Business Banking

Your Partner In Growth

Logistics and infrastructure

Exploring opportunities
Contents

1. Executive summary 3

2. Macro-economic overview 6
2.1. Indian economy - Impact of global economic decline 6
2.2. The way ahead for Indian economy 10
2.3. Interlinking sustainable economic growth with logistics 10
2.4. The logistics cost factor 12

3. Logistics industry overview 13

3.1. Evolution of the global logistics industry 13
3.2. Opportunity indicators for global logistics sector 14
3.3. The Indian logistics sector 16
3.4. Significance of SMEs in the Indian logistics industry 23

4. SMEs in logistics: Succeeding in the market place 24

4.1. Competitiveness of SMEs in logistics 24
4.2. Assessment of challenges – internal & external 31
4.3. S-W-O-T Analysis 31

5. Transport infrastructure 33
5.1. Transport infrastructure performance 33
5.2. Railways 34
5.3. Roads 36
5.4. Ports 38
5.5. Airports 41
5.6. Infrastructure finance 44
5.7. The PPP approach 45

6. Conclusions 46

Abbreviations 48

Bibliography 49
1. Executive summary
Macro-economic outlook
Contrary to the much talked about theory of
‘decoupling hypothesis’ which held that emerging
economies will remain relatively unaffected by the
downturn due to their substantial foreign exchange
reserves, improved policy framework, etc emerging
economies too have been hit by the crisis and India is no
exception. However the Indian economy has fared much
better than most of its Asian peers in the face of the
global economic recession. The real GDP grew by 6.7
per cent in 2008/09, and expects a revival in the latter
part of 2009. Although domestic demand, the mainstay
of the economy, has held up relatively well, there are
signs that the worst might not be over yet .
History has shown that export-led growth is a crucial
component of sustainable economic growth. There
are many enablers of export oriented economic
growth including facilitating regulatory environment,
establishing export oriented zones like SEZs, elimination
of administrative barriers to FDI in export-oriented
sectors etc. However the most important enabler is the
improvement in transportation infrastructure (mainly
ports, roads, airports and railways), telecommunications
and power. Government incentives aimed at promoting
economic growth can make areas such as infrastructure
i.e., development of Greenfield ports, airports, road,
and rail logistics attractive for private investment. This
helps capacity augmentation and thereby encourages
industrial production. In addition, logistics cost is an
important factor that affects the competitiveness of
nations as well as firms. The logistics cost is considerably
high in India (around 13-14 per cent of GDP ) than
developed world regions like U.S (9.5 per cent) & Europe
(7.15 per cent). The comparatively high logistics cost
can be attributed to factors such as a complicated tax
regime, fragmented market structure and inadequate
infrastructure.
Logistics industry overview
The reduction in the logistics cost can be brought about
by improving the national logistics infrastructure to
facilitate smooth transfer of materials and information.
Simultaneously, at the micro level, the logistics service
providers need to infuse better management practices,
employ technology that facilitates its logistics process to
reduce its service cost.
As the logistics services industry evolves, competitors are
moving away from asset-based commoditized services
to more strategic, information-based approaches.
Customers are demanding a “single point of contact”
for all logistics services. In one of the global logistics
study conducted by Deloitte, a set of attributes was
developed to identify high opportunity industries
with diverse but complementary product flows for
the logistics outsourcing industry. The attributes were
formulated based on the requirements of the various
aspects of supply chain planning and implementation
including design, implementation and management of
logistics services. Some of the attributes of industries
researched that would offer the highest opportunity /
best fit for logistics service provider include -.
• Large logistics spend
• Relatively high value products
• Manage across multiple modes
• Manage complex, time sensitive supply chains
• Diverse supply chain footprints including their own
operations, suppliers and customers
• Maturity in outsourcing cycle (currently managing
3PLs)
• Decentralized management of logistics
• Complementary to current base of 4PL business
• High cube and high weight products
Competitiveness of SMEs in logistics
The contribution of SMEs to the nation’s economic
growth is by no means small. As globalization and
technological change reduce the importance of
economies of scale in many activities, the potential
contribution of smaller firms is enhanced and logistics
SMEs are no exception. Today, despite facing regional,
geographical and legislative diversity, the Indian logistics
SMEs reverberate sound local dynamics, assurance of
a personal service and the emergence of a new genre
of integrated solution providers. Since the Small &
Medium Enterprises constitute a significant percentage
of the logistics service providers, it would not be
inappropriate to mention that these SMEs would be
acting as the catalyst in reducing the national logistics
cost component.
3
Deloitte’s survey of Small & Medium logistics players
aimed at bringing to the fore, developments in the
Indian logistics space and more importantly the broad
level challenges that the industry is currently facing,
particularly from the perspective of a Logistics Service
Provider (LSP). The survey covered players across a
wide spectrum of logistics segments such as freight
forwarding, shipping, customs booking, container
freight stations, warehousing, and multi-modal
transportation & thus aimed at offering them a platform
to share their varied concerns.
The analysis of industry’s internal factors suggests that
moving to higher value added services is perceived as
the biggest growth opportunity by the Indian LSPs.
Besides, in a situation like today’s, optimizing operations
is viewed as the best means of surviving in business and
competing effectively. In a way, this would also assist
the individual players in accumulating sufficient profits
to be ploughed back in business, as a means to tide over
the problem of limited access to affordable credit. The
trend of consolidations by way of mergers and forging
alliances with other players is fast picking up in the
logistics community and would address the fragmented
nature of industry. Given these opportunity areas, a
focused training approach and extensive implementation
of advanced technologies could boost the international
competitiveness of Indian LSPs.
Other logistics cost inflators are variable vessel
charter costs, fluctuating fuel prices, exchange rates,
non-availability of return loads and high haulage rates.
Further, the LSPs are typically resorting to initiatives
like negotiating and renegotiating contracts, load
optimization, efficient route scheduling, working capital
management and inventory cost control among others,
to overcome the burgeoning logistics cost. While
a likely boom in construction and pharmaceuticals
spell opportunities for the logistics sector in terms
of increased potential of multi-modal movement of
raw material & manufactured products, progressive
reforms such as introduction of a singular Goods
and Service Tax (GST) and the Government’s push to
infrastructure expansion are equally encouraging. On
the other hand, major threat is posed by competition
4
from large foreign players and price sensitive nature
of Indian markets. There is yet another impediment,
although short term, i.e., the impact of slowdown
in terms of decline in international trade. This can
be curtailed by concentrating on domestic markets,
which are still quite promising. On the external front,
infrastructure and regulatory bottlenecks are the prime
cause of transportation delays and cost overruns, which
consequently hamper the quality of logistics services.
Transportation infrastructure outlook
The 11th five year plan Approach Paper calls for the
investment to increase from a current level of 4.6 per
cent of GDP, to between 7 & 8 per cent. The Capsule
Report on Infrastructure sector performance by Ministry
of Statistics and Program Implementation, the year on
year rate of growth in cargo traffic has considerably
declined in FY 2008-09. The freight loading for Indian
railways for 2008-09 of 833 million tonne did not meet
the target of 850 million tonnes. The Railway Ministry
has outlined many measures to generate revenues
from non-traditional sources to bolster the railways’
balance sheet. The Railways are also working out the
details of a premium service for movement of containers
with assured transit periods for time-sensitive cargo.
Permission has also been provided in the recent budget
to container train operators to access private sidings
to help attract piecemeal traffic that are at present not
being carried by railways. Further, the railways is also
expected to unlock its land resources by holding an
auction for private real estate developers to build malls,
cineplexes and shopping arcades.
The major ports in the country handled 530.35 million
tonnes of cargo during 2008 – 2009, which was 7.9
per cent lower than the target set for the period and
around 2.1 per cent more than that the traffic of 519.31
million tonnes for the previous year. There has been a
drastic decline in augmented capacities at major ports
during the last four years. In addition, lack of proper
facilities, deeper drafts, good connectivity and necessary
equipment / technology has contributed to high logistics
costs. On the positive side, with the Government
encouraging private participation in port development,
non-major ports have begun contributing significantly
to the economy. The new Government’s ambitious
agenda to award 6 concessions for ports and initiate for
20 others through PPP totaling to more than Rs. 3300
crore, within a span of 3 months, is being regarded
as a welcome move. While there are a lot of new
avenues in aerospace services in the coming decades,
the constraints associated need to be addressed to
enable the smooth growth of the sector. Some of the
issues faced by the sector include mounting losses of
the airlines, volatile aviation fuel prices, congestion at
airports, shortage of qualified technical manpower,
upgradation of security, land acquisition, high taxation,
high airport charges etc. Indian aviation space
offers promising opportunities in the areas of airport
infrastructure, airport and ground support equipment,
MRO facilities, ground handling services, trained
manpower, air cargo along with tapping the potential
stream of non aeronautical revenues.
It has been established that spending in road sector has
a multiplier effect in terms of job creation and increase
in per capita income. Hence any spending, whether
by government or by a private partner, definitely helps
in economic stimulus. Accordingly the government
plans to invest around Rs 1,00,000 crore to build about
12,000 kms of roads for the F.Y 2009-10 mainly through
the toll-based model, with options to bring in foreign
investors. Infrastructure projects being capital intensive,
with long gestation periods; the Financial Institutes (FIs)
and the banks need to create new structures to facilitate
the funding. New ways of structuring like take-out
financing, roll over financing, put-call options, hedging
/ swapping of exchange / interest rate risks etc are also
being offered for funding of long gestation projects.
The user’s willingness to pay for the services availed
affects the cash flow. The strength and experience of
the promoters, concession framework, tax benefits to
the project, inputs / off-take arrangements add to the
bankability of the project.
Public Private Partnership (PPP) offers a distinct possibility
for increasing total investments by using a limited
amount of public resources to leverage a much larger
amount of private investment. Given the bottlenecks
and inefficiencies often encountered in public
infrastructural investment, such PPPs could also increase
economic efficiency and lower the capital requirement,
provided that regulatory mechanisms are adequate.
Conclusions
Globalization, consolidation, technology advancements
and outsourcing have only led to growth in the logistics
services market and this industry will continue to evolve
in the coming years. Firms can enhance their market
competitiveness by reducing their logistics costs, thus
lowering the total costs of goods and services. Any
impetus to improve the competitiveness of the firms
at the national platform would enable the nation to
register a dynamic economic performance in a global
environment. India has got a huge opportunity of
reducing its national logistics cost by studying and
benefiting from other success stories. This would include
upgrading the macro logistics infrastructure to world
class standards and by providing a facilitative role to
the SME players in the logistics sector to improve their
service level competitiveness. The effect of the referred
improvement would substantially provide a ripple
effect in the larger canvas of the country’s logistics
development thereby acting as a catalyst in reducing
the national logistics cost.
5
2. Macro-economic overview

2.1 Indian economy - Impact of global economic
decline
Many investors living today have never really had to
weather really tough financial times. It is difficult to
meet someone who was old enough during the Great
Depression to recall how tough that was, especially on
investors. Although there have been recessions since,
none has been of such a disturbing magnitude as the
current crisis. The current crisis is unique not only in its
severity and its projected length, but in how far-reaching
its effects will be felt worldwide. Contrary to the much
talked about theory of ‘decoupling hypothesis’ which
held that emerging economies will remain relatively
as against US $ 251.7 billion in 2007-08, registering
a growth of 14.3 per cent in dollar terms. It is
being increasingly felt that unless we take some
fundamental steps to diversify India’s export basket,
most fiscal incentives may only benefit the profitability
of the few exporters in the short term and not give
a big thrust to the overall export performance of the
country.
India’s EXIM trade trends in billion US $
$ bn
300

unaffected by the downturn due to their substantial

foreign exchange reserves, improved policy framework, 250

and robust corporate balance sheets, emerging

economies too have been hit by the crisis and India is no 180

exception.
120

The extent to which Indian economy is affected can be

60
assessed by gauging the magnitude of changes in the
following key parameters:
0
2003-04 2004-05 2005-06 2006-07 2007-08 2008-09
• Trade Deficit: As the global economy shrank, so
did the growth in India’s external trade. The dismal Export Imports
industrial growth was partly caused by a weak
external demand. Further, a flare up in petroleum Source : Directorate General of Foreign Trade

prices in 2008 led to a sharp rise in import bill,

thereby adding to the trade deficit. India’s cumulative
value of exports for the period 2008-09 was US $
168.7 billion as against US $ 163.1 billion in 2007-08,
thereby registering a growth of 3.4 per cent in dollar
terms. On the other hand, the country’s cumulative
value of imports for 2008-09 was US $ 287.8 billion

