicators of overstretched infrastructure
are India’s congested highways, airports and ports.
Though the current levels of efficiency are much
below as compared to other developed nations, the
government has plans for infrastructure improvement.
While projects like development of the dedicated rail
freight corridors, port development projects under
National Maritime Development Program are being
envisaged and executed at the national level,
it is imperative that India augments its
infrastructure spending.
Given the scale of work that is needed, the level
of investment in infrastructure in India is relatively
low at 4.6% of GDP that is far behind that of China
(which is around 10% of China’s GDP). The Planning
commission recommends a step-up in this ratio to
8% by 2011-12. Post elections it is indeed perceived
that the government will demonstrate renewed
vigour in implementing transportation infrastructure
projects across the country. The government
has also indicated that bottlenecks and delays in
implementation of infrastructure projects because
of policies and procedures, especially in railways,
power, highways, ports, airports will be systematically
removed. It is also expected that a large number
of PPP projects in different areas currently awaiting
government approval would be cleared expeditiously
and the regulatory and legal framework for PPPs
would be made more investment friendly.
The above factors signal the emergence of an efficient
transport infrastructure, which will trigger the growth of
advanced logistics service offerings.
17

Relationship of logistics with other corporate functions
With production
Production scheduling
Production control
Plant warehouse design
Raw material stocks
Source : Handbook of Logistics and Distribution Management by Alan Rushton,
Phil Croucher and Peter Baker
• Recognition of logistics as an integral part of • Qualified work force - For an industry to prosper,
corporate strategy - Over the years, the importance the quality of the personnel it absorbs is an essential
of distribution and logistics has become much more facilitator for sustaining its long term growth. While
apparent to a broad range of Indian companies.The logistics was not usually the first career choice for
significance of logistics and its inter-relationships with many and hence quality of manpower was an issue
other functions such as production, marketing and that was felt in the industry. However with the
finance are as illustrated below. growing recognition of the strategic role that logistics
managers can provide, there has been a steady inflow
of some of the best talents in the logistics sector over
the past few years. From the point of view of supply
With marketing With finance chain planning, the key roles for a logistics manager
with a broad remit might be summarised as:
Customer service Stock-holding
Packaging Stock control
• To lead the design, creation, configuration and
Distribution centre location Equipment financing
parameter setting of the entire supply chain
Inventory levels Distribution cost control
Order processing Stock control
• To create the framework and the dialogue that
determine the performance targets along the
whole chain

• To drive the systems and monitor and report the

For the formulation of any competitive strategy,
knowledge of key logistics elements is essential.
Any factors related to the procurement, storage
and movement of goods must, be relevant to the
determination of a company’s business. Accordingly
there has been a growing importance of the role and
contribution that the logistics/distribution manager
makes to corporate strategic planning
and implementation.
entire logistics operational performance against
agreed targets
• To review how problems can be solved and
performance can be improved
Educational institutes in India have also commenced
designing undergraduate, post graduate, diploma
and executive level courses specifically catering to the

There is an inverse relationship between logistics cost of a

nation and the share of 3PLs in national logistics market.
The greater the share of 3PLs the lesser is the national
logistics cost

18
There has been a growing importance of the role and
contribution that the logistics/distribution manager makes
to corporate strategic planning
logistics and supply chain management sector, for
which there has been a very encouraging response.
In addition, logistics companies are sincerely trying
to benchmark their HR practices with the best in the
industry and implementing measures to attract and
retain talent. Given the steady interest in logistics as
a long term career option among the brightest of
the Indian youth, it can be safely derived that Indian
logistics sector will leverage on the growth path it has
witnessed over the past decade.
• Streamlining of the indirect tax structure - In
India, distribution network is designed more by the
tax consideration rather than the requirements of
servicing customers at optimal cost. Most of the
consumer goods companies operate with at least
one distribution center or Clearing & Forwarding
Agent (CFA) in each state, where they sell, to avoid
inter-state Central Sales Tax (CST). Such companies
operated with 25 to 50 warehouses all over India,
which is a very high number compared to developed
economies (less than 5) or even China (less than
10). The introduction of Value Added Tax (VAT) and
the proposed introduction of a singular Goods and
Services Tax (GST) are expected to significantly reduce
the number of warehouses, which the manufacturers
are required to maintain in different states, thereby
resulting in a substantial increase in the demand for
integrated logistics solutions.
• Globalising of manufacturing systems -
Globalisation of manufacturing systems coupled
with advancements in technology is increasingly
compelling companies across verticals to concentrate
on their core competencies and avail the cost
saving potential of outsourcing. This is expected to
contribute to an increase in the need for integrated
logistics solutions, which is the niche of every third
party logistics service provider.
3.3.3 Opportunities in the logistics space
The Indian logistics industry is poised for a significant
growth in the coming years as companies, especially
in the automotive, pharmaceuticals, manufacturing,
retail and FMCG sectors, are increasingly opting to
outsource their logistic requirements to specialised
service providers. Some of the existing and emerging
growth areas in the logistics sector are enumerated in
the subsequent section.
Cold chain storage and related logistics
Cold chains form an integral part of the supply chain
for storage and distribution of perishable goods,
temperature sensitive pharmaceuticals and biological
preparations. Estimated size of the Indian cold-chain
industry is Rs. 8,000-10,000 crore (US$ 1.80 - US$ 2.27
billion) and is expected to grow at 20 to 25 per cent
annually. It is estimated that this industry will grow to
over Rs. 40,0002 crore (US$ 9.09 Billion) by 2015.
As per the Planning Commission estimates, there are
presently around 4,762 cold storage units in India with
a capacity of 196 lakh tonnes, with potato constituting
almost 81 percent of the total capacity of cold storages
being handled.
India may be among one of the world’s leading
producers of horticulture products but more than half
the fruits and vegetable produce end up rotting as
waste, even before it arrives in the market for sale. Poor
post-harvest methods of warehousing, storage and
unsafe transportation from point of production to point
of sale are the most prominent causes of this otherwise
avoidable value drain. The key issues in the Agri-logistics
related to the development of the cold chain industry
are of non-standard pricing, limited financial capabilities
of the transporters, opportunistic profiteering, lack of
scientific handling of produce and consequent high
prices and limited choices for the consumers.
19
Volume wise perishable products share in India
3%
39%
1%
Milk Fresh fruits and vegetable
Fresh meat and marine sector Others
Note: Others include poultry, ice creams and vaccines
Source: Various
As per industry estimates, approximately 104 million
tonnes of perishable product/produce is moved in the
country in a year. Out of those 104 million tonnes,
around 100 million tonnes goes through the non-reefer
mode and remaining 4 million tonnes goes through
reefer transport. Out of the 100 million tonnes of
perishable load 96 million tonnes directly enter local
and regional markets. Out of this volume, around 86
million tonnes is sold through the wholesale and retail
outlets based in regional and local markets without
warehousing and cold storage conditions and 10 million
tonnes is the produce that requires cold storages when
they enter the markets. In short, the requirement of
cold chain across the country far outstrips the handling
capacity of the available cold chain infrastructure
in the country.
Some of the industry and government initiatives for
development of cold chain infrastructure include:
• Container Corporation of India (CONCOR) is moving
into cold chain logistics in a big way and is developing
a cold supply chain business in the form of suitable
logistics infrastructure as well as state-of-the art
storage facilities to sell fresh fruits and vegetables in
the global food market.
20
• With a view to increase share of processed food
in the country to 20% from the present 6%, the
government is setting up 30 food parks by 2012
under public-private partnership. These food parks
will have cold warehousing, grading centers and
research laboratories. These parks could also be
given SEZ status and other fiscal benefits to reduce
production cost in order to improve competitiveness.
Considering the high risks involved in the food
57% processing sector, the government will provide a
subsidy of Rs 50 crore per park to private investors.
• The development and growth of the food processing
industry in India which has resulted in introduction of
a wide range of branded, packaged, processed and
short-shelf life products, which are to be distributed
across various locations in time-sensitive and under
specified ambient conditions.
• The government plans to establish 50 cold chain
networks, including refrigerated vans all over the
country, which will help the farmers enhance the
shelf-life of their produce and retain their quality.
In addition, investment-linked incentives have been
introduced for setting up and operating cold chain
facilities and warehousing.
• The Agricultural and Processed Food Products Export
Development Authority (APEDA) has established six
centres of varying capacities for Perishable Cargo at
Bangalore, New Delhi, Chennai, Thiruvananthapuram,
Hyderabad, and Mumbai. The total handling capacity
at these six CPCs is 2.16 lakh tonnes per annum.
The operating and ground handling agencies have
been designated for each CPC. In addition, APEDA
has signed MoUs for setting up of CPCs at Cochin,
Ahmedabad, Amritsar, Kolkata, Bogdogra, Lucknow,
and Goa.
 Air cargo
The use of air as the mode of choice for the movement
of cargo has increased over the past few years.
While the amount of the cargo freighted via air is
growing steadily, the infrastructure related to air cargo
handling and evacuation is not. The Government has
acknowledged the need for development of cargo
related facilities and is taking the necessary steps to
address the situation. India already has an open sky
policy for air cargo. An air cargo hub is being developed
at Nagpur by the Ministry of Civil Aviation. The ministry
also has plans to build dedicated cargo airports across
the country to cater to increasing demand in
air cargo traffic.
At present India contributes over 1% of the world air
cargo traffic. The five major airports (Mumbai, Delhi,
Kolkata, Chennai and Bangalore) account for around
88% of the total air cargo handled in India. Growth in
cargo/freight volumes is an outcome of macro-economic
factors such as domestic consumption, exports and
imports. Infrastructure remains a major challenge. The
international and domestic cargo volumes (except for
the F.Y 2008-09) have shown a steady growth despite
inadequate capacity and infrastructure constrains. The
blip in 2008-09 can be accounted due to the
global slowdown.
The Civil Aviation Ministry’s
proposal to frame a policy for the
development of airports
exclusively for cargo operations is
encouraging and commissioning
of these cargo airports in due
course of time will provide a
much needed trigger to the air
cargo segment
Cargo volume handled at international and domestic
airports in India
Cargo in ‘000 Tonnes
2000
1600
1200
800
400
0
2004-05 2005-06 2006-07 2007-08 2008-09
International Domestic Total
Note: 2008-09 figures are provisional
Source: Airports Authority of India
The major commodities being air freighted out of India
are garments, machinery components, pharmaceuticals,
dyes, chemicals and perishables such as fruits,
vegetables, flowers, fish and meat. Due to the high
time sensitivity clientele demand, there has also been a
steady patronage of air cargo services across industries
including telecom, gems & jewellery, electronics, IT &
ITES related equipments etc. The Civil Aviation Ministry’s
proposal to frame a policy for the development of
airports exclusively for cargo operations is encouraging
and commissioning of these cargo airports in due course
of time will provide a much needed trigger to the air
cargo segment. These airports will be established in the
country’s major business centres. Under the new policy
on cargo, a Centre for Perishable Cargo (CPC) would
be established, which would ensure movement of
perishable cargo at the airports.
21

