Robust outlook for logistics demand growth

The last financial year was a moderate one for the Indian logistics sector. Growth of domestic transportation was in single digit, while cross border segment faced challenges due to correction in freight rates and geopolitical disturbance. There was little good news from the warehousing and logistics infrastructure segment in terms of growth rate. The best part for the sector was a strong push from the Government for enabling an ecosystem of efficient logistics and supply chain in the country by way of Gati Shakti NMP and the National Logistics Policy.

The logistics sector’s growth has a positive correlation with the economic growth of the country. India is a fast-growing large economy and as per a UN report, Indian GDP is expected to grow at 6.7% YOY in the calendar year 2024.

Normally GDP has three sectoral components as industry, services, and agriculture. In India, the service sector enjoys the largest, and agriculture has the lowest share in the gross value added of the economy. Out of these three sectors, manufacturing and agriculture have a direct impact on logistics activities due to the physical movement of goods, while the third component of services has a lesser and indirect impact. Agriculture is expected to keep a similar pace of low single-digit growth with few ups and down and will make no major impact on logistics trends. So, industrial activity becomes prominent in driving logistics growth.

Even within the industry segment in GDP, manufacturing and industrial production trends moves closer to logistics trends. On analysing the last eight quarters’ growth trends of manufacturing, we find that the annual growth rate was tapering till a few months back. The growth rate data of the first quarter of each financial year is high only due to the low base figures on account of COVID impact in Q1 of FY21, while these figures are not high in absolute numbers compared to the preceding and subsequent quarters. Manufacturing recovery is clearly visible from the last quarter of FY23 and is likely to continue in FY24. This trend of improvement in manufacturing and industrial activities indicates a healthy sign for logistics sector growth in the short to mid-term.

Another major factor, which has a direct link to the movement of goods is linked to consumption or purchasing power of individuals. High inflation reduces the purchasing power of consumers, especially in an economy where more than 90% population lies in the middle-and lower-income group.

In the last financial year, India faced a high inflation rate compared to preceding years, although it was much lesser than many of our neighboring countries. But the impact of high inflation was clearly visible in consumption patterns and subsequently in other related activities.

Last year e-commerce industry registered a sharp dip in growth rate and according to a few experts’ inflation was one of the reasons for that. The last four months have registered a continuous dip in inflation and it has come down to 4.2% in the month of May 2023.

On the other hand, Consumer Confidence Index, an index measuring optimism and pessimism among consumers regarding the future financial situation, is showing signs of improvement. As per the data released by the Reserve Bank of India, CCI is continuously improving month over month since the last financial year. Nielson IQ has also reported positive growth in consumer goods consumption in rural India in March, after a gap of more than a year. As a whole, Low inflation and a high consumer confidence index indicate an improved consumption outlook leading to more logistics requirements.      

On the business-to-business front, Purchasing Managers’ Index (PMI) is an index of business activities for the direction of the manufacturing and service sectors.  It’s a monthly survey of supply chain managers covering five major areas of new orders, inventory, production, deliveries from suppliers, and employment. Manufacturing PMI for the month of June 2023 is at 58.7, which is the second highest in the last 10 years. This trend clearly indicates a very strong outlook for the manufacturing sector.

The government’s thrust to improve Make in India is also moving in a positive direction and it’s resulting positively for the logistics sector as well. Under the Production Linked Incentive (PLI scheme), 733 applications have been approved in 14 Sectors with an expected investment of INR 3.65 Lakh Crore to date, while an investment of INR 62,500 Crore has been realized till March 2023. The data clearly shows a strong investment pipeline in manufacturing activity. Such a strong manufacturing base will create headroom for the growth of logistics. 

On logistics cost drivers, the price of oil is the most prominent factor and recent trends are showing stability on that front. Global crude oil prices are also hovering within the range of USD 70 to USD 80 per barrel without any sharp change in the last few months, in spite of production cut by OPEC and geopolitical turbulence. Going forward no major rise in crude oil is expected, which is a positive sign for the logistics sector. As per U.S. Energy Information Administration crude oil spot price will average USD 79 per barrel in the second half of 2023 and USD 84 per barrel in 2024. Diesel consumption crossed 8 Mn Metric Tonnes in May 2023, which clearly indicates an upward turn in economic and transportation activities. This trend is likely to continue in the coming quarters.   

Apart from macro indicator about robust growth of logistics, recent data of e-waybill and air cargo lodgement is also indicating strong growth in logistics activities after an intermediate period of relatively lower growth, especially in H2 of FY 23

E-waybill generation has registered a sharp jump from March 2023 onwards. Prior to March e-way bill numbers were hovering in the range of 7.4 Cr to 8.4 Cr range. It jumped to the next level of 9 Cr and maintained the momentum even in subsequent months.

Along with e-waybill fast tag toll volumes registered the sharpest growth of 10% month over month in May 23 with 335 Mn transactions. Fasttag transaction volumes almost stagnated in H2 of the last financial year. Air Cargo volume also had a sluggish H2 except for the month of March. The second half of FY 23 registered no growth in air cargo lodgement volumes, but from March onwards scenario has changed completely and showing positive trends. Even part-load transportation and Express logistics registered weak growth in H2, but in recent months this growth rate has again touched the double-digit mark.

Cross-border merchandise trade is an area of concern for logistics growth in the short term. It has registered YOY degrowth in the last four months continuously. The dip is largely attributed to global factors like economic slowdown in West and inflation. The decline in EXIM volume and sharp correction in freight rate will exert pressure on cross-border logistics.    

Based on macro indicators and recent trends in the sector, the growth outlook is quite robust and positive for the remaining quarters of FY24. With the strong growth, competition within the sector will sharpen, technology adaptation will move to the next level and last but not least sector may once again attract good investment.

This article has been penned by Mr. Vikash Khatri, Founder of Aviral Consulting. 

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