A flare up in petroleum prices in 2008 led to

a sharp rise in import bill, thereby adding to
the amount of net imports

6
• Fiscal deficit: Fiscal deficit is an economic
phenomenon, where the Government’s total
expenditure surpasses the total receipts (excluding
borrowing). It signals the government about the
total borrowing requirements from all sources.
India’s combined fiscal deficit of the Centre and the
states at close to 9.5 per cent of GDP in 2008-09
is among the highest in the world. It has risen
by almost 4 per cent points in a span of just one
year (i.e., 2008-09 vis-à-vis 2007-08). The change
in economic environment between 2007-08 and
2008-09 and corresponding fiscal stimulus packages
by the Government during this period to deal with
the economic slowdown has contributed to widening
of this deficit. To add to this, the Finance Minister, as
expected, has announced a budget keeping the “Aam
Aadmi” in mind.
Combined fiscal deficit (as a % of GDP)
10%
8%
6%
4%
2%
0%
2005-06 2006-07 2007-08 2008-09
Source : Ministry of Finance, GOI
India’s combined fiscal deficit of the Centre
and the states at close to 10 per cent of GDP
in 2008-09 is among the highest in the world
A number of social sector projects have been
announced which, while benefiting employment
creation and infrastructure development, will further
worsen the state of the fiscal balances. Furthermore,
economists are of the view that the centre’s gross
fiscal deficit in 2009-10 is likely to over-shoot the
budgeted estimate of 5.5 per cent on account of an
increase in expenditure and slow pace of increase
in tax revenue. According to some policy makers,
following an aggressive disinvestment policy can help
the Government mobilize enough proceeds to contain
the country’s fiscal deficit.
• Industrial Production: Close on the heels of global
cues, India’s industrial production rose by 2.6 per
cent in 2008-09, down from 8.5 per cent in 2007-08.
It fell by 0.75 per cent year on year in March 2009.
Manufacturing output also dropped by 1.4per cent
year on year to Rs.1.25 trillion in January-March 2009,
after rising by just 0.9 per cent in the fourth quarter
of 2008. In contrast, the month of April witnessed
a rise in industrial production by 1.4 per cent from
a year earlier. This happened for the first time after
three consecutive declines over the trailing four
months. The corresponding manufacturing output for
April also recorded a rise of 0.7 per cent from a year
earlier. This upside can be attributed to improvement
in domestic demand. However, some economists
relate this to election spending by way of increased
construction and electricity production over recent
months. If this is true, then the pick-up in growth may
be just a temporary phenomenon.
7
 • Inflation: Consumer Price Index (CPI) - based
inflation tracks the year-on-year rise in prices paid
by consumers to retailers. Typically, high liquidity
injection by the RBI to tackle the effects of global
turmoil, rising food prices, and the increase in oil
Notwithstanding the earlier, the Indian economy has
fared much better than most of its Asian peers in the
face of the global economic recession.
Percentage Y-o-Y GDP change

and commodity prices have contributed to a high

CPI-based inflation. Vietnam

Thailand
Consumer price inflation (average %)

Malaysia
10

Indonesia
8
India

6 China

Singapore

4
Korea

Hong Kong
2

Japan

2004 2005 2006 2007 2008 2009 2010 -10 -5 0 5 10

World Asia (excl Japan) India 2010 2009

Source : Economist Intelligence Unit Estimates Source : IMF, WEO database

Consumer price inflation only marginally slowed
and stood at 9.6 per cent year on year in February.
According to recent data, it is now ruling around 8 per
cent. Although this is expected to average around 6
per cent in 2009 and 4.7 per cent in 2010, it will be
significantly above the Asian & world averages.
The slowdown in India’s economy is not only due to
the impact of the global recession, but also the bursting
of a real estate bubble following an unprecedented
economic boom between 2003/04 and 2007/08.
It grew more than expected in the quarter ended March
2009, boosting the confidence of both the corporate
sector and the newly formed government. This reiterates
the belief that the Indian growth story remains and is
still by & large domestic driven. A spending spree by
the government and robust growth in agriculture and
services industries helped the economy grow 5.8 per
cent year-on-year in the quarter ended March 2009.
The real GDP grew by 6.7 per cent in 2008/09, and
expects a revival in the latter part of 2009.

8
Real GDP growth (% change)

10

-2

-6

2004 2005 2006 2007 2008 2009 2010

World Asia (excl Japan) India

Source : Economist Intelligence Unit Estimates

Quarterly estimates of GDP for 2008-09 (at 1999-2000 prices) % chg

Industry Q1 Q2 Q3 Q4

Agriculture 3.0 2.7 -0.8 2.7

Mining & quarrying 4.6 3.7 4.9 1.6

Manufacturing 5.5 5.1 0.9 1.4

Electricity 2.7 3.8 3.5 3.6

Construction 8.4 9.6 4.2 6.8

Trade, transport, comm. 13.0 12.1 5.9 6.3

Finance, insurance 6.9 6.4 8.3 9.5

Community 8.2 9.0 22.5 12.5

GDP at factor cost 7.8 7.7 5.8 5.8

Source : Ministry of Finance, GoI

The real GDP grew by 6.7 per cent in 2008/09,

and expects a revival in the latter part of 2009

9
2.2 The way ahead for the Indian economy
India’s relatively less dependence on merchandise
exports, its smooth functioning financial system, and
comfortable forex reserves are believed to aid swift
recovery from the slowdown. Although domestic
demand, the mainstay of the economy, has held up
relatively well, there are signs that the worst might not
be over yet. Forecasts by the Organization for Economic
Co-operation and Development (OECD), the Asian
Development Bank (ADB) and the Economist Intelligence
Unit for the current year are markedly more pessimistic
than the government’s. The OECD projects a further
deceleration in 2009 as a whole, to 5.9 per cent. The
ADB also forecasts that growth will slow again this year,
to 5 per cent.
Neither organization expects economic activity to
bounce back until mid-2010. Looking at a broader
time frame, India’s economic think tank Centre for
Monitoring Indian Economy (CMIE) predicts a 5.8 per
cent growth in 2009-10 and expects that economy
will bounce back to 9 per cent growth by 2011, when
impact of poor exports demand would be overcome.
World Bank’s recent projections of an 8 per cent growth
for India in 2010, ahead of China’s expected growth of
7.7 per cent further add to this optimism.
The new government already has its task cut out. On
an optimistic note, the industry anticipates a growth
rate of around 6 per cent in the current fiscal, and with
the government keen on introducing reforms in its first
few months in office, the situation can get even better.
The challenge before the new government is to initiate
measures aimed at bringing about fiscal consolidation
within a reasonable span of time. With the revenue
growth expected to decline significantly, the only way
to bring down the revenue and fiscal deficit would be to
drastically cut down the subsidies, particularly non-merit
subsidies that never reach the intended target groups
or the poorer sections. It will also be necessary to curtail
wasteful expenditure in several areas.
10
The government should also induce some of the
better-performing PSUs, particularly those engaged in
infrastructure, such as power, transport, construction,
etc., to expand and speed up their investment
programmes. Finding resources for infrastructure
development and speeding up investment in this sector
should receive top priority, for, as the World Bank has
observed, infrastructure is a key factor in improving the
lifestyles of the masses and addressing the pressing issue
of poverty.
2.3 Interlinking sustainable economic growth
with logistics
Typically, export-led growth has been a crucial
component of sustainable economic growth. There
are many enablers of export oriented economic
growth including facilitating regulatory environment,
establishing export oriented zones like SEZs, elimination
of administrative barriers to FDI in export-oriented
sectors etc. However the most important enabler is
the improvement in transportation infrastructure,
telecommunications and power. A booming economy
generates higher purchasing power, which in turn
accelerates domestic demand. This leads to an increase
in production as well as EXIM trade, which necessitates
increase in need for cargo movement both locally as
well as internationally .
Government incentives aimed at promoting economic
growth can make areas such as infrastructure i.e.,
development of Greenfield ports, airports, road, and
rail logistics attractive for private investment. This
helps capacity augmentation and thereby encourages
industrial production.
Although several headways have been made in
the infrastructure sector over the last few years,
shortcomings still exist in almost all the segments, be
it highways, railways, ports or airports. Infrastructure
developments like the railway dedicated freight
corridors, road development projects and
modernization of over 37 operational airports will
increase India’s handling capacities, thereby enhancing
logistical performance.
Transportation infrastructure – Deficit, eleventh plan targets, & permissible FDI
Sector Deficit
Roads / highways 65,590 km of existing national
highways:
• Comprise only 2% of network
• Carry 40% of traffic
• Of which 12% is 4-laned; 50%
is 2-laned; and 38% is single
laned
Ports Inadequacy of
• Berths
• Rail / road connectivity
Airports Inadequacy of
• Runways
• Aircraft handling capacity
• Parking space and terminal
buildings
Railways • Old technology
• Saturated routes
• Slow speeds (freight: avg
22kmph; passengers: avg
50kmph)
• Low payload to tare ratio (2.5)
Source: Planning Commission, IBEF
A snapshot of the Eleventh Five Year Plan for the various
categories of logistics infrastructure is indicated in the
table below. However, with a mid-term review of the
plan in face of the slowdown, there is a likelihood
of these targets being softened. But again, with
infrastructure being the key to sustaining the nation’s
growth, it will be left to policymakers’ domain to
strike a balance between review of growth targets and
infrastructure development.
Eleventh plan targets FDI Envisaged
investment size
• 6-lane 6,500 km in GQ 100 % FDI under automatic route US$ 78.5bn
• 4-lane 6,736 km NS-EW
• 4-lane 20,000 km
• 2-lane 20,000 km
• 1,000 km expressway
New capacity: 100 % FDI under automatic route US$ 22 bn
• 485 million MT in major
ports
• 345 million MT in minor
ports
• Modernize 4 metro and 35 • 100% FDI for existing airports US$ 7.74 bn
non-metro airports (FIPB approval for FDI beyond
• 3 greenfield in North Eastern 74%)
Region (NER) • 100% FDI under automatic
• 7 other greenfield airports route for greenfield airports
• 49% FDI is permissible in
domestic airlines under the
automatic route, but not by
foreign airline companies
• 8132 km new rail 100% FDI permitted in railway US$ 65.45 bn
• 7148 km gauge conversion infrastructure under automatic
• Modernize 22 stations route
• Dedicated freight corridors
11
2.4 The logistics cost factor
Logistics cost is an important factor that affects the
competitiveness of nations as well as firms. However, it
is considerably high in India than first world regions like
U.S. & Europe, thus affecting the cost competitiveness
of India’s exports. It is estimated that transportation and
warehousing costs constitute a major chunk i.e., around
60 per cent of the logistics cost. In India, the logistics
cost is expected to be around 13-14 per cent of GDP as
against the US (9.5 per cent) and Europe (7.15 per cent).

At present, the Indian logistics sector is very fragmented.

Despite being a major contributor to the nation’s
economic development, it is still not awarded the
much needed status of an independent sector so
as to warrant an exclusive budgetary allocation and
corresponding focus on development. The major players
can be broadly categorized as pure transport providers,
transporters providing certain value added services such
as warehousing, and completely integrated players
providing 3PL services. The major elements of logistics
costs for Indian Industries include transportation,
warehousing, inventory management and other value-
added services such as packaging. The comparatively
high logistics cost can be attributed to factors such as
a complicated tax regime, fragmented market structure
and inadequate infrastructure.

