Government aim for an ambitious target to slash logistics costs to 8% of GDP

Concerned with the nation’s elevated logistics costs which are long blamed for eroding its export competitiveness, the government is likely to set a more ambitious target to reduce the elevated logistics costs, as it inches closer to finalizing a national logistics policy.

The government will likely set a target to reduce logistics costs by as much as five percentage points over the next four-five years to about 8% of gross domestic product (GDP). An earlier draft of the national logistics policy, firmed up in 2019, had aimed to reduce such costs to 10% of GDP.

A key thrust of the new policy is to ease various processes and link government initiatives. Towards this goal, the commerce ministry will raise engagement with all states and Union territories to help them improve the overall logistics ecosystem. Synergies flowing from such a coordinated approach will reduce logistics costs, which, in turn, will act as stimulants to the PM Gati Shakti National Master plan.

If the latest target is achieved, it will catapult India to the league of developed nations where the logistics costs are around 8-10% of their GDP. The current logistics cost in India, however, is in sync with that in many other developing nations.

The involvement of more than 20 government agencies under various ministries, 40 partnering government agencies, and 37 export promotion councils dealing with 500 certifications covering 10,000 commodities make the Indian Logistics sector complex.

The renewed thrust on reducing logistics costs assumes significance as the country aims to substantially raise its merchandise exports to $1 trillion by FY28 from $422 billion in FY22. According to a 2016 HSBC report, domestic bottlenecks, including high logistics costs, accounted for half of the slowdown in exports.

Economic Survey 2017-18 revealed that a 10% decrease in indirect logistics costs could lead to export growth of 5-8%. It had predicted that the Indian logistics market would be around $215 billion by 2020.
Apart from the move to cut a complex maze of trade documentation and other initiatives in recent years, some relief on the logistics front has come after the stabilization of the goods and services tax regime.

Along with cutting complexities generated by a multitude of indirect taxes that slowed trade, it has also benefitted the logistics sector by facilitating faster conversion of informal logistics set-ups to formal ones and increasing the speed of movement of freight at inter-state borders due to the dismantling of check posts.

‘Trading across the border’ (in which logistics play a key role) was one of three parameters where India’s rank has improved in recent years in the World Bank’s ease of doing business index. From 143rd in 2015, the country’s rank improved to 68th in the 2020 report. This still trailed its rank of 63 in the overall doing business index.

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