Some of the opportunities emerging from the growth in
the air cargo segment include:
• Providing vendors and industry in the non-metro cities
a speedy gateway to the world
• Investment in air cargo infrastructure would
spawn related supporting infrastructure including
warehousing, industrial parks, Distribution
Centres etc.
• The efficiency and the reach of the express cargo
industry will further improve
• Indian companies can exploit their inherent IT
capabilities to develop specific application systems to
enable air cargo planning, movement, management
and co-ordination
• Domestic airlines can leverage on the development
of the Hub-and-spoke model for the country’s
cargo operations
22
Material handling equipment
The Indian Material Handling Equipment (MHE) market
has been estimated at about Rs 5,000 crore. The
traditionally fragmented material handling Industry has
been consolidating at a fairly rapid pace in the recent
years. Material handling equipment used by logistics
industry include forklifts, pallet trucks, stackers, reach
truck, order picker, overhead travelling cranes etc.
Traditionally, a lot of manual intervention was involved
in the logistics business, as a result of which they
were delay in deliveries; products were more prone to
damage due to poor handling and transit time taken
was much longer. This resulted in low speed, handling
problems like scratches, chipping, breaking and difficulty
in monitoring the material flow.
Demand for material handling equipment has been
increasing in the last few years. One of the primary
reasons fuelling this growth is the widely felt need
by firms to lower their logistics cost. As a result of
which there is a shift from manual operations to use of
electric and battery operated equipments, especially in
warehouses to improve efficiency and save time. Some
of the reasons for this shift include low maintenance
requirement, one time investment, long life of
equipment, no diesel requirement, etc. In addition, the
foreseen increase in cargo traffic handled at the major
gateways over the future, the requirement of material
handling equipment will maintain its uptrend.
Reverse logistics
Many logistics movement of goods go beyond the
conventional supply chain perspective and thereby
generate additional business transactions. These include
failed components repaired to serve as spare parts,
unsold stock being recovered, old products improved
to meet latest standards (retrofitting), reusable material
returned and refilled/re-developed etc. Reverse product
flows may generate value on a product, component, or
at material level.
With an ever increasing breed of quality and timely
delivery conscious Indian consumers, manufacturers
have endeavoured to develop logistics network that
would cater to the reverse logistics flow of materials.
The ability of a logistics network to cater to the timely
retrieval and delivery of material can be considered as a
strategic tool for customer retention. A customer who
enjoys a timely after sales spare part replacement would
generate a positive word-of-mouth campaign.
While earlier, the manufacturers tried to manage their
reverse logistics system in-house, manufacturers are
now also seeking the option of outsourcing of their
entire reverse logistics network to third parties. However
outsourcing the management of reverse logistics flow
entails that the third party service provider has the
mechanism to respond to the customer’s query, develop
suitable system to collect the old product from the
customer and if required possibly replace it with a
new product and deliver the product to the
manufacturer’s location.
The manufacturer hence needs to have the confidence
that the third party interaction with the customer
should be smooth considering that the replacement of
a product may lead to a contentious issue. Accordingly,
before outsourcing of the reverse logistics network,
the manufacturer has to collaborate with the logistics
service providers to chalk out and implement a robust
reverse logistics system. For the logistics service provider,
the reverse logistics support for a manufacturer would
never be treated as a one off transaction. The logistics
service provider would be required to act not only
as a service provider, but would be required to treat
the Client as a service partner treating the Client’s
business as his own. While global manufacturers are
outsourcing reverse logistics operations to third parties
in the developed logistics nations; the trend is steadily
catching up in India. This provides a huge opportunity
for the various logistics service providers to expand their
bouquet of service offerings and consolidate on the
opportunities that reverse logistics would offer.
The challenge however that is in India, the forward
logistics chain is far from perfect and hence establishing
a sustainable reverse logistics system might be a
challenging task.
3.4 Significance of SMEs in the Indian
logistics industry
Small and medium-sized enterprises (SMEs) are usually
the mainstay of most economies, particularly in terms
of employment and overall development impacts.
As per the World Association for Small and Medium
Enterprises (WASME), there are over 5 million SMEs in
India accounting for around 80% of the industrial sector
employment. It is the second largest employer of human
resources after agriculture, employing around 20 million
people, contributing 35% of the total export trade and
accounting for nearly 40% of the total value of
industrial production.
The above figures reflect the importance and
contribution of the SME sector to the national economic
growth and prosperity. It is hence not surprising to
realise the importance and the significance of the
SMEs in the Indian logistics sector. The logistics sector
in the country is dominated by the Small and Medium
Enterprises (SMEs) of which the majorities are the road
transport providers. It is estimated that more than a
million transport operators are own and run more than
4 million trucks.
The reduction in the logistics cost can be brought about
by improving the national logistics infrastructure to
facilitate smooth transfer of materials and information
from one place to another. While at the macro level,
the Government of India can initiate steps for improving
the logistics infrastructure of the country, the logistics
service providers at the micro level would need to infuse
better management practices to reduce their service
cost and improve their operational efficiency. Since the
Small & Medium Enterprises constitute a significant
percentage of the logistics service providers, it would
not be inappropriate to mention that these SMEs
would be acting as the catalyst in reducing the national
logistics cost component.
23
4. SMEs in logistics: Succeeding
in the market place

The power of ‘small’ is enough to bring about a
revolution in the way business is done. Typically, firms
that start small but do a good job of responding to
market needs become larger over a period of time. To
enable such new entrants with drive and good ideas to
grow, it is necessary to create conducive environment.
The objective of any program for SME support,
therefore, should not be to reward firms that happen
to be small. Rather, it should ensure a functioning
ecosystem, in which new ones can emerge, existing
ones can grow, and large and small ones can collaborate
and leverage their synergies.
Logistics service providers having investment in
equipment (excluding land and buildings) exceeding
Rs.10 lakh (US$ 0.2 lakh) but less than Rs.2 crore (US$
4.1 lakh) qualify as small enterprises and those investing
more than Rs. 2 crore but less than Rs.5 crore (US$10.3
lakh) classify as Medium enterprises3 . Today, perhaps
the biggest challenge that these service providers face
is coping with the regional, geographical and legislative
diversity in the country. This results in a lack of standard
practices, procedures, regulations as well as disparities
in the level of compliance. Land transportation in
particular gets significantly exposed to these issues
as the fragmented ownership of key components like
warehouses and trucks makes the consolidation of
services an enormous task, and the resultant offering
becomes extremely inflexible to suit customers’ needs.
Users of logistics services are no longer lured by
buzzwords or big names; the focus is clearly on costs
and delivered value. Hence, the emergence of SMEs
as strong regional or sectoral players is imminent.
SME service providers are rich in local experience and
have the flexibility and speed to deliver according to
the expectations of the principal. Most SMEs are also
owner-driven, and this reassures customers that
they will be dealing with a person rather than an
impersonal service.
wet and dry goods. This will serve as a major attraction
for international companies, as they are looking for
a one-stop-shop for most of their business verticals.
In addition, implementation of innovative technology
and the cost-effective models will help ensure better
management of assets, allowing SMEs to reduce
expenditure and remain competitive in the present
economic slowdown.
4.1 Competitiveness of SMEs in logistics
Deloitte conducted a survey of several Small & Medium
logistics players to capture the developments in the
Indian logistics space and more importantly the broad
level challenges that the industry is currently facing,
particularly from the perspective of a Logistics Service
Provider (LSP). The respondent companies belonged to
a wide spectrum of logistics segments such as freight
forwarding, shipping, customs booking, container
freight stations, warehousing, and multi-modal
transportation.
As a part of the survey, Deloitte had designed a
holistic questionnaire, which was administered to
the respondents during a one-to-one discussion. It
attempted to seek responses on various parameters
such as company background, operational performance,
internal benchmarking, soft infrastructure and also
views on quality of external infrastructure and its impact
on logistics businesses. The individual responses thus
collated, form the basis of analysis that follows.

