GDP Growth To Logistics Gain: How India's 8.4% GDP Growth Will Impact the Logistics Sector

India’s gross domestic product (GDP) grew 8.4 percent in the December quarter, data released by the Ministry of Statistics and Programme Implementation on February 29, 2024 showed.

At? 8.4% year-on-year this is the strongest growth since the second quarter of 2022,? beating forecasts of 6.6%. The National Statistics Office (NSO), in its second advance estimate of national accounts, pegged the country's growth at 7.6 per cent for 2023-24. It had projected a growth of 7.3 percent for the current fiscal year in its first advance estimates released earlier in January 2024.?

The logistics sector plays a crucial role in facilitating trade and commerce within India and with other countries. With an annual market size of over US$160 billion, it is one of the fastest-growing industries in India. Therefore, any changes or developments in the country's economic landscape can greatly impact this sector. In this blog post, we will delve deeper into how India's GDP growth is expected to affect the logistics industry and what it means for its future prospects.

Significance of India's Logistics Sector

The logistics sector in India is a crucial component of the country's economy, as it serves as the backbone for trade and commerce. It comprises various sub-sectors such as transportation, warehousing, packaging, and distribution. According to reports by IBEF (India Brand Equity Foundation), the sector employs over 22 million people and is expected to witness a compound annual growth rate of 10% between 2021-2025.

With the strong GDP growth in the December quarter, there will be an increase in demand for goods both domestically and internationally. This will lead to a surge in transportation requirements across all modes – roadways, railways, air cargo, and sea freight. As per estimates by CRISIL Research, this increase in demand can result in a revenue boost of up to US$26.6 billion for transporters alone.

Moreover, with companies looking to expand their operations or shift production bases to India due to its resilient economy amidst global uncertainties, there will be an increase in investment opportunities within the logistics industry as well. This can result in adopting new technology and modernising infrastructure, leading to increased efficiency and capacity building.

The rise of e-commerce has also been a significant driving force behind the growth of India's logistics industry. With more people turning towards online shopping during lockdowns and continued preference post-pandemic, there has been an exponential rise in last-mile delivery services provided by logistics players.

Factors Driving Logistics Sector Growth

The logistics sector in India is a critical backbone of the country's economy, influencing both its domestic performance and its global trade prospects. Several factors are poised to drive the growth of the logistics sector in India in the coming years:

?Government Initiatives and Policy Support: With policies aimed at enhancing efficiency and reducing logistics costs, such as the National Logistics Policy, the sector is poised for transformation and streamlined operations.

?Infrastructure Development: Massive investments in roads, railways, ports, and airports are crucial for reducing transportation times and costs, directly benefiting the logistics industry.

?Technological Advancements: The integration of IoT, AI, blockchain, and analytics is revolutionizing logistics operations, enabling better tracking, forecasting, and inventory management.

?E-commerce Growth: The exponential rise of e-commerce necessitates robust logistics networks for warehousing and last-mile delivery, especially in expanding markets of tier 2 and tier 3 cities.

?Focus on Cold Chain Logistics: The demand for cold chain logistics is surging due to the need for perishable goods, pharmaceuticals, and vaccines. Investments in cold storage facilities and refrigerated transport will support sectors like food processing, agriculture, and healthcare, reflecting a growing emphasis on maintaining the integrity of temperature-sensitive products.

?Increased International Trade: India's strategic position as a trade hub, bolstered by efforts to improve trade relations and logistics infrastructure, offers vast opportunities for the logistics sector. Enhancements in trade facilities and customs processes are vital for facilitating smoother cross-border trade, making India a key player in global logistics networks.

?Sustainability and Green Logistics: Initiatives aimed at environmental sustainability are becoming increasingly important, with a focus on reducing emissions and adopting eco-friendly practices in logistics operations.

Skilled Workforce Development: Investing in training and development for modern logistics management is crucial for enhancing sector efficiency and meeting the evolving demands.

Urbanization and Consumer Demand: Rapid urbanization is driving consumer demand across both urban and rural areas, necessitating efficient logistics solutions to meet the increasing needs. This urban expansion, coupled with a growing middle class, is significantly impacting the logistics sector, requiring adaptive and flexible logistics networks to cater to a broader range of consumer demands.