While several factors like these go against India’s

logistics industry, there are indeed many growth factors
and opportunities enumerated in the subsequent
sections that suggest its steady transformation.
3. Logistics industry overview
Logistics has always been a central and essential feature
of all economic activity. Despite this importance, there
is a long history of organizations paying little attention
to their logistics. They traditionally concentrated their
efforts into manufacturing products and considered the
movement and storage of materials as an
uninteresting errand that formed part of the
overheads of doing business.
However, over the years, the status of logistics has
continued to improve, primarily due to recognition by
the organizations of the following critical factors:
• Appreciation of high logistics cost and opportunities
for major savings
• Increasing competition for both users and providers of
logistics, who have to continually improve operations
to remain competitive
• New types of operations, which can force changes
to logistics – such as just-in-time, total quality
management, flexible operations, time
compression etc.
• Need for improved technology for identifying,
locating and tracking materials
Recession in many markets, combined with new
sources of competition, has raised the consciousness of
customers towards value of service delivered to them
by their service providers. Accordingly, the logistics
industry has consciously strived to be at the focal point
of strategy formulation and operational excellence
to continue in its endeavour for providing maximum
contribution in value creation.
3.1 Evolution of the global logistics industry
Globalization, consolidation, technology advancements
and outsourcing have led to growth in the logistics
services market. The capabilities of logistics service
providers are growing along with the changing
expectations of their clients. As the logistics services
industry evolves, competitors are moving away from
asset-based commoditized services to more strategic,
information-based approaches.
Evolution of the logistics model
5PL (electronic co-ordination of
supply-chain-information ownership)
Increased information intensity
Reduced asset intensity
4PL (SCM limited asset provision)
3PL (Supply chain expertise
with some asset provision)
2PL (pre-dominatly
asset provision)
Source : Deloitte Research
Customers are demanding a “single point of contact”
for all logistics services and are looking for “one-stop
logistics shopping” unable to cope with complexities
across their supply chains. The models in logistics
industry have accordingly evolved over time to address
the changing needs of the market and vary based on
scope of service offerings, degree of collaboration, levels
of asset intensity and IT capabilities across the supply
chain. The logistics model has been evolving from a
specialized function to fourth party Logistics (4PL) and
fifth Party Logistics (5PL) companies .
First and Second Party Logistics handle all logistics
functions, such as trucking and warehousing, which
face low returns and high levels of asset intensity but
low barriers to entry. With the increasing need for
“one-stop solutions”, many 2PL have evolved into 3PL
by adding new logistics capabilities and integrating their
operations. They are asset light and usually tend to have
high returns; they contact most of their capacity needs
to 2PLs. While the 2PL puts in hard cash tangible asset,
the 3PL puts in intellectual property.
Fourth party logistics is an integrator that assembles
the resources, capabilities, and technology of its own
organization and other organizations to design, build
and run comprehensive supply chain solutions. The
figure below illustrates the gamut of services that a 4PL
provider will offer.
13
 4PL Provider managed services

4PL

Order to deliver supply chain services

Transition & support services

Provider managed services

3PL provided services Distribution operations Claims management

Carrier services Transportation routing Freight pay and audit

and scheduling

Forwarder services Transportation execution Trade management

Brokerage services Warehouse management Others

Source : Deloitte Research

As the “orchestrator” of this broad set of providers, a
4PL must comprehend broad and deep expertise and
capabilities. Since the advent of the 4PL service, the
international logistics industry has been researching on
the development of the fifth-party logistics service i.e.
the realization of full-scale operation of e-procurement.
A key function of the 5PL is to aggregate the demands
of the 3PL into a bulky volume for negotiating more
favorable rates with airlines and shipping companies
regardless of which generation of logistics solution
belongs to all.
3.2 Opportunity indicators for global logistics
sector
In one of the global logistics study conducted
by Deloitte, a set of attributes was developed to
identify high opportunity industries with diverse
but complementary product flows for the logistics
outsourcing industry. The attributes were formulated
based on the requirements of the various aspects of
supply chain planning and implementation including
design, implementation and management of logistics
services. The set of attributes derived were to focus
attention on those industries that offer greatest
opportunity for logistics service providers. The attributes
of industries that would offer the highest opportunity /
best fit for logistics service provider are provided below -
• Large logistics spend
• Relatively high value products
• Manage across multiple modes
• Manage complex, time sensitive supply chains
• Diverse supply chain footprints including their own
operations, suppliers and customers
• Maturity in outsourcing cycle (currently managing
3PLs)
• Decentralized management of logistics
• Complementary to current base of 4PL business
• High cube and high weight products

The 4PL will serve as the single point of contact for

customers, managing a comprehensive set of supply chain
and logistics services that are executed by other providers

14
The description of the logistics requirements for each of the attributes, is mentioned below:
Large logistics spend
Relatively high value products
Manage across multiple modes
Manage complex, time sensitive
supply chains
Diverse supply chain footprints,
including their own operations,
suppliers and customers
Maturity in outsourcing cycle
(currently managing 3PLs)
Decentralized management of
logistics
Complementary to current base
of 3PL / 4PL business
High cube and high weight
products
Based on the detailed analysis of the above attributes, the following industries were identified as potential high priority areas of focus for marketing
opportunities for logistics services.
Auto OEMs & suppliers
Heavy equipment manufacturing
Metals
Technology infrastructure
Retail
• Industries whose logistics spend is significant relative to the value of its products naturally place a high
degree of importance and priority on logistics
• Industries with high value products place a high degree of importance on logistics which can impact
macro inventory levels
• Logistics functions operating multiple modes of transport face significant issues in dealing with the
resulting complexity and present greater opportunities for logistics service providers
• The more complex a supply chain, and the more important it is to manage time across it, the more likely
companies are to look to a logistics service provider for help
• Diverse and wide spanning supply chains are complex and difficult to manage. Companies with such
supply chains are more likely to struggle with these complexities and may therefore seek help
• History has shown that outsourcing is an evolutionary process and that industries that have a longer
history of outsourcing are more receptive to advanced stages of outsourcing such as contracting with third
and fourth party logistics providers
• The logistics function is difficult to manage across geographic boundaries. Companies with decentralized
management tend to offer ripe opportunities for logistics service providers to add immediate value
• Industries whose logistics and/or product attributes are complimentary to the 3PLs/ 4PLs base of business
(macro flow patterns, etc.) offer opportunities to increase efficiencies of logistics resources (e.g., increased
utilization of transportation equipment) and thereby reduce rates and total spend
• Industries with these product attributes offer greater opportunity to leverage and better utilize common
transportation equipment
• This industry offers obvious synergies, large market potential and the most immediate opportunities for
3PL / 4PL
• However, auto suppliers are highly fragmented with very few having large logistics spend
• This industry is similar to the auto industry in terms of shipment attributes
• However there are challenges to penetrating this industry, due to the smaller size and regional focus of
most companies
• Logistics flow balance opportunities exist within the industry; majority shipments flow to automotive and
industrial equipment manufacturing applications
• However, these industries are fairly vertically integrated and traditionally manage logistics operations
in-house
• This industry is attractive in terms of majority shipment attributes including complex supply chains with
short order-to-delivery cycles
• This industry offers tremendous opportunities from synergies in shipment attributes; large players are
looking to cut logistics costs dramatically
15
3.3 The Indian logistics sector
The logistics sector in India has evolved over the
past two decades from being a pure transportation /
warehousing functional service to provision of more
value added offerings like customs clearance, domestic
/ international freight forwarding, cross-docking,
reverse logistics, freight consolidation, warehousing of
modern standards etc. India with a GDP1 of about Rs
31,297 billion is estimated to spend 13 per cent of its
GDP on logistics creating an industry size of around Rs.
4,068 billion. The sector has been witnessing double
digit y-o-y growth rate since 2002 and is expected to be
more than USD 120 billion (approx Rs.5,400 billion) by
2015.
3.3.1 The growth drivers
The evolving business landscape and increasing
competition across industries, is creating the need for
more efficient and reliable logistics services than what
exists today. For example, rapid growth of organized
retail and the need to reach out to the large untapped
rural markets in India are necessitating development of
strong back end and front end supply networks.
While the end user industries like auto, consumer
durables, organized retail, etc are direct triggers for the
growth of the logistics sector in India, some of the other
drivers are described below:
Key growth drivers for the logistics sector

While there has been a growing recognition in India of Streamlining of Investments in

indirect tax transportation
logistics as a strategic tool for enterprise cost reduction structure infrastructure
and improvement of organizational efficiency on the
flip side however, the logistics sector is characterized
by dominance of a disorganized market. Transporters
with fleets smaller than five trucks account for over
Increased demand Infusion of qualified
two-thirds of the total trucks owned and operated of 3PL services Growth Drivers work force
in India and make up 80% of revenues. The freight
forwarding segment is also represented by thousands
of small customs brokers and clearing & forwarding
agents, who cater to local cargo requirements.
Recognition of logistics Globalization of
management as a manufacturing
In order to reduce logistics costs and focus on core
strategic tool systems
competencies, Indian companies across verticals are
now increasingly seeking and using the services of
third-party logistics service providers. Traditionally LSPs • Rise of 3PL services - The logistics cost is a direct
(Logistics Service Providers) concentrated mainly on function of quality of the national transportation
transportation and logistics as they form a major share infrastructure and professionalism of the logistics
in logistics. However, in order to keep up with rising services offered. In addition, the level of maturity of
demands and customer expectations, companies now the logistics industry of a nation is co-related to the
also concentrate on value added services like packaging, share of 3PL service providers vis-à-vis the share of
custom clearance, inventory management and labeling. first and second party logistics service providers.

Transporters with fleets smaller than five trucks account

for over two-thirds of the total trucks owned and operated
in India and make up 80% of revenues

16
 In the developed economies like Japan, the
United States, Canada and the European Union
nations, business customers have very similar high
expectations for logistics system performance,
regardless of where in the developed economies
they’re operating. The professionalism and maturity
has indeed been derived from the share of the 3PL
service players in the referred countries. Hence it is
not surprising to note that the logistics cost of the
developed countries is comparatively less than that of
emerging world nations (India, China, Brazil).
National logistics cost vis-à-vis the share of 3PL in the
logistics market
Country Logistics cost as a Share of 3PL
% of GDP
India 13.0 – 14.0% Less than 10%
China 18.0% Less than 10%
USA 9.9% 34%
Europe 7.1% 54%
Source : Various
The table reflects that there is an inverse relationship
between logistics cost of a nation and the share of
3PLs in national logistics market . The greater the
share of 3PLs the lesser is the national logistics cost
thus highlighting the importance of 3PLs in logistics .
Many Indian companies are realizing the importance
of their supply chain network and are increasingly
calling upon logistics managers for their professional
inputs into corporate and marketing strategies.
Consequently there has been an uptrend in the
requirement of specialized Third Party Logistics
Service Providers to whom companies are looking to
outsource their logistics requirements. As per industry
estimates, it is expected that 3PL solutions in India
would grow at a CAGR of more than 20% during the
period 2009-15.
• Investments in infrastructure - A well-knit and
coordinated system of logistics infrastructure plays
an important role in the sustained economic growth
of the country. India’s infrastructure deficiencies
have become more visible because of high growth
witnessed during the past few years. The most visible
indicators of overstretched infrastructure are India’s
congested highways, airports and ports. Though
the current levels of efficiency are much below
when compared with other developed nations, the
government has plans for improvement through
infrastructure development. While projects like
development of the dedicated rail freight corridors,
port development projects under National Maritime
Development Program are being envisaged and
executed at the national level, it is imperative that
India augments its infrastructure spending.
Given the scale of work that is needed, presently
it is still relatively low at 4.6% of GDP far behind
China’s which is around 10% of GDP. The Planning
commission recommends a step-up in this ratio to
8% by 2011-12. Post elections it is indeed perceived
that the government will demonstrate renewed
vigour in implementing transportation infrastructure
projects across the country. It is expected that a stable
government at the centre 2009 will usher a new wave
of confidence globally in the Indian economy. The
government has also indicated that bottlenecks and
delays in implementation of infrastructure projects
because of policies and procedures, especially in
railways, power, highways, ports, airports will be
systematically removed. It is also expected that a large
number of PPP projects in different areas currently
awaiting government approval would be cleared
expeditiously and the regulatory and legal framework
for PPPs would be made more investment friendly.
The above factors signal the emergence of an efficient
transport infrastructure, which will trigger the growth of
advanced logistics service offerings.
17