As the Indian logistics sector becomes more competitive

globally, multinational companies will look to outsource
their entire logistics services to India. Most of the
logistics companies in India now offer a complete
range of services: warehousing systems, distribution,
tracking of goods and separate storage facilities for

24
4.1.1 Internal factors affecting competitiveness
Services
In the recent past, the logistics industry has witnessed
a paradigm shift in scope of service offerings with
the constituent players moving from typically being
single service specialisation companies to what are
now popularly referred to as “Total logistics solution”
providers. This has added a new dimension of service
synergies, which ultimately helps the service providers to
offer a whole gamut of quality services to the client at
competitive rates.
Foreign alliances
Another trend which is fast picking up is that of LSPs
forging alliances with foreign players to ensure access
to untapped geographies and benefit from collaborative
effort. Having said that, the regional strength of
domestic players is equally a compelling factor for SMEs
to collaborate and leverage on. In several cases, the
scope of this relationship has moved beyond the realm
of geographic reach to making strategic investments
and bringing specific logistics related expertise, which
can be a strong competitive advantage.
Key value propositions of alliances

Furthermore, in a situation like today’s it also helps

diversifying the basket of offerings into a wide
range of avenues so as to minimise risk faced due to Value added
unpredictable/vulnerable business segments. While Reliability service
managing the complete supply chain presents its own
unique challenges, it also helps in optimising costs not International Market reach
presence
only for the service provider, but also for their customers
wherein they can have greater control over their
Key value
inventory levels to prevent stock outs. Organisations Financial
Size proposition of
that have been able to embrace this change and expand strength
alliances
their capabilities beyond pure play transportation
certainly enjoy a competitive advantage over their peers.
Technical
In India, this trend is largely seen in firms which have Pricing
expertise
a strong warehousing and distribution capability, a
Company Cost of
customer centric approach and a forward background alliance
thinking leadership.

Source: Deloitte survey

Users of logistics services are no

longer lured by buzzwords or big
names; the focus is clearly on costs
and delivered value. Hence, the
emergence of SMEs as strong
regional or sectoral players is
imminent
25
 Cost
The current slowdown has robbed the logistics sector
of not just volumes but even margins. The businesses
have witnessed varying impacts with volumes falling to
the tune of anywhere between 10 per cent to 30 per
cent and margins declining by as high as 70 per cent.
While segments such as project cargo movement and
domestic agency business have managed to remain
afloat, others like container business and ship chartering
have had to bear the brunt. eg: Booking a container
from India to U.K. which used to earn around US $1000
per TEU earlier, now gives only US $300 per TEU. Unlike
commercial orders which have taken a hit, personal
cargo volumes are still promising and thereby ensuring
reduction of adverse impact.
To ensure survival, some players are charging rock
bottom rates and in turn rendering the services of other
players uncompetitive. This has clear implications for
individual players to streamline operations. Optimising
operations together with cost cutting will therefore go a
long way in helping SMEs gather strength internally and
compete effectively. This can be further supplemented
by company initiatives such as adopting a sales intensive
approach including cross selling by different divisions
and strengthening recovery.
Training
Although basic training is provided in most
organisations, it lacks the necessary focus to tap
and promote workforce talent and elevate service
performance to global best standards. This is partly
reflected in the survey response, wherein despite having
adequate workforce and low attrition, the quality of
work has been lagging.
Another reason could be recruitment of inexperienced/
unqualified staff at lower wages, with an objective
of cutting on costs, unaware of the repercussions it
could have on the quality of services rendered. At
certain places, the operational training is limited to
The fear of price sensitive Indian market, not
being able to bear the additional cost of
technology acts as an impediment
26
technology updates, while at some other it is purely in
form of on the job experience. To compete effectively
in today’s age, training in supply chain management
practices and quality management techniques such as
Six Sigma can help to a great extent.
Technology
Globally, investment in technology is another important
driver of an organisation’s efficacy. However, technology
implemented by the respondent LSPs is more or less
limited to cargo tracking in general and for agency
business in particular, it is confined to systems used by
the principal so as to ensure compatibility. At times,
point-to-point movement of cargo is even manually
tracked and updated by agents en route the final
destination. The level of familiarisation and use of
advanced technologies like Global Positioning System
(GPS), Warehouse Management System (WMS), Radio
frequency identification (RFID) amongst SMEs in India is
quite low.
The fear of price sensitive Indian market, not being able
to bear the additional cost of technology further acts
as an impediment. Again, a few setups despite being
significantly large do not employ such technologies since
they cater to bulk transportation & warehousing, unlike
third party logistics players which are concerned with
moving numerous small parcel sizes.
The chart on the next page plots areas of growth
opportunity from the perception of Logistics SMEs that
were covered by the survey. The various opportunity
areas were assigned weights, based on world averages
sourced from survey by leading logistics player UPS,
on SMEs in India. These have been compared with
corresponding relative importance in per cent terms,
which was an outcome of the Deloitte survey. From the
analysis, it follows that moving to higher value added
services is perceived as the biggest growth opportunity
by Logistics SMEs today.
Perception of growth opportunity by logistics SMEs

Relative importance for logistic SMEs

35%

30% Moving higher value

added services
Optimising operations
25%
Improving workforce
quality through training
20%
IT adoption
15%
Forging alliances & acquisitions
10%

0%
0 1 2 3 4 5 6

Relative weights based on world average

Source: UPS Asia Business Monitor 2009; Deloitte Survey and Analysis

Pursuing the right mix of growth opportunities can help

a player boost its market share.

Notwithstanding this, the customer’s choice of an LSP

is driven by a set of parameters, some of which are
indispensable and the others desirable.

Key determinants of choice for selecting a LSP

Cost effectiveness

Service quality Network reach

Specialised cargo
Equipment Choice of an LSP
handling

Compliance
Reputation
& approvals

Timely delivery

Source: Deloitte survey

27
 In the earlier mentioned chart, compliance and
approvals refer to the various licences and/or permits
which are particularly of relevance to custom house
and clearing & freight forwarding agencies. Besides the
above factors, public sector organisations also typically
look for past performance, financial standing and the
quantum of orders executed by the prospective LSP in
a particular period. The desirable factors, on the other
hand, are sophisticated IT infrastructure, door-to-door
service, alliances, and brand name.
Other factors that have a bearing on the
competitiveness of logistics service providers are:
• Transactional relations: This is mostly driven by the
client’s requirements and degree of his satisfaction
with the services of the LSP. Although on an
average most deals are carried out on a deal-to-deal
basis, many LSPs are trying to pitch in for longer
relationships as this can ensure them a steady flow of
work orders.
• Service level agreements: Service Level
Agreements (SLAs) set out performance standards
to be complied by the logistics service provider and
include parameters such as delivery, quality, safety
information availability, etc. Such agreements bring in
efficiency and accountability in the business. SLAs are
largely insisted in contract logistics wherein the service
provider handles product movement up to the point
of purchase and can vary as per the industry and
nature of cargo. Industries like computer peripherals
and hardware, automotive, perishable products are
The survey responses indicate that pure play
transporters generally are not very conscious
about SLAs as they are more worried about
the cost, as compared to 3PLs who monitor
the SLAs closely
28
likely to demand stringent SLAs. It is understood that
adherence to SLAs in India is around 80 to 85 per
cent while in developed economies it is around 95
per cent. The survey responses also indicate that pure
play transporters generally are not very conscious
about SLAs as they are more worried about the cost,
as compared to 3PLs who monitor the SLAs closely.
• Benchmarking: Each player seemed to be guided
by their own set of benchmarking practices. Internal
benchmarking is mostly being practiced by way of
achieving conformity with SOPs to ensure uniform
level of performance at all operation centres, internal
review, performance audit, and periodic calculation
of customer satisfaction index based on customer
feedback. External benchmarking, however, is not so
widely undertaken by the Indian LSPs yet.
• Innovation: This is one such factor that can help a
player differentiate its services from the rest and more
importantly benefit from the first mover advantage.
This could either manifest in the form of exclusive
service offerings such as serving the niche segment
of hydrocarbon transportation, etc or thinking
out of box like fitting four cars in one container
instead of three using a movable deck. Innovation
can also sometimes take form of intensive capital
investment, the first of its kind, in equipment at a
place, such that competitors find difficult to match
such huge investment and eventually tend to lose out.
Unfortunately, the degree of innovation amongst the
Indian logistics SMEs is still at a relatively
nascent stage.
4.1.2 External factors affecting competitiveness infrastructure such as roads, railways, ports, airports,
These can be broadly classified into infrastructural Inland Container Depots (ICDs) & Container Freight
bottlenecks and policy constraints. Infrastructural Stations (CFSs), whereas policy constraints refer to the
bottlenecks relate to deficiencies in physical regulatory & procedural hurdles affecting transportation.

