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India’s 14% Logistics Cost: Just a misinterpretation carved in stone?

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For someone who has been following India’s supply chain industry and its developments closely, saying that India’s logistics cost is considerably high sitting at 14% of GDP, is as effortless as breathing. The high logistics cost and Modi government’s umbrella of initiatives to bring it down to a single number has been a trending topic, both domestic and overseas. But when one comes to think of it, without the veil of any sort of bias, it is not difficult to realise that the coined number of 14% of GDP is an overestimate – arrived at by Armstrong & Associates, using a model built for developed countries. Armstrong & Associates routinely estimates logistics costs as a percentage of GDP for many countries.

The model is based on observed data of economy and infrastructure-related input variables (available from the World Bank database) and output variables (logistics cost as percentage of GDP) of select developed countries. Typically, estimates of output variables of developed countries are available through alternative methods. Input variables for any country can be fed into the aforesaid model to arrive at the tentative logistics cost as a percentage of GDP for that country.

Armstrong & Associates’ model is developed for control countries, which are basically first world economies. And there is a common saying in the global logistics industry – One Size Does Not Fit All.

While it may be an easy way to estimate the figure, and even though the consulting firm is a reliable source; but is the model actually relevant for developing countries, including India?

The said model and report evaluate around 46 elements to arrive at the logistics costs, and some of them may just not be relevant for India as a developing economy. However, the elements of the logistics costs are not explicitly stated, and there is no uniform definition of what should be included in measuring logistics cost.

While there are a handful of ‘core elements’ that are considered while calculating the logistics costs of a country, transportation is the single largest cost element comprising 30-50 per cent of the total logistics cost, depending on transport infrastructure and bottlenecks in last-mile connectivity. India’s official statistics do not report logistics cost, but they do report transportation cost in the computation of Supply Use Table (SUT) of India. According to SUT, which is for 2018-19, the transportation cost amounted to 4.7% of that year’s GDP.

Isn’t it incredible how the numbers differ – with one side taken by a renowned multinational consulting firm and the other by India’s ‘official statistics’. The NCAER study of India’s logistics cost comes up with a similar figure, post-introduction of GST.

Double-digit logistics cost in India is an unverified figure. Logistics bodies can use it for their lobbying exercises. From the business planning point, the variability in consignment movement time is more important, which one hopes will reduce with the adoption of the National Logistics Policy.

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