Relationship of logistics with other corporate functions
With production
Production scheduling
Production control
Plant warehouse design
Raw material stocks
Source : Handbook of Logistics and Distribution Management by Alan Rushton, Phil Croucher and Peter
Baker
18
• Recognition of logistics as an integral part of
corporate strategy -Over the years, the importance
of distribution and logistics has become much more
apparent to a broad range of Indian companies.
The significance of logistics within a company’s total
business structure is illustrated in the table below by
using the inter-relationships of logistics with
other functions .
With marketing With finance
Customer service Stock-holding
Packaging Stock control
Distribution centre location Equipment financing
Inventory levels Distribution cost control
Order processing Stock control
For the formulation of any competitive strategy,
knowledge of key logistics elements is essential.
Any factors related to the procurement, storage and
movement of goods must, of necessity, be relevant
to the determination of a company’s business.
Accordingly there has been a growing importance
of the role and contribution that the logistics /
distribution manager makes to corporate
strategic planning.
There is an inverse relationship between
logistics cost of a nation and the share of 3PLs
in national logistics market. The greater the
share of 3PLs the lesser is the national
logistics cost
• Qualified work force -For an industry to prosper, the
quality of the personnel it absorbs is an essential
facilitator for sustaining its long term growth. While
logistics was not usually the first career choice for
many and hence quality of manpower was an issue
that was felt in the industry. However with the
growing recognition of the strategic role that logistics
managers can provide, there has been a steady inflow
of some of the best talent in the logistics sector over
the past few years.
From the point of view of supply chain planning, the key
roles for a logistics manager with a broad remit might
be summarized as:
• To lead the design, creation, configuration and
parameter setting of the entire supply chain
• To create the framework and the dialogue that
determine the performance targets along the
whole chain
• To drive the systems and monitor and report the
entire logistics operational performance against
agreed targets
• To review how problems can be solved and
performance improved
Educational institutes in India have also commenced
designing undergraduate, post graduate, diploma
and executive level courses specifically catering to the
logistics and supply chain management sector, for
which there has been a very encouraging response.
In addition, logistics companies are sincerely trying
to benchmark their HR practices with the best in the
industry and implementing measures to attract and
retain talent. Given the steady interest in logistics as
a long term career option amongst the brightest of
the Indian youth, it can be safely derived that Indian
logistics sector will leverage on the growth path it has
witnessed over the past decade.
• Streamlining of the indirect tax structure - In India,
distribution network is designed more by the tax
consideration rather than the requirements of
servicing customers at optimal cost. Most of the
consumer goods companies operate with at least
one distribution center or Clearing & Forwarding
Agent (CFA) in each state, where they sell, to avoid
inter-state Central Sales Tax (CST). Such companies
operated with 25 to 50 warehouses all over India,
which is a very high number compared to developed
economies (less than 5) or even China (less than
10). The introduction of Value Added Tax (VAT)
and the proposed introduction of a singular Goods
and Services Tax (GST) are expected to significantly
reduce the number of warehouses, manufacturers
are required to maintain in different states, thereby
resulting in a substantial increase in the demand for
integrated logistics solutions.
• Globalizing of manufacturing systems-
Globalization of manufacturing systems coupled
with advancements in technology is increasingly
compelling companies across verticals to concentrate
on their core competencies and avail the cost
saving potential of outsourcing. This is expected to
contribute to an increase in the need for integrated
logistics solutions, which is the niche of every third
party logistics service provider.
3.3.3 Opportunities in the logistics space
The Indian logistics industry is poised for a significant
growth in the coming years as companies, especially
in the automotive, pharma, manufacturing, retail and
FMCG sectors, are increasingly opting to outsource their
logistic requirements to specialized service providers.
Some of the existing and emerging growth areas in the
logistics sector is enumerated in the subsequent section.
Cold chain storage and related logistics
Cold chains form an integral part of the supply chain
for storage and distribution of perishable goods and
temperature sensitive pharmaceuticals and biological
preparations. Estimated size of the Indian cold-chain
industry is Rs. 8,000-10,000 crore (US$ 1.80 - US$ 2.27
billion) and is expected to grow at 20 to 25 per cent
annually. It is estimated that this industry will grow to
over Rs. 40,0002 crore (US$ 9.09 Billion) by 2015.
As per the planning commission estimates, there are
presently around 4,762 cold storage units in India with
a capacity of 196 lakh tonnes, with potato constituting
almost 81 percent of the total capacity of cold storages
being handled.
India may be among one of the world’s leading
producers of horticulture products but more than half
the fruits and vegetable produce end up rotting as
waste, even before it arrives in the market for sale.
Poor post-harvest methods of warehousing, storage
and unsafe transportation from point of production to
point of sale are among most prominent causes of this
avoidable value drain. The key issues in the Agri-logistics
related to the development of the cold chain industry
are of non-standard pricing, limited financial capabilities
of the transporters, opportunistic profiteering, lack of
scientific handling of produce and consequent high
prices and limited choices for the consumers.
There has been a growing
importance of the role and
contribution that the logistics /
distribution manager makes to
corporate strategic planning
19
Volume wise perishable products share in India
3%
39%
1%
Milk Fresh fruits and vegetable
Fresh meat and marine sector Others
Note: Others include poultry, ice creams and vaccines
Source: Various
As per industry estimates, approximately 104 million
tonnes of perishable product / produce is moved in the
country in a year. Out of that around 100 million tonnes
goes through the non-reefer mode and remaining 4
million tonnes goes through reefer transport. Out of
the 100 million tonnes of perishable load 96 million
tonnes directly enter in local and regional markets. Out
of this volume, around 86 million tonnes is sold through
the wholesale and retail outlets based in regional and
local markets without warehousing and cold storage
conditions and 10 million tonnes is the produce that
requires cold storages even when they enter the
markets. Accordingly the requirement of cold chain
across the country by the stakeholders far outstrips
the handling capacity of the available cold chain
infrastructure in the country.
Some of the industry and government initiatives for
development of cold chain infrastructure include -
20
• Container Corporation of India (CONCOR) is moving
into cold chain logistics in a big way and is developing
a cold supply chain business in the form of suitable
logistics infrastructure as well as state-of-the art
storage facilities to sell fresh fruits and vegetables in
the global food market.
• With a view to increase share of processed food
in the country to 20% from the present 6%, the
57% government is setting up 30 food parks by 2012
under public-private partnership. These food parks
will have cold warehousing, grading centers and
research laboratories. These parks could also be given
SEZ and other fiscal benefits to reduce production
cost and increasing competitiveness. Considering the
high risks involved in the food processing sector, the
government will provide a subsidy of Rs 50 crore per
park to private investors.
• The government plans to establish 50 cold chain
networks, including refrigerated vans all over the
country, which will help the farmers enhance the
shelf-life of their produce and retain their quality.
In addition, investment-linked incentives have been
introduced for setting up and operating cold chain
facilities, warehousing.
• The Agricultural and Processed Food Products Export
Development Authority (APEDA) has established
six Centres for Perishable Cargo at Bangalore, New
Delhi, Chennai, Thiruvananthapuram, Hyderabad,
and Mumbai of varying capacities. The total handling
capacity at these six CPCs is 2.16 lakh tonnes per
annum. The operating and ground handling agencies
have been designated for each CPC. In addition,
APEDA has signed MoUs for setting up of CPCs at
Cochin, Ahmedabad, Amritsar, Kolkata, Bogdogra,
Lucknow, and Goa.
 Air cargo
The use of air as the mode of choice for the movement
of cargo has increased over the past few years.
While the amount of the cargo freighted via air is
growing steadily, the infrastructure related to air cargo
handling and evacuation is not. The Government has
acknowledged the need for development of cargo
related facilities and is taking the necessary steps to
address the situation. India already has an open sky
policy for air cargo. An air cargo hub is being developed
at Nagpur by the Ministry of Civil Aviation. The ministry
also has plans to build dedicated cargo airports across
the country to cater to increasing demand in
air cargo traffic.
At present India contributes over 1% of the world air
cargo traffic. The five major airports (Mumbai, Delhi,
Kolkata, Chennai and Bangalore) account for around
88% of the total air cargo handled in India. Growth
in cargo / freight volumes is an outcome of macro-
economic factors such as domestic consumption,
exports and imports. Infrastructure remains a major
challenge. The international and domestic cargo
volumes (except for the F.Y 2008-09) have shown
a steady growth despite inadequate capacity and
infrastructure constrains. The blip in 2008-09 can be
accounted due to the global slowdown.
The Civil Aviation Ministry’s
proposal to frame a policy for the
development of airports
exclusively for cargo operations is
encouraging and on
commissioning of these cargo
airports in due course of time will
provide a much needed trigger to
the air cargo segment
Cargo volume handled at international and domestic
airports in India
Cargo in ‘000 Tonnes
2000
1600
1200
800
400
0
2004-05 2005-06 2006-07 2007-08 2008-09
International Total
Domestic
Source: Airports Authority of India
The major commodities being air freighted out of India
are garments, machinery components, pharmaceuticals,
dyes, chemicals and perishables such as fruits,
vegetables, flowers, fish and meat. Due to the high
time sensitivity Clientele demand, there has also been a
steady patronage of air cargo services across industries
including telecom, gems & jewellery, electronics, IT &
ITES related equipments etc. The Civil Aviation Ministry’s
proposal to frame a policy for the development of
airports exclusively for cargo operations is encouraging
and on commissioning of these cargo airports in due
course of time will provide a much needed trigger to the
air cargo segment. These airports will be established in
the country’s major business centres. Under the new
policy on cargo, a Centre for Perishable Cargo (CPC)
would be established, which would ensure movement
of perishable cargo at the airports.
21