Nature of
Area Cause Effect
bottleneck
Inadequate capacity at major ports Heavy congestion at most major ports leading to
Untapped potential of non-major ports higher vessel turnaround time
Ports
Outdated equipment Inefficient handling
Lack of warehousing Long waiting time
Few busy airports (Delhi, Mumbai, Kolkata,
Chennai, Bangalore, Hyderabad)
Congestion at main airports
Numerous unused airstrips & relatively less used
Airports airports
Inefficient handling resulting in pilferage/damage
Lack of equipment for odd-sized packages,
High cost of alternate arrangements (prices quoted
professional packers, etc
by individual loaders)
Do not support the axle weight of trucks and
Infrastructure Bad quality of roads
cause the roads to break and cave in
Bad road quality leading to poor speeds, accidents
Roads Inadequate lanes/lack of maintenance
and high vehicle maintenance
Inconvenience due to limited access to
Inadequate hinterland connectivity
neighbouring ports
Too many level crossings/minimal electronic Choked rail network & resultant lower speeds of
controls/priority to passenger trains over cargo trains cargo trains
Railways Limited network and terminals of private players
Transportation delays & cost overruns
(container movement)
Inadequate capacity/connectivity Transportation delays
Less integrated services, inefficiency & resultant
Cold Unreliable infrastructure/uneconomical size
inconvenience
Chain/CFS/ICD
Inexperienced staff Inefficient handling
Outdated customs formalities incl. documentation
Huge delays
Erratic EDI
Interpretation of rules & regulations left to the
Customs
discretion of Customs officials
Regulation & Ineffective administration of customs laws
Too many collectorates especially in the NCR region
soft issues
Corruption
Border duties such Abolished by most states, but still applicable in Increases cost of transporting through that city &
as octroi Mumbai, Pune, etc. eventually distorts logistics network
Inadequate controls Bad road quality leading to poor speeds and
Excess loads going unchecked
(esp. roads) accidents
Continue on next page

29
 Nature of
Area Cause Effect
bottleneck
Distorts logistics network as units in remote
Attractive manufacturing incentives such as tax
regions of Himachal Pradesh/Assam, etc may not
holidays for setting up units in a remote/industrially
enjoy the logistical advantage of a place with
Taxation backward region
relatively better connectivity
Multiple taxes for shipping Renders Indian shipping internationally
(Tonnage tax + 12 other taxes) uncompetitive
Regulation
Involvement of multiple agencies such as
Red tape/
Commerce Ministry for ICD/CFS/SEZ, rail ministry for Cost overruns, inconvenience & delay due to
bureaucratic
private rail terminals, Ministry of Surface Transport coordination problems
hurdles
for Roads, & Shipping Ministry for Ports/Shipping

Applicability of multiple acts such as Railway Act, Subjects multi-modal operations to multiple
Law
Merchant Shipping Act, Indian Ports Act, MMTG Act regulations and makes compliance cumbersome

At present, the congestion at ports has reduced due
to decline in trade. But once trade volumes pick up,
it could again start posing problems and will have a
cascading effect on related transport channels. eg: The
ideal transit time for container from Ludhiana - JNPT
(1500kms) is approximately 2-3 days. However, in times
of congestion, this can escalate to even a week or more.
The LSPs have found a way to mitigate this problem
by collaborating with ports, which enables them in
availing preferential allotment of window. The long
term solution to this, however, is development of more
non-major ports. Further, alternatives like development
of coastal shipping and inland water transport can be
explored to help ease out the infrastructural bottlenecks
and bring down the overall logistics cost.
To overcome the burgeoning logistics costs, the
respondent LSPs are resorting to the following initiatives:
• Negotiating & re-negotiating contracts
Negotiations with airlines would involve a minimum
cargo commitment, eventually resulting in lower rates
for customers. Negotiating with truckers (surface
transport) would involve giving contracts to those
providing competitive rates besides having a good
network of pick-up.
• Load optimisation
This refers to judicious selection of cargo by going for
a right combination of weight & volume cargoes so
that total capacity is optimally utilised.

From the analysis, it follows that besides poor • Efficient route scheduling
infrastructure & regulatory hurdles, the other logistics This involves evaluation of available routes between
cost inflators are: the source and destination and selecting the most
appropriate route which will optimise cost and
• Variable vessel charter costs delivery, proper selection of load & discharge points
and deciding on what quantities to be picked up from
• Fluctuating oil/fuel prices where. The ability to provide the most cost effective
distribution network is being used as a competitive
• Fluctuating exchange rates advantage by the LSPs.

• Non-availability of return loads

• High haulage rates

30
• Increased adoption of IT Areas for improvement/challenges
This is being actively pursued by implementing IT
infrastructure and software for managing business Level of improvement desired

processes as well as operations. This will increase 90%

efficiency and reduce time taken for various activities
80% Transportation
particularly in warehousing and fleet management. Access to funding infrastucture
70% Regulatory
A well designed MIS enables regular tracking of
effectiveness
performance and financial metrics such as sales, 60%
profitability, variance analysis etc., Survey responses 50% Innovation
indicate a mix of organisations having separate IT
40%
systems and also those which have implemented a Quality of manpower
30% IT Adoption
unified ERP solution.
20%

• Saving on logistics related communication 10%

International communication is an integral part 0%
of logistics operations, especially that of a freight 0 1 2 3 4 5 6 7
forwarder. Most work is sorted over emails. The
Relative weight based on world average
operations team refrains from making phone calls,
unless absolutely necessary. Source: UPS Asia Business Monitor 2009; Deloitte Survey and Analysis

• Cutting down on manpower Transportation infrastructure, which is rated the highest

This is being actively pursued by implementing ERP
systems, which enable integration of office systems
and provide client interface. Most of the manual work
gets automated and therefore replaces the junior
human resource at operations level.
• Other measures
These include working capital management, inventory
cost control and periodic reviews among other things.
4.2 Assessment of challenges: Internal & external
A thorough analysis of internal and external factors
affecting the logistics industry in general, together with
acknowledgement of constraints specific to SME players
like lack of funding enabled us to identify areas of
improvement for the industry, given as follows:
in terms of the level of improvement required, is crucial
for logistics services efficiency in the country. The next
big challenge is the inadequate access to funding,
a problem particularly faced by SMEs. Regulatory
effectiveness, although equally important for India,
carries a lesser weightage going by the world averages,
probably due to foreign countries already having an
appropriate and enabling regulatory regime.
4.3 S-W-O-T Analysis
Strategy formulation for any entity or a group of entities
is primarily influenced by their relative competitive
position in the industry. This, in turn, is collectively
determined by a set of factors such as strengths &
weaknesses (internal), opportunities & threats (external).

The ability to provide the most cost effective

distribution network is being used as a
competitive advantage by the LSPs
31
 A conscious effort to maintain an edge in the areas of ploughing back profits (self funding) and optimising
strengths, improve on weaknesses, a drive to actively operations so as to qualify for SME loans
pursue opportunities, and take proactive measures to
guard oneself in areas of threats can enable the group • Lack of use of state of the art technologies, if suitably
of firms to find their way through adversity. The inputs addressed, can boost the competitiveness of the
obtained during the survey and subsequent analysis Indian logistics industry
form the base for S-W-O-T framework for Indian
Logistics SMEs, which is elaborated in the figure below: • Inadequate controls and cost consciousness drive
LSPs. This is particularly true for road transporters,
S-W-O-T Analysis for Indian logistics SMEs often leading to low safety standards (eg: instances of
overloading by trucks)
Strengths Weaknesses Opportunities Threats
Opportunities
• Owner driven • Highly fragmented • Promising • Competition
• A likely boom in Construction and Pharmaceutical/
• Adequate • Lack of affordable sectors from large
Healthcare sectors would imply potential business
labour pool credit (construction & foreign players
opportunity for LSPs in terms of increased multimodal
• Regional • Lack of use of state healthcare) • Pricing pressure
movement of raw material & manufactured products,
dominance of art technologies • Progressive • Influence of
both domestically as well as internationally.
• Low attrition • Low safety reforms (GST) global market
standards • Infrastructure conditions
• Progressive reforms such as introduction of single
expansion
Goods and Service Tax (GST) will help rationalise the
Source: Deloitte analysis warehousing set-up in the country and enable the
LSPs to trim their logistics costs
Strengths
• Most enterprises, by virtue of being owner driven, • Government’s plan to award projects worth
tend to offer personal commitment and quality more than Rs. 3,300 crore (US $ 67.9 crore) for
services to their clients development and upgradation of container/cargo
terminals during the first three months in office and
• Relative ease at filling up vacancies in operations budget announcement of facilitating incremental
abundantly reflects availability of adequate labour infrastructural lending through take-out financing
scheme of IIFCL provide the much necessary push to
• With operations & agency network primarily infrastructure expansion and is likely to augur well for
concentrated in a particular region, they enjoy the LSPs
regional dominance and can provide services at
economical rates compared to their counterparts Threats
• Competition from large foreign players can be
• Low attrition, partly aided by the current downturn, guarded against by adopting advanced technologies,
can be further exploited by focusing on training & collaborations and leveraging on regional strengths
employee-friendly HR initiatives and resultant cost advantages

Weakness • The deal to deal transactions and price sensitive

• The fragmented nature, an inherent weakness of
the industry, can be effectively addressed through
consolidations, partnerships, and segment specific
forums aimed at providing integrated services
to the clientele
• A common problem faced by SMEs is that of limited
access to affordable credit, and can be overcome by
nature of Indian markets compels the LSPs to charge
lower rates, whether affordable or not, for fear of
losing out customers to competition
• The impact of global market conditions on logistics
business by way of decline in international trade can
be curtailed by concentrating on domestic markets,
which are still quite promising