Challenges Faced by the Logistics Sector

The Indian logistics sector, despite its significant growth potential, faces a variety of challenges that can impede its efficiency and effectiveness. These challenges span across infrastructure, regulatory, operational, and technological domains:

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Infrastructure Deficits: One of the primary challenges is the inadequacy of infrastructure. Congested ports, poor road conditions, and insufficient rail freight capacities lead to delays and increased costs. The lack of quality infrastructure in remote areas further exacerbates the problem, hindering efficient logistics operations.

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Fragmented Industry Structure: The logistics sector in India is highly fragmented, with a large number of small players operating with limited scale and scope. This fragmentation leads to inefficiencies, inconsistent service quality, and difficulty in achieving economies of scale.

Regulatory and Bureaucratic Hurdles: Complex regulations, cumbersome bureaucracy, and multiple checkpoints contribute to significant delays and unpredictability in supply chains. The regulatory environment often involves cumbersome paperwork, unclear tax structures (despite improvements like GST), and varied state and national laws that complicate interstate transportation.

Inadequate Technology Adoption: Compared to global standards, the adoption of technology in India's logistics sector is still in nascent stages. Limited use of modern management information systems, GPS, and automation technologies hampers operational efficiency and transparency.

?Supply Chain Visibility: Limited visibility across the supply chain due to inadequate tracking and monitoring systems leads to inefficiencies in inventory management, forecasting, and demand planning.

?Addressing these challenges requires a concerted effort from both the government and the private sector, including significant investments in infrastructure, regulatory reforms, technology adoption, and workforce development. Overcoming these hurdles is crucial for enhancing the efficiency of the logistics sector and leveraging its full potential to drive economic growth in India.

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Future Outlook of the Logistics Sector

International corporations are increasingly investing in India's logistics infrastructure, leveraging the nation's advantageous geographic location, skilled workforce, and improving business climate.

?The emergence of industrial and logistics parks, along with data centres, marks a significant area of interest in the Indian real estate sector. In 2022, these segments attracted US$ 1.8 billion in Private Equity (PE)/Venture Capital (VC) investments, showing a 29% growth from the previous year.

?Early in 2022, the industry secured investments totalling US$ 1 billion. The average quarterly investment in the logistics and industrial sectors was about 1.3 times higher in 2022 compared to US$ 335.69 million in 2021.

From 2019 to 2022, the warehousing and logistics sector received a total of US$ 5.4 billion in institutional investments, with 2022 alone contributing to a substantial 35% of this figure.

?In terms of institutional real estate investments, warehousing was the second-largest asset class in both 2021 and 2022, representing 27% and 31% of the total, respectively, and surpassing other categories such as residential and retail.

?Throughout the four-year span from 2019 to 2022, the western part of India, particularly Mumbai, Pune, and Becharji (a small town in Gujarat), saw the second-highest level of institutional warehousing investment, making up 35% of the sector's total investments. This underscores the growing investor confidence in the country's Tier II cities.

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Conclusion

The logistics sector in India is vibrant and swiftly expanding, anticipated to become a cornerstone of the national economy. The 8.4% GDP growth of the nation is indicative of strong economic progress and logistics sector will stand to gain considerably from this development. Despite facing certain hurdles, this sector is on a trajectory of sustained growth, offering promising prospects for both investors and enterprises.

The government's commitment to enhancing infrastructure, coupled with the burgeoning e-commerce industry, positions logistics as a pivotal force behind economic development in India.

Additionally, the sector stands to gain from the widespread integration of technology and the government's initiative towards a digital economy. This opens avenues for logistics entities to adopt data analytics, artificial intelligence, and machine learning, aiming to boost operational efficacy and elevate the consumer experience.

Furthermore, the landscape is ripe for international investments as global corporations seek to enter India's flourishing logistics market. In support of this, the Indian government has facilitated foreign participation by permitting 100% foreign direct investment in logistics parks and warehousing, thereby smoothing the path for overseas investors.

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