Some of the opportunities emerging from the growth in
the air cargo segment include:
• Providing vendors and industry in the non-metro cities
a speedy gateway to the world
• Investment in air cargo infrastructure would
spawn related supporting infrastructure including
warehousing, industrial parks, Distribution
Centres etc.
• The efficiency and the reach of the express cargo
industry will further improve
• Indian companies can exploit their inherent IT
capabilities to develop specific application systems to
enable air cargo planning, movement, management
and co-ordination
• Domestic airlines can leverage on the development
of the Hub-and-spoke model for the country’s
cargo operations
22
Material handling equipment
The Indian Material Handling Equipment (MHE) market
has been estimated at about Rs 5,000 crore. The
traditionally fragmented material handling Industry has
been consolidating at a fairly rapid pace in the recent
years. Material handling equipment used by logistics
industry include forklifts, pallet trucks, stackers, reach
truck, order picker, overhead travelling cranes etc.
Traditionally, a lot of manual intervention was involved
in the logistics business, as a result of which they
were delay in deliveries; products were more prone to
damage due to poor handling and transit time taken
was much longer. This resulted in low speed, handling
problems like scratches, chipping, breaking and difficulty
in monitoring the material flow.
Demand for material handling equipment has been
increasing in the last few years. One of the primary
reasons fuelling this growth is that companies are
increasingly feeling the need to lower their logistics
cost. As a result of which there is a shift from manual
operations to use of electric and battery operated
equipments, especially in warehouses to improve
efficiency and save time. Some of the reasons for
this shift include low maintenance requirement, one
time investment, long life of equipment, no diesel
requirement, etc. In addition, the foreseen increase in
cargo traffic handled at the major gateways over the
future, the requirement of material handling equipment
will maintain its uptrend.
Reverse logistics
Many logistics movement of goods go beyond the
conventional supply chain perspective and thereby
generate add itional business transactions. These
include failed components repaired to serve as spare
parts, unsold stock being recovered, old products
improved to meet latest standards again, reusable
material returned and refilled / re-developed etc.
Reverse product flows may generate value on a product,
component, or material level.
With an ever increasing breed of quality and timely
delivery conscious Indian consumers, manufacturers
have endeavoured to develop logistics network that
would cater to the reverse logistics flow of materials.
The ability of a logistics network to cater to the timely
retrieval and delivery of material can be considered as a
strategic tool for customer retention. A customer who
enjoys a timely after sales spare part replacement would
generate a positive word-of-mouth campaign.
While earlier, the manufacturers tried to manage their
reverse logistics system in-house, manufacturers are
now also seeking the option of outsourcing of their
entire reverse logistics network to third parties. However
outsourcing the management of reverse logistics flow
entails that the third party service provider has the
mechanism to respond to the customer’s query, develop
suitable system to collect the old product from the
customer and if required possibly replace it with a new
product, deliver the product to the
manufacturer’s location.
The manufacturer hence needs to have the confidence
that the third party interaction with the customer
should be smooth considering that the replacement of
a product may lead to a contentious issue. Accordingly,
before outsourcing of the reverse logistics network,
the manufacturer has to collaborate with the logistics
service providers to chalk out and implement a robust
reverse logistics system. For the logistics service provider,
the reverse logistics support for a manufacturer would
never be treated as a one off transaction. The logistics
service provider would be required to act not only
as a service provider, but would be required to treat
the Client as a service partner treating the Client’s
business as his own. While global manufacturers are
outsourcing reverse logistics operations to third parties
in the developed logistics nations; the trend is steadily
catching up in India. This provides a huge opportunity
for the various logistics service providers to expand their
bouquet of service offerings and consolidate on the
opportunities that reverse logistics would offer.
The challenge however that is in India, the forward
logistics chain is far from perfect and hence establishing
a sustainable reverse logistics system might be a
challenging task.
3.4 Significance of SMEs in the Indian logistics
industry
Small and medium -sized enterprises (SMEs) are usually
the mainstay of most economies, particularly in terms
of employment and overall development impacts.
As per the World Association for Small and Medium
Enterprises (WASME), there are over 5 million SMEs in
India accounting for around 80% of the industrial sector
employment. It is the second largest employer of human
resources after agriculture, employing around 20 million
people, contributing 35% of the total export trade and
accounting for nearly 40% of the total value of
industrial production.
The above figures reflect the importance and
contribution of the SME sector to the national economic
growth and prosperity. It is hence not surprising to
realize the importance and the significance of the
SMEs in the Indian logistics sector. The logistics sector
in the country is dominated by the Small and Medium
Enterprises (SMEs) of which the majorities are the road
transport providers. It is estimated that more than a
million transport operators are owning and running
more than 4 million trucks.
The reduction in the logistics cost can be brought about
by improving the national logistics infrastructure to
facilitate smooth transfer of materials and information.
While at the macro level, the Government of India can
initiate steps for improving the logistics infrastructure
of the country, the logistics service providers at the
micro level would need to infuse better management
practices to reduce their service cost and improve their
operational efficiency. Since the Small & Medium
Enterprises constitute a significant percentage of the
logistics service providers, it would not be inappropriate
to mention that these SMEs would be acting as the
catalyst in reducing the national logistics
cost component.
23
4. SMEs in logistics: Succeeding
in the market place

The power of ‘small’ is enough to bring about a
revolution in the way business is done. Typically, firms
that start small but do a good job of responding to
market needs become larger over a period of time. To
enable such new entrants with drive and good ideas to
grow, it is necessary to create a conducive environment.
The objective of any program for SME support,
therefore, should not be to reward firms that happen
to be small. Rather, it should ensure a functioning
ecosystem, in which new ones can emerge, existing
ones can grow, and large and small ones can collaborate
and leverage their synergies.
Logistics service providers having investment in
equipment (excluding land and buildings) exceeding
Rs.10 lakh (US$ 0.2 lakh) but less than Rs.2 crore (US$
4.1 lakh) qualify as Small enterprises and those investing
more than Rs. 2 crore but less than Rs.5 crore (US$10.3
lakh) classify as Medium enterprises3 . Today, perhaps
the biggest challenge that these service providers face
is coping with the regional, geographical and legislative
diversity in the country. This results in a lack of standard
practices, procedures, regulations as well as disparities
in the level of compliance. Land transportation in
particular gets significantly exposed to these issues
as the fragmented ownership of key components like
warehouses and trucks makes the consolidation of
services an enormous task, and the resultant offering
becomes extremely inflexible to suit customers’ needs.
wet and dry goods. This will serve as a major attraction
for international companies, as they are looking for
a one-stop-shop for most of their business verticals.
In addition, implementation of innovative technology
and the cost-effective models will help ensure better
management of assets, allowing SMEs to reduce
expenditure and remain competitive in the present
economic slowdown.
4.1 Competitiveness of SMEs in logistics
Deloitte conducted a survey of several Small & Medium
logistics players to capture the developments in the
Indian logistics space and more importantly the broad
level challenges that the industry is currently facing,
particularly from the perspective of a Logistics Service
Provider (LSP). The respondent companies belonged to
a wide spectrum of logistics segments such as freight
forwarding, shipping, customs booking, container
freight stations, warehousing, and
multi-modal transportation.

Users of logistics services are no longer lured by

buzzwords or big names; the focus is clearly on costs
and delivered value. Hence, the emergence of SMEs
as strong regional or sectoral players is imminent.
SME service providers are rich in local experience and
have the flexibility and speed to deliver according to
the expectations of the principal. Most SMEs are also
owner-driven, and this reassures customers that
they will be dealing with a person rather than an
impersonal service.

As the Indian logistics sector becomes more competitive

globally, multinational companies will look to outsource
their entire logistics services to India. Most of the
logistics companies in India now offer a complete
range of services: warehousing systems, distribution,
tracking of goods and separate storage facilities for

24
 As a part of the survey, Deloitte had designed a
holistic questionnaire, which was administered to
the respondents during a one-to-one discussion. It
attempted to seek responses on various parameters
such as company background, operational performance,
internal benchmarking, soft infrastructure and also
views on quality of external infrastructure and its impact
on logistics businesses. The individual responses thus
collated, form the basis of analysis that follows.
4.1.1 Internal factors affecting competitiveness
Services
In the recent past, the logistics industry has witnessed
Foreign alliances
Another trend which is fast picking up, is that of LSPs
forging alliances with foreign players to ensure access
to untapped geographies and benefit from collaborative
effort. Having said that, the regional strength of
domestic players is equally a compelling factor for SMEs
to collaborate and leverage on. In several cases, the
scope of this relationship has moved beyond the realm
of geographic reach to making strategic investments
and bringing specific logistics related expertise, which
can be a strong competitive advantage.
Key value propositions of alliances

a paradigm shift in scope of service offerings with

the constituent players moving from typically being
single service specialization companies to what are
Value added
now popularly referred to as “Total logistics solution” Reliability service
providers. This has added a new dimension of service
synergies, which ultimately helps the service providers to International Market reach
presence
offer a whole gamut of quality services to the client at
competitive rates.
Key value
Financial
Size proposition of
Furthermore, in a situation like today’s it also helps strength
alliances
diversifying the basket of offerings into a wide
range of avenues so as to minimize risk faced due to
Technical
unpredictable / vulnerable business segments. While Pricing
expertise
managing the complete supply chain presents its own
Company Cost of
unique challenges, it also helps in optimizing costs not background alliance
only for the service provider, but also for their customers
wherein they can have greater control over their
inventory levels to prevent stock outs. Organizations
that have been able to embrace this change and expand Source: Deloitte survey
their capabilities beyond pure play transportation
certainly enjoy a competitive advantage over their peers. Cost
In India, this trend is largely seen in firms which have The current slowdown has robbed the logistics sector
a strong warehousing and distribution capability, a of not just volumes but even margins. The businesses
customer centric approach and a forward have witnessed varying impacts with volumes falling to
thinking leadership. the tune of anywhere between 10 per cent to 30 per
cent and margins declining by as high as 70 per cent.

Users of logistics services are no longer lured by

buzzwords or big names; the focus is clearly on costs and
delivered value. Hence, the emergence of SMEs as strong
regional or sectoral players is imminent
25
 While segments such as project cargo movement and
domestic agency business have managed to remain
afloat, others like container business and ship chartering
have had to bear the brunt. eg: Booking a container
from India to U.K. which used to earn around US $1000
per TEU earlier, now gives only US $300 per TEU. Unlike
commercial orders which have taken a hit, personal
cargo volumes are still promising and thereby ensuring
reduction of adverse impact.
To ensure survival, some players are charging rock
bottom rates and in turn rendering the services of other
players uncompetitive. This has clear implications for
individual players to streamline operations. Optimizing
operations together with cost cutting will therefore go a
long way in helping SMEs gather strength internally and
compete effectively. This can be further supplemented
by company initiatives such as adopting a sales intensive
approach including cross selling by different divisions
and strengthening recovery.
Training
Although basic training is provided in most
organizations, it lacks the necessary focus to tap
and promote workforce talent and elevate service
performance to global best standards. This is partly
reflected in the survey response, wherein despite having
adequate workforce and low attrition, the quality of
work has been lagging.
Another reason could be recruitment of inexperienced
/ unqualified staff at lower wages, with an objective of
cutting on costs, unaware of the repercussions it could
have on the quality of services rendered. At certain
places, the operational training is limited to technology
updates, while at some other it is purely in form of on
the job experience. To compete effectively in today’s
age, training in supply chain management practices and
quality management techniques such as six sigma can
help to a great extent.
The fear of price sensitive Indian market, not
being able to bear the additional cost of
technology acts as an impediment
26
Technology
Globally, investment in technology is another important
driver of an organization’s efficacy. However, technology
implemented by the respondent LSPs is more or less
limited to cargo tracking in general and for agency
business in particular, it is confined to systems used by
the principal so as to ensure compatibility. At times,
point-to-point movement of cargo is even manually
tracked and updated by agents en route the final
destination. The level of familiarization and use of
advanced technologies like Global Positioning System
(GPS), Warehouse Management System (WMS), Radio
frequency identification (RFID) amongst SMEs in India is
quite low.
The fear of price sensitive Indian market, not being able
to bear the additional cost of technology further acts
as an impediment. Again, a few setups despite being
significantly large do not employ such technologies since
they cater to bulk transportation & warehousing, unlike
third party logistics players which are concerned with
moving numerous small parcel sizes.
The chart below plots areas of growth opportunity from
the perception of Logistics SMEs that were covered by
the survey. The various opportunity areas were assigned
weights, based on world averages sourced from survey
by leading logistics player UPS, on SMEs in India. These
have been compared with corresponding relative
importance in per cent terms, which was an outcome
of the Deloitte survey. From the analysis, it follows that
moving to higher value added services is perceived as
the biggest growth opportunity by Logistics SMEs today.
Perception of growth opportunity by logistics SMEs

Relative importance for logistic SMEs

35%

30% Moving higher value

added services
Optimizing operations
25%
Improving workforce
quality through training
20%
IT adoption
15%
Forging alliances &
acquisitions
10%

0%
0 1 2 3 4 5 6

Relative weights based on world average

Source: UPS Asia Business Monitor 2009; Deloitte Survey and Analysis

Pursuing the right mix of growth opportunities can help

a player boost its market share. Notwithstanding this,
the customer’s choice of an LSP is driven by a set of
parameters, some of which are indispensable and the
others desirable.