32
5. Transport infrastructure

5.1. Traffic performance
The 11th five year plan Approach Paper calls for the
investment in transport infrastructure to increase from a
current level of 4.6% of GDP, to between 7 and 8%.
While the target of 8% for the 11th plan is still short of
the 10% figure which India needs to achieve, there is still a
need for arriving at how much would the government be
investing; and how much is needed to be the share of the
private sector, including also FDI in Infrastructure. As per
Ports - The major ports in the country handled 530.35
million tonnes of cargo during 2008-2009, which was
7.9 per cent lower than the target set for the period.
About 80 per cent of the total volume of ports’ traffic
handled was in the form of dry and liquid bulk, with
the residual consisting of general cargo, including
containerised cargo
Traffic handled at the major ports

the Capsule Report on Infrastructure sector performance In million tonnes

by Ministry of Statistics and Program Implementation, the
year on year rate of growth in cargo traffic has considerably 600
declined in FY 2008-09. A snapshot of the performance of
500
each of the transport infrastructure sector is indicated in the
subsequent section. 400

300
Rail - The freight traffic carried by the railways during
2008-2009 at 833.31 MT was 2.0 per cent lower than the 200
target set for the period, and recorded a growth of 4.9
100
per cent over the performance during 2007-2008. The
freight loading for 2008-09 of 833 million tonne does not 0
meet the target of 850 million tonnes. Freight loading got 2004-05 2005-06 2006-07 2007-08 2008-09
(Prov)
impacted by the economic downturn, which in turn, has hit
the railways’ earnings. The freight loading for the current Source: Ministry of Shipping
financial year has been estimated at 882 million tonnes

Railways freight loading in million tonne

In million tonnes

1000

800

600

400

200

0
2005-06 2006-07 2007-08 2008-09 2009-10
(RE) (BE)

Ministry of Railways

33
 Aviation: The five major airports (Mumbai, Delhi,
Kolkatta, Chennai and Bangalore) account for around
80-85 per cent of the total air cargo handled in India.
These five International Airports handled 5,37,382 tonnes
of export cargo during 2008-2009, which was 3.4 per
cent higher than the previous year. The growth rate,
however, was lower than 7.5 per cent in 2007-2008.
Further, 4,29,527 tonnes of import cargo was handled
at these airports during this period registering a negative
growth of 5.7 per cent. The corresponding growth rate
was 19.7 per cent during 2007-2008.

Air cargo traffic handled at Indian airports.

In ‘000 tonnes

1200

900

600

300

2004-05 2005-06 2006-07 2007-08 2008-09

International Domestic

Source : Airports Authority of India

The detailed description with regards to the
development needs, challenges and opportunities
existing in each of the transport infrastructure sector is
indicated in the subsequent sections.
5.2 Railways
5.2.1 Development needs
Indian Railways (IR) serves as the backbone of India’s
transport infrastructure, and as such contributes
significantly to macroeconomic growth and global
competitiveness. The premier transport organisation of
the country is the largest rail network in Asia and the
world’s second largest under one management at a
total of 63,332 route kms. Freight contributes to around
34
65% of its total revenue. The Railway Ministry in its
recent budget estimated its cash surplus (earnings net
of operating expenses & pension) after dividend of Rs
5,479 crore to the Centre will be Rs 8,722 crore, 31%
lower than the Rs 12,683 crore (actuals) in 2008-09.
This would imply that organisation’s dependence on
budgetary support and market borrowings heightens as
the cash surplus, the amount available for capitalisation
(transfer to the development fund and capital fund),
is down to Rs 2,642 crore from Rs 6,356 crore in the
revised estimates for 2008-09. Accordingly, the Railway
Ministry has outlined many measures to generate
revenues from non-traditional sources. This includes
laying of optic fibre along railway tracks, utilising land
and airspace for other commercial purposes, etc.
The existing railway network is crippled by capacity
constraints and is inadequate to meet the potential
demand of cargo transportation. The ambitious
project of railway freight corridor should address the
capacity constraint. The work for the dedicated freight
corridor (DFC) which has been renamed as Diamond
Freight Corridor in the recent Rail Budget, envisages
construction of dedicated freight lines along the eastern
and western sides of India covering 2,739 km. Once
commissioned, the DFC along with the feeder routes will
ensure the availability of sufficient capacity in the face of
rising demand. It is expected to increase average speeds
to over 100 kmph, reduce transit time by half and also
reduce the cost of operations. The project is expected to
reach completion by 2016-17.
Proposed dedicated freight corridor
Ludhiana
5.2.2 Challenges
The Railways are carrying the additional burden of
sixth pay commission recommendations. The Railways
have to pay Rs.6,600 crore in arrears alone to the
employees besides the increased salary burden of about
Rs. 7,000 crore in the F.Y 09-10. About 60% of the
arrears on account of pay has to be paid in 2009-10.
This has coincided with the economic slowdown which
has affected earning. In two years, the Railways have
to pay Rs. 28,000 crore towards salary and arrears.
The two factors have led to an increased operating
ratio of 92.5%. Some of the other challenges facing
the Railways are professionalising its cadre, giving up
tradition of hierarchies which its departments signify,
bonding the various departments within the railways
into a cohesive unit flexible to cope up with the fast
changing environment, cutting cost, yielding economies,
reducing tariffs and benchmarking performance with
comparable systems abroad.

Dadri 5.2.3 Opportunities

Khurja The rail container policy announced in January 2006
allows private companies to undertake container
Son Nagar
transportation by rail. As many as 16 licenses have
Ahmedabad been issued for operating container trains. In the
Vadodra
Howrah recent budget announcement, it was indicated that the
Railways were working out the details of a premium
JNPT service for movement of containers with assured transit
periods for time-sensitive cargo. Permission has also
Source: Dedicated Freight Corridor Corporation of India Limited been provided to container train operators to access
private sidings to help attract piecemeal traffic that are
at present not being carried by railways.

Implementation details of the Dedicated Freight Corridor Corporation of India Limited

Western corridor Stretch Implementation period

Phase I Rewari - Vadodara (920 km) 2009-2016

Phase II Vadodara - JNPT (430 km) 2010-2017

Phase III Rewari - Dadri (140 km) 2010-2017

Eastern corridor Stretch Implementation period

Phase IA Sonenagar - Mughalsarai 2009-2016

Phase IB Mughalsarai - Khurja (710 km) 2010-2016

Phase II Khurja - Ludhiana (Dandarikalan) 2011-2017

Source: Dedicated Freight Corridor Corporation of India Limited

35
 The railways have also chalked out plans for a freight 5.3.1. Development needs
related revamp in partnership with the private sector.
The partnership involves redevelopment of dilapidated Road sector breakup

goods sheds and freight terminals into state-of-the-art 2% 4%

logistics parks. The railways would hand over the
damaged property on a long term lease to a private
player for development, operation and maintenance on 14%
a revenue sharing basis.

Indian Railway Catering and Tourism Corporation

(IRCTC) has already been mandated to develop catering
services, budget hotels and food plazas at major
stations through involvement of private entrepreneurs.
IRCTC intends to take up around a hundred such
budget hotel projects in the next five years with Public
Private Partnership. 20 such concessions have already
been awarded. Some of the proposals that have been
mentioned in the recent budget that offer opportunities
to various private parties include: 80%

• Multi-functional complexes having shopping facilities,

food stalls, budget hotels to be constructed at 50
railway stations serving centres of pilgrimage, tourist
and industry National highways District road
State highways Rural roads
• Private ownership of special purpose rolling stock Source : Ministry of Road Transport and Highways
for commodities and private operation of freight
terminals will be encouraged To improve and develop national highways, the
government has initiated National Highways
• Mega logistic hubs being planned alongside Eastern Development Programme (NHDP) in a phased manner.
and Western Dedicated Freight Corridors The National Highways Authority of India (NHAI) is
implementing the NHDP programme. The NHDP with its
5.3. Roads planned seven phases covering approximately 50,000
A good road network constitutes the basic infrastructure km at a massive investment of about Rs.3,000 billion
that propels the development process through has been the blueprint for national highway network
connectivity and opening up of backward regions to development in India.
trade and investment. Roads also play a key role in
inter-modal transport development, establishing links
with airports, railway station and ports. India has the
world’s second largest road network, aggregating over
3.34 million kilometers next only to the United States.
Indian roads carry about 61 per cent of the freight and
85 per cent of the passenger traffic. All the highways
and expressways together constitute about 66,000
kilometers (only 2% of all roads), whereas they carry
40% of the road traffic.

