We are passing through a global crisis of COVID-19, which has had a phenomenal impact on both humanity and the economy. Most of the governments are in a dilemma of “Lives Vs Livelihood”. Efforts are on at a war-footing level to develop a vaccine for COVID-19, but any launch of the vaccine will take a minimum of three to four more months. Till then, we will have to live with certain restrictions and follow strict measures of social distancing. These restrictions will, however, not bring the economy back on the normal track.
A mixed growth outlook with 12% YOY degrowth of the logistics sector
Economic activities have a direct correlation with logistics; any negative trend in the economy will result more negatively on the logistics sector. In FY 2020, growth of the logistics sector has witnessed tapered growth compared to the previous few years. The crisis of the pandemic is going to make the situation more critical in FY 2021. With respect to immediate term impact on logistics, it will be very severe and may force closure of small logistics companies, while in the long term this crisis may turn in opportunity for the Indian logistics sector. As per our estimates, the logistics sector is estimated to shrink by 12-13% in this financial year.
Immediate term Impact
First month of the current financial year has already passed without much economic activities. The complete supply chain of non-essential consumer goods (lifestyle, apparel, footwear, automobile, electronics etc.) is on pause. Out of the total domestic transportation, 30% is contributed by rail movement, which carries a large chunk of core industrial products like steel, coal, cement or commodities. But the movement of these products is also down due to lower commercial activities. Cement and steel consumption has been severely hit due to a blanket ban on construction activities and non-availability of labour workforce. Even coal and petroleum have witnessed a significant volume drop in April.
In spite of certain relaxation from 20th April, there is no quantum jump in cargo movement. In the second month of FY 21, the scenario is not expected to change much all a sudden, although the Government plans on restarting economic activities by giving some relaxation.
The coronavirus spread has not peaked so far in India. However, the number of cases is still increasing day by day. Unless the COVID-19 cases start coming down, we don’t expect any significant improvement in logistics activities. In spite of lockdown relaxation, economic and logistics activities are expected to be limited in the first quarter.
Short term Impact
Even in the second quarter of the current financial year, economic activities will not be in full swing. Major drivers for suppressed activities will be the availability of finance and labours. SME sector will be most impacted from such factors. On the other hand, consumer spending will also not grow all of a sudden in the post-pandemic period. Even on the international trade front, the trends are expected to be similar, as most of the global economic activities will be in the recovery phase. If at all, consumer demand may see a recovery during the festive season in Q3. In the current financial year, capital expenditure and government spending on infrastructure projects will not be the same as in previous years and will lead to reduced logistics spend.
Long term Impact
Long term view on logistics is, however, quite optimistic. Current pandemic will lead to a shift in global manufacturing locations. China may be the biggest loser in the race and the most likely gainer could be India, Indonesia, Malaysia, Philippines and Vietnam. India developing as one of the major manufacturing destinations will be a terrific boost for the logistics sector. Also in the long run, other drivers of logistics linked to domestic consumption will be back to the normal pace of growth.
On the human logistics front, this crisis is going to impact negatively in long run as well. Business travels contributes a significant share in people logistics. Concepts like digital connect, work from home and virtual conferences are gaining popularity and have become the new norms of business. This change in behavior will be irreversible, as the new practice saves time and money both.
This article has been authored by Vikash Khatri, Founder, Aviral Consulting. He can be contacted at [email protected]