Key determinants of choice for selecting a LSP

Cost effectiveness

Service quality Network reach

Specialized cargo
Equipment Choice of an LSP
handling

Compliance
Reputation
& approvals

Timely delivery

Source: Deloitte survey

27
 In the earlier mentioned chart, compliance and
approvals refer to the various licences and/or permits
which are particularly of relevance to custom house
and clearing & freight forwarding agencies. Besides the
above factors, public sector organizations also typically
look for past performance, financial standing and the
quantum of orders executed by the prospective LSP in
a particular period. The desirable factors, on the other
hand, are sophisticated IT infrastructure, door-to-door
service, alliances, and brand name.
Other factors that have a bearing on the
competitiveness of logistics service providers are:
• Transactional relations: This is mostly driven by the
client’s requirements & degree of his satisfaction with
the services of the LSP. Although on an average most
deals are carried out on a deal-to-deal basis, many
LSPs are trying to pitch in for longer relationships as
this can ensure them a steady flow of work orders.
• Service level agreements: Service Level Agreements
(SLAs) set out performance standards to be
complied by the logistics service provider and
include parameters such as delivery, quality, safety
information availability, etc. Such agreements bring in
efficiency and accountability in the business. SLAs are
largely insisted in contract logistics wherein the service
provider handles product movement up to the point
of purchase and can vary as per the industry and
nature of cargo. Industries like computer peripherals
and hardware, automotive, perishable products are
likely to demand stringent SLAs. It is understood that
adherence to SLAs in India is around 80 to 85 per
cent while in developed economies it is around 95 per
cent. The survey responses also indicate that pure
play transporters generally are not very conscious
about SLAs as they are more worried about the cost,
as compared to 3PLs who monitor the SLAs closely.
The survey responses indicate that pure play transporters
generally are not very conscious about SLAs as they are
more worried about the cost, as compared to 3PLs who
monitor the SLAs closely
28
• Benchmarking: Each player seemed to be guided
by its own set of benchmarking practices. Internal
benchmarking is mostly being practiced by way of
achieving conformity with SOPs to ensure uniform
level of performance at all operation centres, internal
review, performance audit, and periodic calculation
of customer satisfaction index based on customer
feedback. External benchmarking, however, is not so
widely undertaken by the Indian LSPs yet.
• Innovation: This is one such factor that can help a
player differentiate its services from the rest and more
importantly benefit from the first mover advantage.
This could either manifest in form of exclusive
service offerings such as serving the niche segment
of hydrocarbon transportation, etc or thinking
out of box like fitting four cars in one container
instead of three using a movable deck. Innovation
can also sometimes take form of intensive capital
investment, the first of its kind, in equipment at a
place, such that competitors find difficult to match
such huge investment and eventually tend to lose out.
Unfortunately, innovation amongst the Indian logistics
SMEs is still at a relatively nascent stage
4.1.2 External factors affecting competitiveness
These can be broadly classified into infrastructural
bottlenecks and policy constraints. Infrastructural
bottlenecks relate to deficiencies in physical
infrastructure such as roads, railways, ports, airports,
Inland Container Depots (ICDs) & Container Freight
Stations (CFSs), whereas policy constraints refer to the
regulatory & procedural hurdles affecting transportation.
Nature of
Area Cause Effect
bottleneck
Inadequate capacity at major ports Heavy congestion at most major ports leading to
higher vessel turnaround time
Untapped potential of non-major ports
Ports
Outdated equipment Inefficient handling

Lack of warehousing Long waiting time

Few busy airports (Delhi, Mumbai, Kolkata, Congestion at main airports

Chennai, Bangalore, Hyderabad)
Numerous unused airstrips & relatively less used
Airports airports
Lack of equipment for odd-sized packages,
professional packers, etc
Bad quality of roads
Infrastructure
Inadequate lanes / lack of maintenance
Roads
Inadequate hinterland connectivity
Too many level crossings / minimal electronic
controls / priority to passenger trains over cargo
trains
Railways Limited network and terminals of private players
(container movement)
Inadequate capacity / connectivity
Inefficient handling resulting in pilferage/damage
High cost of alternate arrangements (prices quoted
by individual loaders)
Do not support the axle weight of the trucks &
cause the roads to break and cave in
Bad road quality leading to poor speeds, accidents
and high vehicle maintenance
Inconvenience due to limited access to
neighbouring ports
Choked rail network & resultant lower speeds of
cargo trains
Transportation delays & cost overruns
Transportation delays

Unreliable infrastructure / uneconomical size Less integrated services, inefficiency & resultant
Cold inconvenience
Chain/ CFS/ ICD Inexperienced staff Inefficient handling

Outdated customs formalities incl. documentation Huge delays

Erratic EDI

Interpretation of rules & regulations left to the Ineffective administration of customs laws
Customs discretion of Customs Commissioner
Too many collectorates especially in the NCR
Regulation region
Corruption

Border duties Abolished by most states, but still applicable in Increases cost of transporting through that city &
such as octroi Mumbai, Pune, etc. eventually distorts logistics network
Inadequate Excess loads going unchecked Bad road quality leading to poor speeds, accidents
controls (esp.
roads)

Continue on next page

29
 Nature of
Area Cause
bottleneck
Attractive manufacturing incentives such as
tax holidays for setting up units in a remote /
industrially backward region
Taxation
Multiple taxes for shipping (Tonnage tax + 12
other taxes)
Involvement of multiple agencies such as
Regulation
Red tape / Commerce Ministry for ICD / CFS / SEZ, rail ministry
bureaucratic for private rail terminals, Ministry of Surface
hurdles Transport for Roads, & Shipping Ministry for Ports
/ Shipping
Applicability of multiple acts such as Railway Act,
Law Merchant Shipping Act, Indian Ports Act, MMTG
Act
At present, the congestion at ports has automatically
reduced thanks to the decline in trade. But once
trade volumes pick up, it could again start posing
a significant problem and have a cascading effect
on related transport channels. eg: The ideal transit
time for container from Ludhiana – JNPT (1500kms)
is approximately 2-3 days. However, in times of
congestion, this can escalate to even a week or more.
The LSPs have found a way to mitigate this problem
by collaborating with ports, which enables them in
availing preferential allotment of window. The long
term solution to this, however, is development of more
non-major ports. Further, alternatives like development
of coastal shipping and inland water transport can be
explored to help ease out the infrastructural bottlenecks
and bring down the overall logistics cost.
From the analysis, it follows that besides poor
infrastructure & regulatory hurdles, the other logistics
cost inflators are:
• Variable vessel charter costs
• Fluctuating oil / fuel prices
• Fluctuating exchange rates
• Non-availability of return loads
• High haulage rates
30
Effect
Distorts logistics network as units in remote
regions of Himachal Pradesh / Assam, etc may
not enjoy the logistical advantage of a place with
relatively better connectivity
Renders Indian shipping internationally
uncompetitive
Cost overruns, inconvenience & delay
Subjects multi-modal operations to multiple
regulations and makes compliance cumbersome
To overcome the burgeoning logistics costs, the
respondent LSPs are resorting to the following
initiatives:
• Negotiating & re-negotiating contracts
Negotiations with airlines would involve a minimum
cargo commitment, eventually resulting in lower rates
for customers. Negotiating with truckers (surface
transport) would involve giving contracts to those
providing competitive rates besides having a good
network of pick-up.
• Load optimization
This refers to judicious selection of cargo by going for
a right combination of weight & volume cargoes so
that total capacity is optimally utilized.
• Efficient Route scheduling
This involves evaluation of available routes between
the source and destination and selecting the most
appropriate route which will optimise cost and
delivery, proper selection of load & discharge points
and deciding on what quantities to be picked up from
where. The ability to provide the most cost effective
distribution network is being used as a competitive
advantage by the LSPs.
 • Increased adoption of IT Areas for improvement / challenges
This is being actively pursued by implementing IT
Level of improvement desired
infrastructure and software for managing business
processes as well as operations. This will increase 90%
efficiency and reduce time taken for various activities Transportation
80%
particularly in warehousing and fleet management. Access to funding infrastucture
70% Regulatory
A well designed MIS enables regular tracking of effectiveness
performance and financial metrics such as sales, 60%

profitability, variance analysis etc., Survey responses 50% Innovation

indicate a mix of organisations having separate IT 40%
systems and also those which have implemented a Quality of manpower
30% IT Adoption
unified ERP solution.
20%

• Saving on logistics related communication 10%

International communication is an integral part 0%
of logistics operations, especially that of a freight 0 1 2 3 4 5 6 7
forwarder. Most work is sorted over emails. The
Relative weight based on world average
operations team refrains from making phone calls,
unless absolutely necessary. Source: UPS Asia Business Monitor 2009; Deloitte Survey and Analysis

• Cutting down on manpower Transportation infrastructure is not just crucial for

This is being actively pursued by implementing ERP
systems, which enable integration of office systems
and provide client interface. Most of the manual work
gets automated and therefore replaces the junior
human resource at operations level.
• Other measures
These include working capital management, inventory
cost control and periodic reviews among other things.
4.2 Assessment of challenges: Internal & external
A thorough analysis of internal and external factors
affecting the logistics industry in general, together with
acknowledgement of constraints specific to SME players
like lack of funding can enable us identify areas of
improvement for the industry, as follows:
logistics services world over, but is also an area that
needs substantial improvement in the Indian context.
This is followed by inadequate access to funding,
a problem particularly faced by SMEs. Regulatory
effectiveness, although equally important for India,
carries a lesser weightage going by the world averages,
probably due to foreign countries already having an
appropriate and enabling regulatory regime.
4.3 S-W-O-T Analysis
Strategy formulation for any entity or a group of entities
is primarily influenced by their relative competitive
position in the industry. This, in turn, is collectively
determined by a set of factors such as strengths &
weaknesses (internal), opportunities & threats (external).

The ability to provide the most cost effective

distribution network is being used as a
competitive advantage by the LSPs

31
 A conscious effort to maintain an edge in the areas of
strengths, improve on weaknesses, a drive to actively
pursue opportunities, and take proactive measures to
guard oneself in areas of threats can enable the group
of firms to find their way through adversity. The inputs
obtained during the survey and subsequent analysis
form the base for S-W-O-T framework for Indian
Logistics SMEs, which is elaborated in the figure below:
S-W-O-T Analysis for Indian logistics SMEs
Strengths Weaknesses Opportunities Threats
ploughing back profits (self funding) and optimizing
operations so as to qualify for SME loans
• Lack of use of state of art technologies, if suitably
addressed can boost the international competitiveness
of the Indian logistics industry, as a whole
• Inadequate controls & cost consciousness amongst
drive LSPs, particularly road transporters, often lead
to low safety standards eg: instances of overloading
by trucks

• Owner driven • Highly fragmented • Promising • Competition Opportunities

• Adequate • Lack of affordable sectors from large • A likely boom in Construction and Pharmaceutical
labour pool credit (construction & foreign players / Healthcare sectors would imply potential business
• Regional • Lack of use of state healthcare) • Pricing pressure opportunity for LSPs in terms of increased multimodal
dominance of art technologies • Progressive • Influence of movement of raw material & manufactured products,
• Low attrition • Low safety reforms (GST) global market both domestically as well as internationally.
standards • Infrastructure conditions
expansion • Progressive reforms such as introduction of single
Goods and Service Tax (GST) will help rationalize the
Source: Deloitte analysis warehousing set-up in the country and enable the
LSPs to trim their logistics costs
Strengths
• Most enterprises, by virtue of being owner driven, • Government’s plan to award projects worth
tend to offer personal commitment and quality more than Rs. 3,300 crore (US$ 67.9 crore) for
services to their clients development and upgradation of container / cargo
terminals during the first three months in office and
• Relative ease at filling up vacancies in operations budget announcement of facilitating incremental
abundantly reflects availability of adequate labour infrastructural lending through takeout financing
scheme of IIFCL provide the much necessary push to
• With operations & agency network primarily infrastructure expansion and is likely to augur well for
concentrated in a particular region, they enjoy the LSPs
regional dominance and can provide services at
economical rates compared to their counterparts Threats
• Competition from large foreign players can be
• Low attrition, partly aided by the current downturn, guarded against by adopting advanced technologies,
can be further exploited by focusing on training & collaborations and leveraging on regional strengths &
employee friendly HR initiatives resultant cost advantages