36
 Phase Length(km) Description Target completion date

I 7,521 Comprises 5,846 km of GQ, 981 km of NSEW corridor, 380 km of December 2009 (GQ by
port connectivity and 315 km of other national highways December 2008)
II 6,805 Comprises 6,319 km of NSEW corridor and 496 km of other December 2009
national highways
III 12,109 Four-laning of 12,109 km of national highways in two phases, March 2012
Phase IIIA and IIIB, on BOT basis
IV 20,000 Two-laning with paved shoulders of 20,000 km of national December 2015
highways on BOT basis
V 6,500 Six-laning of 6,500 km of national highways on DBFO basis December 2012

VI 1,000 Construction of 1,000 km of expressways on DBFO basis December 2015

VII - Construction of ring roads, bypasses, flyovers, etc. on BOT basis December 2015

The spending in road sector has a multiplier effect in Requirement of funds for maintenance of Highways as per the norms and funds provided
terms of job creation and increase in per capita income.
Hence any spending, whether by government or by a Year Requirement Amount Shortfall % Shortfall
private partner, definitely helps in economic stimulus. as per norms provided
Accordingly the government plans to invest around 2002-2003 2200.00 800.00 1400.00 63.64
Rs 1,00,000 crore to build about 12,000 kilometres of
2003-2004 2200.00 731.74 1468.26 66.74
roads for the F.Y 2009-10 mainly through the toll-based
model, with options to bring in foreign investors. 2004-2005 2480.00 745.56 1734.44 69.94

2005-2006 2100.00 868.10 1231.90 58.66

Inadequacy of funds is a prime reason for the demand-
supply gap. Road projects in the country require 2006-2007 2012.00 814.38* 1197.62 59.52
around Rs 2,00,000 crore over the next three years for
which, the Ministry of Road Transport and Highways is Source: Report of the working group on Roads ( 2007-12) for the 11th five year plan

considering innovative financing instruments that will

fund road projects and attract domestic and foreign
investors. Efforts are also being made to involve all
possible investment channels, including pension funds,
sovereign wealth funds, equity funds, besides funds
from banks. The ministry has plans to boost road and
highway connectivity - at the rate of 20 km daily.
5.3.2 Challenges
The road transport cost comprises of vehicle operating
cost and road related cost. The vehicle operating cost
on Highways, which is major component of the total
transport cost, is entirely dependent on the condition
of the roads. In order to reduce this total transport cost
it is essential to maintain the roads at a good level of
service. The existing NH network is under severe strain
due to rapid traffic growth, overloading of vehicles and
the Government’s inability to provide the required funds
for maintenance of National Highways.
Apart from funds, other factors as cited in the report
of the working group include outmoded system of
gang labour, weak planning, scheduling and monitoring
of maintenance operations, inherent deficiencies in
structural thickness, lack of attention of drainage and
poor enforcement of legal axle load limits which have
hastened the process of decay of the NH network.
Hence there is a need to deploy proper management
for maintenance of National Highways.
Some other challenges include land acquisition,
encroachment on highways, environmental and forest
clearances, shifting of utilities, railway approvals for
rail overbridges, local law and order problems, poor
performance by some contractors, etc. This translates
into slower speeds of vehicular traffic. On an average, the
kilometer range per Commercial Vehicle per day in India is
240-280, as against 680-700 in the developed countries.

37
5.3.3 Opportunities The industrial corridor will emerge within 150 km each
The Delhi-Mumbai Industrial Corridor side of the proposed 1,483 km long dedicated railway
Industrial corridors are considered an efficient way freight corridor. In the first phase it will cover six Indian
of integration between industry and Infrastructure states of Delhi (22 km), Haryana (148 km), Uttar Pradesh
leading to economic development. One of India’s most (22 km), Rajasthan (578 km), Gujarat (565 km) and
ambitious projects in recent years, the Delhi-Mumbai Maharashtra (148 km). The industrial corridor will have
Industrial Corridor (DMIC) is a massive project envisaged three ports, six airports and a 4,000 MW power plant to
across nearly 1,500 km of land and linking the two serve it apart from connectivity with existing sea ports
metros of N. Delhi and Mumbai. It aims to boost It would also link 10 cities with a population exceeding
the country’s industrial and economic development a million each - Delhi, Faridabad, Meerut, Jaipur,
by creating supporting logistics infrastructure. Japan Ahmedabad, Vadodara, Surat, Nashik, Pune and Greater
is committed to a huge investment for the project, Mumbai. The government also hopes to formulate a
planned on the lines of the Tokyo-Osaka industrial policy relating to ‘Manufacturing Investment Regions’
corridor. DMIC would be beneficial to both the countries (MIRs), to attract foreign investments for the DMIC.
in terms of development of ports, business parks and
infrastructure. The $ 90 billion project is likely to be 5.4 Ports
executed in seven years.
5.4.1 Development needs
Stretch covered by DFC and DMIC Ports provide an interface between the ocean transport
and land-based transport. India’s port infrastructure
Haryana Dadri constitutes of 12 major ports (Kandla, Mumbai,
Jawaharlal Nehru, Mormugoa, New Mangalore, Cochin,
Rajasthan
Uttar Tuticorin, Chennai, Ennore, Vishakhapatnam (Vizag),
Pradesh Paradip and Kolkata including Haldia and around 187
India India
non-major ports. India’s port infrastructure constitutes
Gujarat 11 major ports, 1 corporate port &187 non-major ports.
Madhya Pradesh Of the non-major ports, only around 48 are operational;
rest are only fishing harbours. Around 7 of the 12 major
Arabian Maharashtra Indian ports are operating at more than 100 per cent
Sea Jn port capacity, as against an optimum range of
70-80 per cent utilisation.

Dedicated freight Corridor (DFC)

Delhi-Mumbai Industrial Corridor (DMIC)

Source : Dedicated Freight Corridor Corporation of India Limited

Road projects in the country require around Rs 2,00,000

crore over the next three years for which, the Ministry of
Road Transport and Highways is considering innovative
financing instruments

38
Capacity utilisation at the major ports ( 2007-08)

Million tonnes % Capacity utilisation

70 140

60 120

50 100

40 80

30 60

20 40

10 20

0 0
Kolkata Haldia Paradip Vizag Ennore Chennai Tuticorin Cochin NMPT MGPT MPT JNPT Kandla
13.74 43.58 42.43 64.59 57.15 11.56 21.48 15.81 36.01 35.12 57.03 55.83 64.92
14.56 46.70 56.00 61.15 53.35 13.00 20.75 28.37 43.50 33.05 44.70 54.34 62.60
94 93 76 106 107 89 104 56 83 106 128 103 104

Traffic Capacity Utilisation (%)

Source: Indian Ports Association

Further, available data shows a drastic decline in

augmented capacities at major ports during the last four
years. While there was a 14.8 per cent increase to 456.2
Million MT in major port capacity during 2005-06, the
year 2006-07 saw capacity additions decline to 10.6
per cent. During 2007-08, new capacity additions were
limited to 5.4 per cent and they are projected to further
decline to 4.4 per cent in 2008-09.

39
Aggregate capacity & capacity additions at major ports (2005-2009)
Year
As on 31-03-2005
As on 31-03-2006
As on 31-03-2007
As on 31-03-2008
As on 31-03-2009
Source: Ministry of Shipping
40
Capacity in Additional % Increase
million tonnes capacity in
million tonnes
397.50 - -
456.20 58.70 14.8
504.75 48.55 10.6
532.07 27.32 5.4
555.67 23.60 4.4
5.4.2 Challenges
Lack of proper facilities, shallow drafts, inadequate
connectivity and lack of necessary equipment/
technology has contributed to high logistics costs. At
present, a lot of time is wasted because of pre-berthing
delays. The average turnaround time of vessels at major
Indian ports ranges from 1.77 days to 4.82 days. Dwell
time for EXIM containers at Indian ports is between 1-3
days compared to less than a day at Singapore. Larger
vessels, having the potential to cut substantial cost,
are unable to call at Indian ports due to limited draft.
The draft available at international ports ranges from
12 m to 23 m whereas, in India except for a handful
of ports like Kandla, Mundra, Ennore, Gangavaram
& Krishnapatnam, other ports have an average draft
ranging from 8m to 12m. This issue will be partly
addressed with the commencement of operations at the
much awaited International Container Transshipment
Terminal at Vallarpadam, Cochin Port.
Port development is further bogged down by the need
for getting multiple clearances. Multiple agencies
are involved in granting approvals to port projects.
These involve project appraisal by the Planning
Commission, Law Ministry, and Ministry of Finance.
This preliminary process of consultation among
inter-ministerial groups, prior to Cabinet approval is
inherently time consuming. To add to the concern, the
National Maritime Development Programme (NMDP)
is progressing at a slow pace with many project delays
and cost escalations. So far, only 41 of the total 253
port projects and 5 of the 111 shipping projects have
been completed. Other issues facing Indian ports relate
to port security, and land acquisition particularly for
non-major ports.
Also, port projects typically suffer from delay in
environmental clearances, which on an average take
approximately a year and a half for each project. Going
forward, these issues will need to be addressed on
a proactive basis. Further, due to global meltdown
reduction in trade has resulted in decline in cargo traffic.
As a consequence, recently awarded port projects may
find it difficult to achieve financial closure. While publicly
funded port projects will stay relatively unaffected,
private sector port projects would face difficulty in
raising funds.
5.4.3 Opportunities
On the positive side, with the Government encouraging
private participation in port development, non-major
ports have begun contributing significantly to the
economy. The relative share of non-major ports has
grown from 26 per cent to 28 per cent in the four years
since 2004-05. While the total capacity of non-major
ports in 2008-09 is estimated at 228.3 Million MT, the
corresponding total cargo handled was 220 Million MT.
The new Government’s ambitious agenda to award 6
concessions for ports and initiate for 20 others through
PPP totalling to more than Rs. 3300 crore, within a span
of 3 months, is being regarded as a welcome move.
Players with ports as their core business can now invest
in strengthening their back-end and soft infrastructure
such as connectivity linkages and alliances as well
as initiatives for productivity improvements, service
augmentation and customer development. Foreign and
private equity investments in Indian ports in recent times
reflect a strong faith in India’s port sector and
suggest the inflow of more such funds in the
forthcoming period. Please refer table below for
container terminals owned and operated by foreign
parties:
Container TEUs handled by foreign operators at various
Indian ports (2008)
Foreign Million Ports
operator TEUs
Maersk 1.48 JNPT, Pipavav
Dubai World 2.85 JNPT, Chennai, Kochi,
Visakhapatnam, Mundra
PSA Singapore 0.45 Tuticorin, Chennai
Source: Business India issue dated May 31, 2009
 PSA also has a stake in ABG Kandla Container Terminal, 5.5.1 Development needs
which is the concessionaire for Kandla Port. Dragados & The rapid growth in air traffic over the last few years
Gammon collaborating to develop the Mumbai Offshore exposed the deficiencies of airport infrastructure across
Container Terminal is yet another case of foreign the country. After decades of neglect, many of India’s
investment. The table below shows the PE investment in airports were forced to operate well above design
Indian ports: capacity. The resulting congestion in the terminals
and on the runways delivered a poor experience
Private Equity investments in non-major ports for the passenger and a costly, inefficient operating
environment for the airlines. However, although a
Company PE Investor Amount (Rs. crore) weakness today, it would gradually cease to be so, as
the airport modernisation program starts to deliver
Gujarat Pipavav Port IDFC PE 192
results, with new airports in Bangalore and Hyderabad,
SICAL IDFC PE 116 and improvement in facilities at Delhi and Mumbai.
Mundra Port GIC, 3i 450 There are 454 airports/airstrips in the country which
include operational, non operational and abandoned
Chennai Container Global Infrastructure 25% stake
airports, whose ownership pattern is illustrated in the
Terminal Partners
figure below:
Dighi Port IL&FS 20% stake
Ownership pattern of the airports/airstrips (operational/
Krishnapatnam Port 3i 994 non-operational) in the country (2008)

Gangavaram Port Warburg Pincus 150 (30% stake)

21%
Source : Business India issue dated May 31, 2009

30%
The concept of port-based SEZs is fast catching up
amongst Indian investors ever since the successful
launch of Mundra Port SEZ. It establishes that credible
port infrastructure is no more value-adding, but
imperative for development of globally competitive 14%
hubs of economic activity and thereby promoting
international trade.

5.5 Aviation
Civil Aviation plays a pivotal role in economic growth
of a nation. Airline industry not only brings efficiencies 35%

in transportation of both people and cargo, but for

a country like India, it can create a large number of AAI State government

jobs too. It is estimated that every $100 spent on air Private owners Defence department

transport yields benefits to the tune of $325 to the Source: 11th Five Year Planning Commission’s working group report
economy and 100 additional jobs in aviation result in on Civil Aviation

610 other new jobs. Having recognised its strategic

importance, Indian aviation has transformed from an
over regulated and an under managed sector to a more
open, liberal and investment friendly sector since 2004.
Compliance with global standards has also made air
transport, the safest mode of transportation.

41
The Government has acknowledged the infrastructure
deficiency and has wisely sought private sector
participation to facilitate infrastructure improvements
(modernisation of Delhi and Mumbai airports,
commissioning of Greenfield projects at Hyderabad and
Bengaluru, modernisation of 35 non metro airports). The
estimated investments at Delhi airport are in the order of
Rs. 7,531 crores; while that at Mumbai airport is estimated
to be in the region of Rs. 11,553 crores. Greenfield airport
projects have also been proposed at Goa, Navi Mumbai,
Pune, Greater Noida and Kannur. The objective is to
develop facilities conforming to international standards
and try to encourage the domestic operators to shift base,
so as to decongest the major airports. AAI is in the process
of carrying out feasibility studies for this purpose. The
Civil Aviation Ministry has set a target of getting around
500 airports operational in the country by 2020. This will
include renovation of used airports, developing Greenfield
airports, establishing merchant and low cost airports and
airports dedicated to movement of cargo and logistics.
5.5.2 Challenges
Despite the high growth rates witnessed in the last five
years, certain pressing issues need to be resolved to realise modifications. At present, major part of the MRO work
the full potential of the sector. These include:
• High waiting time and congestion in airports causing
huge wastage of fuel
• Airlines incurring losses
• Taxation issues
• Aviation security
• Shortage of skilled technical manpower
• High airport and security charges
• Inadequate night parking facilities
• Less number of gates and counters
• Inadequate security machines and shortage of
security personnel
• Requirement of efficient baggage management system
• Lack of maintenance facilities at airports
The Civil Aviation Ministry has set a target of getting
around 500 airports operational in the country by 2020
42
In addition, while there are a lot of new avenues
in aerospace services in the coming decades, the
constraints associated needs to be addressed to enable
the smooth growth of the sector.
5.5.3 Opportunities
The Indian aviation growth trend has resulted in many
lucrative business opportunities for players in the
aviation industry. In spite of this, many of global aviation
industry players have remained insulated from being part
of India’s aviation growth story. This has been largely on
account of lack of proper market potential assessment,
not being able to find the right business partners, not
understanding the legal and policy implications or
concern of continuity of growth of aviation sector. An
overview of some of the opportunities offered by Indian
aviation growth is indicated below:
Maintenance, Repairs and Overhaul (MRO) services
MRO as an aviation segment represents a relatively
untapped opportunity. They include engine overhaul,
airframe maintenance, heavy checks and line
maintenance, component overhaul and major airframe
for the Indian aircrafts is outsourced to the service
providers in Europe and Singapore. While airlines are
increasing and strengthening their in-house MRO
facilities, dedicated MRO players are also entering
the Indian aviation space. The Indian MRO market is
growing at about 15 per cent annually. The entire Asia
Pacific aircrafts and engine MRO market is estimated
to touch US$ 12.9 billion in 2011. Major components
of MRO services in India include engine overhaul and
components. Together, these account for around 60 per
cent of MRO services business in terms of value.
Market break up for MRO services
4%
17%
20%
40%
7%
12%
Line Maintenance Airframe (Heavy)
Components Engine Overhaul
Modifications Others
Source : www.reserachwikis.com
Recently, three different joint ventures between Indian
companies and foreign companies like Airbus, Boeing
and SIA Engineering have embarked upon setting up
of MROs. A satellite MRO centre is planned at Chennai
Aero Park. Gujarat government is examining the
prospects for developing MRO business and making
Gujarat, a MRO hub in the region.
Airport and ground support equipment
Airport and ground support equipment segment
presents another opportunity with estimated market
size of US $ 359 million in India for 2008 and expected
to cross US $ 400 million over next three years. With
up-gradation and modernisation in place, demand for
technology driven ground support equipments is set
to grow. Needless to say, modernisation of airports
to world class standards in the country will make it
imperative to equip airports with the best airport and
ground support equipments. Increased safety and
security concerns and up-gradation of navigational
aids, traffic control services and adoption of traffic
management technology will further strengthen
the demand.
The systems for which demand is expected to rise
include Dedicated Satellite Communication Network
(DSCN), Automatic Message Handling System
(AMHS), Flight Information Display System (FID),
Aeronautical Telecommunication Network (ATN), Voice
Communication and Control System (VCCS) among
others. India imports more than 60% of airport and
ground handling equipments currently. The AAI alone
has an annual budget of US $ 60 million for equipments
purchase. This represents a lucrative opportunity for
suppliers of ground support equipments based on latest
technology which increases efficiency and are cost
effective in operations. Global manufacturers, by setting
up manufacturing plants in India, can take advantage
of lower input costs, lower labour rates and liberalised
aviation policies and manufacture high technology
equipment at relatively lower costs in India.
India - as an air cargo hub
India has a great potential for becoming a possible
cargo hub for SAARC and ASEAN countries and its
strategic location as a transit destination connecting
the eastern-western global corridors. The Civil Aviation
ministry has identified Nagpur as India’s national cargo
hub and has promised an aviation policy for providing
significant concessions for air freighter operations out
of Nagpur. There are also plans of creating a national
grid for cargo hubs at various airports in India with cold
storage and warehousing facilities. The Government has
chalked out various policies and plans for development
of the air cargo infrastructure thereby providing
opportunities to the various entities involved in the
value chain. Civil aviation ministry proposal to set up
dedicated cargo airports and Government’s plan to
allow cargo airports within 150 kms radius of existing
airports through automatic routes are major steps taken
to the cause of developing India as a cargo hub.
43
5.6 Infrastructure finance
Infrastructure projects being capital intensive, with long
gestation periods; the Financial Institutions (FIs) and the
banks need to create new structures to facilitate the
funding. Most infrastructure projects are financed at
a debt: equity ration of 70:30. The following agencies
usually finance the debt portion:
• Multi lateral agencies like World Bank, International
Finance Corporation (IFC) and Asian Development
Bank (ADB).
• Development Financial Institutions like Industrial
Finance Corporation of India (IFCI), Industrial
Development Bank of India (IDBI), Small Industries
Development Bank of India (SIDBI), Infrastructure
Development Finance Corporation (IDFC), Power
Finance Corporation (PFC) etc.
• India Infrastructure Finance Co Ltd (IIFCL), a 100 per
cent government owned infrastructure financing SPV
formed in January, 2006.
• Foreign Commercial Banks
• Domestic Banks
Domestic banks have traditionally been reluctant to
finance infrastructure projects due to long gestation
period, low commercial viability and unpredictable
Civil aviation ministry proposal to set up dedicated cargo
airports and Government’s plan to allow cargo airports
within 150 kms radius of existing airports through
automatic routes are major steps taken to the cause of
developing India as a cargo hub
44
revenue stream. However with several positive
developments in policy and legislation, banks are slowly
evolving appropriate financing structures for funding
infrastructure projects. Project financing remains the
basic form of infrastructure development. The lenders
are also developing innovative structures depending on
the extent of government participation, loan tenor and
risk associated with the project. Avenues like corporate
bond market; securitisation of receivables etc is slowly
becoming a fairly acceptable form of financing. Other
typical ways of funding are rupee term loan, extending
of foreign currency loans, providing non fund based
credit facilities such as opening of project letter of
credit, issuing of bank guarantee for the project.
New ways of structuring like take-out financing, roll
over financing, put-call options, hedging/swapping of
exchange/interest rate risks etc are also being offered
for funding of long gestation projects. The projects
are funded on their viability, projected cash flow and
their ability to service the debt. The user’s willingness
to pay for the services availed affects the cash flow.
Sectors such as power, roads, ports, airports and
telecom have been able to raise funds due to level of
clarity of government policies, historical performance
of the sector and the user’s willingness to pay. The
strength and experience of the promoters, concession
framework, tax benefits to the project, inputs/off-take
arrangements add to the bankability of the project.
Infrastructure development in India would
require a massive investment of US $ 492
billion during the 11th Plan Period, according
to an estimate by the Planning Commission
5.7 The PPP approach
Sustaining and accelerating India’s economic growth
would require substantial investments in infrastructure
development. Infrastructure development in India would
require a massive investment of US $ 492 billion during
the 11th Plan Period, according to an estimate by the
Planning Commission. Since such massive investments
cannot be undertaken by public financing alone, the
government has identified and is encouraging public
private partnership (PPP) in infrastructure development.
PPP offers a distinct possibility for increasing total
investments by using a limited amount of public
resources to leverage a much larger amount of private
investment. Given the bottlenecks and inefficiencies
often encountered in public infrastructural investment,
such PPPs could also increase economic efficiency and
lower the capital requirement, provided that regulatory
mechanisms are adequate.
In India, due to policy changes and reforms, Public
Private Partnerships (PPPs) have increasingly become
slowly the preferred mode for construction and
operation of infrastructure services such as highways,
airports & ports. PPPs can be undertaken through a
range of alternatives such as BOT, BOOT etc, with the
Model Concession Agreement (MCA) being used to
provide a stable regulatory and policy framework. The
MCA regulates the PPP contracts by defining the rights
and obligation of all parties concerned. In case a project
is not viable due to either long-gestation periods or
inadequate returns, the government is committed to
provide up to 40% funding by way of grants in some
cases, called viability gap funding.
There are four major areas that needs to be addressed
for the PPP model to be successful:
• A stronger policy and regulatory framework both at
the centre and states
• Appropriate market instruments and capacity to raise
long term equity and debt
• Credible and bankable infrastructure projects
• Strengthening of government capacity to manage
PPP projects.
PPPs present an opportunity to meet India’s investments
needs that can be translated into a win-win situation
for all.
45
6. Conclusions