Weakness • The deal to deal transactions and price sensitive

• The fragmented nature, an inherent weakness of
the industry, can be effectively addressed through
consolidations, partnerships, and segment specific
forums aimed at providing integrated services to the
clientele
• A common problem faced by SMEs is that of limited
access to affordable credit, and can be overcome by
nature of Indian markets compels the LSPs to charge
lower rates, whether affordable or not, for fear of
losing out customers to competition
• The impact of global market conditions on logistics
business by way of decline in international trade can
be curtailed by concentrating on domestic markets,
which are still quite promising

32
5. Transport infrastructure

The 11th five year plan Approach Paper calls for the
investment to increase from a current level of 4.6% of
GDP, to between 7 & 8%. While the target of 8% for
the 11th plan is still short of the 10% figure which India
needs to achieve, there is still a need for adopting a
strategy in terms of how much would the government
be investing; and how much needed to be the share of
the private sector, including also FDI in Infrastructure.
The Capsule Report on Infrastructure sector performance
Ports—The major ports in the country handled 530.35
million tonnes of cargo during 2008 – 2009, which
was 7.9 per cent lower than the target set for the
period. About 80 per cent of the total volume of ports’
traffic handled was in the form of dry and liquid bulk,
with the residual consisting of general cargo, including
containerized cargo
Traffic handled at the major ports

by Ministry of Statistics and Program Implementation, In million tonnes

the year on year rate of growth in cargo traffic has
considerably declined in FY 2008-09. A snapshot of 600
the performance of each of the transport infrastructure
500
sector is indicated in the subsequent section.
400
5.1. Traffic performance
300
Rail — The freight traffic carried by the railways during
2008 – 2009 at 833.31 MT was 2.0 per cent lower than 200
the target set for the period, and recorded a growth of
100
4.9 per cent over the performance during 2007–2008.
The freight loading for 2008-09 of 833 million tonne 0
do not meet the target of 850 million tonnes. Freight 2004-05 2005-06 2006-07 2007-08 2008-09
(Prov)
loading got impacted by the economic downturn,
which in turn, has hit the railways’ earnings. The freight Source: Ministry of Shipping
loading for the current financial year has been estimated
at 882 million tonnes

Railways freight loading in million tonne

In million tonnes

1000

800

600

400

200

0
2005-06 2006-07 2007-08 2008-09 2009-10
(RE) (BE)

Ministry of Railways

33
Aviation: The five major airports (Mumbai, Delhi,
Kolkatta, Chennai and Bangalore) account for around
80-85 per cent of the total air cargo handled in India.
These five International Airports handled 5,3,382 tonnes
of export cargo during 2008 – 2009, which was 3.4 per
cent higher than the previous year. The growth rate,
however, was lower than 7.5 per cent in 2007-2008.
Further, 4,29,527 tonnes of import cargo was handled
at these airports during this period registering a negative
growth of 5.7 per cent. The corresponding growth rate
was 19.7 per cent during 2007-2008.

Air cargo traffic handled at Indian airports.

In ‘000 tonnes

1200

900

600

300

2004-05 2005-06 2006-07 2007-08 2008-09

International Domestic

Source : Airports Authority of India

The detailed description with regards to the
development needs, challenges and opportunities
existing in each of the transport infrastructure sector is
indicated in the subsequent sections.
5.2 Railways
Indian Railways (IR) serves as the backbone of India’s
transport infrastructure, and as such contributes
significantly to macroeconomic growth and global
competitiveness. The premier transport organization of
the country is the largest rail network in Asia and the
world’s second largest under one management at a
total of 63,332 route kms. Freight contributes to around
65% of its total revenue. The Railway Ministry in its
recent budget estimated its cash surplus (earnings net
of operating expenses & pension) after dividend of Rs
5,479 crore to the Centre will be Rs 8,722 crore, 31%
lower than the Rs 12,683 crore (actuals) in 2008-09.
This would imply that organization’s dependence on
budgetary support and market borrowings heightens as
the cash surplus, the amount available for capitalization
(transfer to the development fund and capital fund),
is down to Rs 2,642 crore from Rs 6,356 crore in the
revised estimates for 2008-09. Accordingly, the Railway
Ministry has outlined many measures to generate
revenues from non-traditional sources. This includes
laying of optic fibre along railway tracks, utilizing land
and airspace for other commercial purposes, etc.

34
 5.2.1 Development needs
The existing railway network is crippled by capacity
constraints and is inadequate to meet the potential
demand of cargo transportation. The ambitious
project of railway freight corridor should address the
capacity constraint. The work for the dedicated freight
corridor (DFC) ( which has been renamed as Diamond
Freight Corridor in the recent Rail Budget) , envisages
construction of dedicated freight lines along the eastern
and western sides of India covering 2,739 km . Once
commissioned, the DFC along with the feeder routes will
ensure the availability of sufficient capacity in the face of
rising demand. It is expected to increase average speeds
to over 100 kmph, reduce transit time by half and also
reduce the cost of operations. The project is expected to
reach completion by 2016-17.
Proposed dedicated freight corridor
Ludhiana
5.2.2 Challenges
The Railways are carrying the additional burden of sixth
pay commission recommendations. The Railways have
to pay Rs.6,600 crore in arrears alone to the employees
besides the increased salary burden of about Rs. 7,000
crore in the F.Y 09-10. About 60% of the arrears on
account of pay commission has to be paid in 2009-10.
This has coincided with the economic slowdown which
has affected earning. In two years, the Railways have
to pay Rs. 28,000 crore towards salary and arrears.
The two factors have led to an increased operating
ratio of 92.5%. Some of the other challenges facing
the Railways are professionalizing its cadre, giving up
tradition of hierarchies which its departments signify,
bonding the various depts. into a cohesive unit flexible
to cope up with the fast changing environment,
cutting cost, yielding economies, reducing tariffs and
benchmarking performance with comparable
systems abroad.

5.2.3 Opportunities
Dadri
The rail container policy announced in January 2006
Khurja
allows private companies to undertake container
transportation by rail. As many as 16 licenses have
Son Nagar been issued for operating container trains. In the
Ahmedabad
recent budget announcement, it was indicated that the
Vadodra
Howrah Railways were working out the details of a premium
service for movement of containers with assured transit
JNPT
periods for time-sensitive cargo. Permission has also
been provided to container train operators to access
Source: Dedicated Freight Corridor Corporation of India Limited private sidings to help attract piecemeal traffic that are
at present not being carried by railways.

Implementation details of the Dedicated Freight Corridor Corporation of India Limited

Western corridor Stretch Implementation period

Phase I Rewari – Vadodara (920 km) 2009-2016

Phase II Vadodara – JNPT (430 km) 2010-2017

Phase III Rewari – Dadri (140 km) 2010-2017

Eastern corridor Stretch Implementation period

Phase IA Sonenagar – Mughalsarai 2009-2016

Phase IB Mughalsarai – Khurja (710 km) 2010-2016

Phase II Khurja – Ludhiana 2011-2017

(Dandarikalan)

Source: Dedicated Freight Corridor Corporation of India Limited

35
The railways have also chalked out plans for a freight 5.3.1. Development needs
related revamp in partnership with the private sector.
The partnership involves redevelopment of dilapidated Road sector breakup

goods sheds and freight terminals into state–of-the-art

2% 4%
logistics parks. The railways would hand over the
damaged property on a long term lease to a private
player for development, operation and maintenance on 14%
a revenue sharing basis.

Indian Railway Catering and Tourism Corporation

(IRCTC) have already been mandated to develop catering
services, budget hotels and food plazas at major
stations through involvement of private entrepreneurs.
IRCTC intends to take up around a hundred such
budget hotel projects in the next five years with Public
Private partnership. 20 such concessions have already
been awarded. Some of the proposals that have been
mentioned in the recent budget that offer opportunities
to various private parties include: 80%

• Multi-functional complexes having shopping facilities,

food stalls, budget hotels to be constructed at 50
railway stations serving centres of pilgrimage, tourist
and industry National highways District road
State highways Rural roads
• Private ownership of special purpose rolling stock
for commodities and private operation of freight Source : Ministry of Road Transport and Highways

terminals will be encouraged

To improve and develop national highways, the
• Mega logistic hubs being planned alongside Eastern government has initiated National Highways
and Western Dedicated Freight Corridors Development Programme (NHDP) in a phased manner.
The National Highways Authority of India (NHAI) is
5.3. Roads implementing the NHDP programme The NHDP with its
A good road network constitutes the basic infrastructure planned seven phases covering approximately 50,000
that propels the development process through km at a massive investment of about Rs.3,000 billion
connectivity and opening up of backward regions to has been the blueprint for national highway network
trade and investment. Roads also play a key role in development in India.
inter-modal transport development, establishing links
with airports, railway station and ports. India has the
world’s second largest road network, aggregating over
3.34 million kilometers next only to the United States.
Indian roads carry about 61 per cent of the freight and
85 per cent of the passenger traffic. All the highways
and expressways together constitute about 66,000
kilometers (only 2% of all roads), whereas they carry
40% of the road traffic.

36
 Phase Length(km) Description Target completion date

I 7,521 Comprises 5,846 km of GQ, 981 km of NSEW corridor, 380 km of December 2009 (GQ by
port connectivity and 315 km of other national highways December 2008)
II 6,805 Comprises 6,319 km of NSEW corridor and 496 km of other December 2009
national highways
III 12,109 Four-laning of 12,109 km of national highways in two phases, March 2012
Phase IIIA and IIIB, on BOT basis
IV 20,000 Two-laning with paved shoulders of 20,000 km of national December 2015
highways on BOT basis
V 6,500 Six-laning of 6,500 km of national highways on DBFO basis December 2012

VI 1,000 Construction of 1,000 km of expressways on DBFO basis December 2015

VII - Construction of ring roads, bypasses, flyovers, etc. on BOT basis December 2015

The spending in road sector has a multiplier effect in Requirement of funds for maintenance of Highways as per the norms and funds provided
terms of job creation and increase in per capita income.
Hence any spending, whether by government or by a Year Requirement Amount Shortfall % Shortfall
private partner, definitely helps in economic stimulus. as per norms provided
Accordingly the government plans to invest around 2002-2003 2200.00 800.00 1400.00 63.64
Rs 1,00,000 crore to build about 12,000 kilometres of
2003-2004 2200.00 731.74 1468.26 66.74
roads for the F.Y 2009-10 mainly through the toll-based
model, with options to bring in foreign investors. 2004-2005 2480.00 745.56 1734.44 69.94

2005-2006 2100.00 868.10 1231.90 58.66

Inadequacy of funds is a prime reason for the demand-
supply gap. Road projects in the country require around
Rs 2,00,000 crore over the next three years for which,
the Ministry of Road Transport and Highways are
considering innovative financing instruments that will
fund road projects and attract domestic and foreign
investors. Efforts are also being made to involve all
possible investment channels, including pension funds,
sovereign wealth funds, equity funds, besides funds
from banks. The ministry has plans to boost road and
highway connectivity—at the rate of 20 km daily.
5.3.2 Challenges
The road transport cost comprises of vehicle operating
cost and road related cost. The vehicle operating cost
on Highways, which is major component of the total
transport cost, is entirely dependent on the condition
of the roads. In order to reduce this total transport cost
it is essential to maintain the roads at a good level of
service. The existing NH network is under severe strain
due to rapid traffic growth, overloading of vehicles and
the Government’s inability to provide the required funds
for maintenance of National Highways.
2006-2007 2012.00 814.38* 1197.62 59.52
Source: Report of the working group on Roads ( 2007-12) for the 11th five year plan
Apart from funds, other factors as cited in the report
of the working group include outmoded system of
gang labour, weak planning, scheduling and monitoring
of maintenance operations, inherent deficiencies in
structural thickness, lack of attention of drainage and
poor enforcement of legal axle load limits which have
hastened the process of decay of the NH network.
Hence there is a need to deploy proper management
for maintenance of National Highways.
Some other challenges include land acquisition,
encroachment on highways, environmental and forest
clearances, shifting of utilities, railway approvals for
rail overbridges, local law and order problems, poor
performance by some contractors, etc. This translates
in form of slower speeds of vehicular traffic. On an
average, the kilometer range per Commercial Vehicle
per day in India is 240-280, as against 680-700 in the
developed countries.