Globalisation, consolidation, technology advancements
and outsourcing have only led to growth in the logistics
services market and this industry will continue to evolve
in the coming years.
Industry research suggests that the following
interdependent factors will shape the Global Logistics
Industry over the next 5-10 years:
• Globalisation and consolidation - Mergers and
acquisitions of firms are leading to formation of
entities having capability to provide a “single point
of contact” to manage global supply chains for their
clients. Globalisation of traditional businesses is
driving the logistics industry to address considerations
like market expansion, new sources of supply,
international trade, etc.
would enable the nation to register a dynamic economic
performance in a global environment. USA has
successfully reduced its logistics cost as a percentage of
GDP from 17% in 1980 to its present level of 9.5 % by
incorporating macro level reforms in the transportation
infrastructure coupled with micro level upgradation of
logistics facility in individual firms.
India has therefore got a huge opportunity of reducing
its national logistics cost by emulating such business
models customised to suit Indian business environment.
Indian logistics firms will have a major role in achieving
this cost reduction.

• Increased outsourcing - Companies are utilising

logistics outsourcing more and more in order to
increase flexibility and responsiveness in their supply
chain. Global supply chains are getting increasingly
complex to manage and companies are focusing
more on core competencies.

• Security and risk management - Supply Chain Security

and Risk Management will be a key area to prevent
disruptions due to factors like weather, labor issues,
strikes, diseases like SARS, or terrorist attacks.

• Technological advancements - Rapid advancements in

supply chain technology enablers (like RFID) will lead
to increased functionality and greater potential to
improve performance of supply chains.

• Increased customer expectations - Customers will be

moving away from tactical transactional based service
outsourcing to solutions that are more strategic in
nature and supported by leading edge technology
and systems.

Firms can enhance their market competitiveness by

reducing their logistics costs, thus lowering the total
costs of goods and services. Any impetus to improve the
competitiveness of the firms at the national platform

46
India has got a huge opportunity of reducing its national
logistics cost by studying and benefiting from other
success stories
This may include upgrading the macro logistics
infrastructure to world class standards and by providing
a facilitative role to the SME players in the logistics
sector to improve their service level competitiveness.
Government initiatives like development of SEZs,
logistics parks, infrastructure building, privatisation of
transport operations, implementing PPP models etc.,
will encourage private sector investment and lead to
greater demand for logistics services. Moreover, growth
of user industries like retail, telecom, consumer goods,
automotive, pharmaceuticals, foods and beverages etc.
notwithstanding the current economic slowdown will
provide further impetus to logistics services
across sectors.
Drivers like these and the push/pull pressures created by
the market forces will not only trigger structural changes
in the logistics industry resulting in specialisation,
consolidation, outsourcing, service migration, new
markets, new services but will also create challenges
around service, delivery, quality and cost as customer
needs become more demanding and complex.
SMEs, forming the core of the logistics industry, will
be impacted by this transition in a major way and
will have to focus on improvement of its internal
operations, processes, technology upgradation, resource
utilisation, service quality, customer relationships, market
intelligence, and financial strengthening, in a nutshell in
overall capability enhancement - in order to respond to
and gain from the changing environment.
47
Abbreviations

2pl Second party logistics IIFCL India Infrastructure Finance Company Limited
3pl Third party logistics IRCTC Indian Railway Catering and Tourism
4pl Fourth party logistics Corporation
AAI Airports Authority of India ITES Information Technology Enabled Services
ADB Asian Development Bank JNPT Jawaharlal Nehru Port Trust
AMHS Automatic Message Handling System Kmph Kilometer per hour
APEDA Agricultural And Processed Food Products LSP Logistics Service Provider
Export Development Authority MCA Model Concession Agreement
ASEAN Association of Southeast Asian Nations MHE Material Handling Equipment
ATN Aeronautical Telecommunication Network MIR Manufacturing Investment Region
BOT Build, Operate and Transfer MNC Multi National Company
CFA Clearing & Forwarding Agent MOSPI Ministry of Statistics and Programme
CFS Container Freight Station Implementation
CMIE Centre for Monitoring Indian Economy MRO Maintenance, Repairs and Overhaul
CONCOR Container Corporation of India MT Metric Tonne
CPC Centre for Perishable Cargo MW Mega Watt
CPI Consumer Price Index NER North East Region of India
CST Central States Tax NH National Highway
DBFO Design, Build, Finance and Operate NHAI National Highways Authority of India
DMIC Delhi Mumbai Industrial Corridor NHDP National Highways Development Programme
DSCN Dedicated Satellite Communication Network NMDP National Maritime Development Programme
EDI Electronic Data Interchange NSEW North South East West
EIU Economist Intelligence Unit OECD Organisation for Economic Co-operation
ERP Enterprise Resource Planning and Development
Exim Export - Import OEM Original Equipment Manufacturer
FDI Foreign Direct Investment PE Private Equity
FI Financial Institutions PFC Power Finance Corporation
FIDS Flight Information Display System PPP Public Private Partnership
FIPB Foreign Investment Promotion Board RBI Reserve Bank of India
FY Financial Year RFID Radio Frequency Identification
FYP Five Year Plans (Planning Commission of India) SAARC South Asian Association for Regional
GDP Gross Domestic Product Cooperation
GOI Government of India SCM Supply Chain Management
GPS Global Positioning System SEZ Special Economic Zone
GQ Golden Quadrilateral SIDBI Small Industries Development Bank of India
GST Goods and Service Tax SME Small and Medium Enterprise
HR Human Resource SOP Standard Operating Procedure
ICD Inland Container Depot SPV Special Purpose Vehicle
IDBI Industrial Development Bank of India S-W-O-T Strength-Weakness-Opportunities-Threats
IDFC Infrastructure Development Finance TEU Twenty feet Equivalent Unit
Corporation VAT Value Added Tax
IFCI Industrial Finance Corporation of India VCCS Voice Communication and Control System
IR Indian Railways WMS Warehouse Management System

48
Bibliography

Websites Others Sources

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www.businessworld.in 2008-09, Ministry of Statistics and Programme
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www.commerce.nic.in
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www.economictimes.com Economic Survey 2008-09
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www.expressindia.com “Global Logistics & Distribution Planning: Strategies for
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www.finmin.nic.in
www.ibef.org “Handbook of Logistics and Distribution Management”
www.imf.org by Alan Rushton, Phil Croucher and Peter Baker UPS Asia
www.indiainbusiness.nic.in Business Monitor 2009
www.indianrailways.gov.in
www.livemint.com 11th Five Year Plan Working Commission Report on
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Deloitte ATS Regional overview - APAC logistics

End Notes

1
GDP at factor cost :1999-00
2
Findings of SCS Agribusiness Consultants (South Asia office of the International Association of Refrigerated
Warehouses (IARM))
3
USD/INR = 48.63 as on 16th July 2009

49
Contacts

Mr. Hemant Bhattbhatt

Senior Director
Deloitte Touche Tohmatsu India Pvt. Ltd.
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