37
5.3.3 Opportunities
The Delhi-Mumbai Industrial Corridor
Industrial corridors are considered an efficient way
of integration between industry and Infrastructure
leading to economic development. One of India’s most
ambitious projects in recent years, the Delhi-Mumbai
Industrial Corridor (DMIC) is a massive project envisaged
across nearly 1,500 km of land and linking the two
metros of N. Delhi and Mumbai. It aims to boost
the country’s industrial and economic development
by creating supporting logistics infrastructure. Japan
is committed to a huge investment for the project,
planned on the lines of the Tokyo-Osaka industrial
corridor. DMIC would be beneficial to both the countries
in terms of development of ports, business parks and
infrastructure. The $ 90 billion project is likely to be
executed in seven years.
Stretch covered by DFC and DMIC
Haryana Dadri
Rajasthan
Uttar
Pradesh
India India
Gujarat
Madhya Pradesh
Arabian Maharashtra
Sea Jn port
Dedicated freight Corridor (DFC)
Delhi-Mumbai Industrial Corridor (DMIC)
Source : Dedicated Freight Corridor Corporation of India Limited
Road projects in the country require around Rs 2,00,000
crore over the next three years for which, the Ministry of
Road Transport and Highways are considering innovative
financing instruments
38
The industrial corridor will emerge within 150 km each
side of the proposed 1,483 km long dedicated railway
freight corridor. In the first phase it will cover six Indian
states of Delhi (22 km), Haryana (148 km), Uttar Pradesh
(22 km), Rajasthan (578 km), Gujarat (565 km) and
Maharashtra (148 km). The industrial corridor will have
three ports, six airports and a 4,000 MW power plant to
serve it apart from connectivity with existing sea ports
It would also link 10 cities with a population exceeding
a million each – Delhi, Faridabad, Meerut, Jaipur,
Ahmedabad, Vadodara, Surat, Nashik, Pune and Greater
Mumbai. The government also hopes to formulate a
policy relating to ‘manufacturing investment regions’
(MIRs), to attract foreign investments for the DMIC.
5.4 Ports
Ports provide an interface between the ocean transport
and land-based transport. India’s port infrastructure
constitutes of 12 major ports (Kandla, Mumbai,
Jawaharlal Nehru, Mormugoa, New Mangalore, Cochin,
Tuticorin, Chennai, Ennore, Vishakhapatnam (Vizag),
Paradip and Kolkata including Haldia and around 187
non-major ports. Of the non-major ports, only around
48 are operational; rest are only fishing harbors.
5.4.1 Development needs
India’s port infrastructure constitutes 11 major ports, 1
corporate port &187 non-major ports. Of the non-major
ports, only around 48 are operational; rest are only
fishing harbours. Around 7 of the 12 major Indian ports
are operating at more than 100 per cent capacity, as
against an optimum range of 70-80 per cent utilization.
Capacity utilization at the major ports ( 2007-08)

Million tonnes % Capacity utilization

70 140

60 120

50 100

40 80

30 60

20 40

10 20

0 0
Kolkata Haldia Paradip Vizag Ennore Chennai Tuticorin Cochin NMPT MGPT MPT JNPT Kandla
13.74 43.58 42.43 64.59 57.15 11.56 21.48 15.81 36.01 35.12 57.03 55.83 64.92
14.56 46.70 56.00 61.15 53.35 13.00 20.75 28.37 43.50 33.05 44.70 54.34 62.60
94 93 76 106 107 89 104 56 83 106 128 103 104

Traffic Capacity Utilization (%)

Source: Indian Ports Association

Further, available data show a drastic decline in

augmented capacities at major ports during the last four
years. While there was a 14.8 per cent increase to 456.2
Million MT in major port capacity during 2005-06, the
year 2006-07 saw capacity additions decline to 10.6
per cent. During 2007-08, new capacity additions were
limited to 5.4 per cent and they are projected to further
decline to 4.4 per cent in 2008-09.

39
Aggregate capacity & capacity additions at major ports (2005-2009)
Year
As on 31-03-2005
As on 31-03-2006
As on 31-03-2007
As on 31-03-2008
As on 31-03-2009
Source: Ministry of Shipping
40
Capacity in Additional % Increase
million tonnes capacity in
million tonnes
397.50 - -
456.20 58.70 14.8
504.75 48.55 10.6
532.07 27.32 5.4
555.67 23.60* 4.4
5.4.2 Challenges
Lack of proper facilities, deeper drafts, good connectivity
and necessary equipment / technology has contributed
to high logistics costs. At present, a lot of time is wasted
because of pre-berthing delays. The average turnaround
time of vessels at major Indian ports ranges from 1.77
days to 4.82 days. Dwell time for EXIM containers at
Indian ports is between 1-3 days compared to less than
a day at Singapore. Larger vessels, having the potential
to cut substantial cost, are unable to call at Indian ports
due to limited draft. The draft available at international
ports ranges from 12 m to 23 m whereas, in India
except for a handful of ports like Kandla, Mundra,
Ennore, Gangavaram & Krishnapatnam, other ports have
an average draft ranging from 8m to 12m This issue
will be partly addressed with the commencement of
operations at the much awaited International Container
Transshipment Terminal at Vallarpadam, Cochin Port.
Port development is further bogged down by the need
for getting multiple clearances. Multiple agencies
are involved in granting approvals to port projects.
These involve project appraisal by the Planning
Commission, Law Ministry, and Ministry of Finance.
This preliminary process of consultation among
inter-ministerial groups, prior to Cabinet approval is
inherently time consuming. To add to the concern, the
National Maritime Development Programme (NMDP) is
progressing at a slow pace with many project delays
and cost escalations. So far, only 41 of the total 253
port projects and 5 of the 111 shipping projects have
been completed. Other issues facing Indian ports relate
to port security, and land acquisition particularly for
non-major ports. Also, port projects typically suffer from
delay in environmental clearances, which on an average
take approximately a year and a half for each project.
Going forward, these issues will need to be addressed
on a proactive basis. Further, due to global meltdown
reduction in trade has resulted in decline in cargo traffic.
As a consequence, recently awarded port projects may
find it difficult to achieve financial closure. While publicly
funded port projects will stay relatively unaffected,
private sector port projects would face difficulty in
raising funds.
5.4.3 Opportunities
On the positive side, with the Government encouraging
private participation in port development, non-major
ports have begun contributing significantly to the
economy. The relative share of non-major ports has
grown from 26 per cent to 28 per cent in the four years
since 2004-05. While the total capacity of non-major
ports in 2008-09 is estimated at 228.3 Million MT, the
corresponding total cargo handled was 220 Million MT.
The new Government’s ambitious agenda to award 6
concessions for ports and initiate for 20 others through
PPP totalling to more than Rs. 3300 crore, within a span
of 3 months, is being regarded as a welcome move.
Players with ports as their core business can now invest
in strengthening their back-end and soft infrastructure
such as connectivity linkages and alliances as well
as initiatives for productivity improvements, service
augmentation and customer development. Foreign and
private equity investments in Indian ports in recent times
reflect a strong faith in India’s port sector and
suggest the inflow of more such funds in the
forthcoming period.
Container TEUs handled by foreign operators at various
Indian ports (2008)
Foreign Million Ports
operator TEUs
Maersk 1.48 JNPT, Pipavav
Dubai World 2.85 JNPT, Chennai, Kochi,
Visakhapatnam, Mundra
PSA Singapore 0.45 Tuticorin, Chennai
Source: Business India issue dated May 31, 2009
 PSA also has a stake in ABG Kandla Container Terminal, 5.5.1 Development needs
which is the concessionaire for Kandla Port. Dragados & The rapid growth in air traffic over the last few years
Gammon collaborating to develop the Mumbai Offshore exposed the deficiencies of airport infrastructure across
Container Terminal is yet another case of foreign the country. After decades of neglect, many of India’s
investment airports were forced to operate well above design
capacity. The resulting congestion in the terminals
Private Equity investments in non-major ports and on the runways delivered a poor experience
for the passenger and a costly, inefficient operating
Company PE Investor Amount (Rs. crore) environment for the airlines. However, although a
weakness today, it would gradually cease to be so, as
Gujarat Pipavav Port IDFC PE 192
the airport modernization program starts to deliver
SICAL IDFC PE 116 results, with new airports in Bangalore and Hyderabad,
Mundra Port GIC, 3i 450 and improvement in facilities at Delhi and Mumbai.
There are 454 airports / airstrips in the country which
Chennai Container Global Infrastructure 25% stake include operational, non operational and abandoned
Terminal Partners airports, whose ownership pattern is illustrated in the
Dighi Port IL&FS 20% stake figure below:

Krishnapatnam Port 3i 994

Ownership pattern of the airports/ airstrips (operational /
Gangavaram Port Warburg Pincus 150 (30% stake) non-operational) in the country (2008)

Source : Business India issue dated May 31, 2009

21%

The concept of port-based SEZs is fast catching up

amongst Indian investors ever since the successful 30%

launch of Mundra Port SEZ. It establishes that credible

port infrastructure is no more value-adding, but
imperative for development of globally competitive
hubs of economic activity and thereby promoting
international trade. 14%

5.5 Aviation
Civil Aviation plays a pivotal role in economic growth
of a nation. Airline industry not only brings efficiencies
in transportation of both people and cargo, but for
35%
a country like India, it can create a large number of
jobs too. It is estimated that every $100 spent on air
AAI State government
transport yields benefits to the tune of $325 to the
Private owners Defence department
economy and 100 additional jobs in aviation result in
610 other new jobs. Having recognized its strategic Source: 11th Five Year Planning Commission’s working group report
importance, Indian aviation has transformed from an on Civil Aviation
over regulated and an under managed sector to a more
open, liberal and investment friendly sector since 2004.
Compliance with global standards has also made air
transport, the safest mode of transportation.

41
The Government has acknowledged the infrastructure
deficiency and has wisely sought private sector
participation to facilitate infrastructure improvements
(modernization of Delhi and Mumbai airports,
commissioning of Greenfield projects at Hyderabad and
Bengaluru, modernization of 35 non metro airports).
The estimated investments at Delhi airport are in the
order of Rs. 7,531 crores; while that at Mumbai airport
is estimated to be in the region of Rs. 11,553 crores.
Greenfield airport projects have also been proposed at
Goa, Navi Mumbai, Pune, Greater Noida and Kannur.
The objective is to develop facilities conforming to
international standards and try to encourage the
domestic operators to shift base, so as to decongest
the major airports. AAI is in the process of carrying out
feasibility studies for this purpose. The Civil Aviation
Ministry has set a target of getting around 500 airports
operational in the country by 2020. This will include
renovation of used airports, developing Greenfield
airports, establishing merchant and low cost airports
and airports dedicated to movement of cargo and
logistics.
5.5.2 Challenges
Despite the high growth rates witnessed in the last five
years, certain pressing issues need to be resolved to
realize the full potential of the sector. These include:
In addition, while there are a lot of new avenues
in aerospace services in the coming decades, the
constraints associated needs to be addressed to enable
the smooth growth of the sector.
5.5.3 Opportunities
Maintenance and repairs overhaul
MRO as an aviation segment represents a relatively
untapped opportunity. They include engine overhaul,
airframe maintenance, heavy checks and line
maintenance, component overhaul and major airframe
modifications. At present, major part of the MRO work
for the Indian aircrafts is outsourced to the service
providers in Europe and Singapore. While airlines are
increasing and strengthening their in-house MRO
facilities, dedicated MRO players are also entering
the Indian aviation space. The Indian MRO market is
growing at about 15 per cent annually. The entire Asia
Pacific aircrafts and engine MRO market is estimated
to touch US$ 12.9 billion in 2011. Major components
of MRO services in India include engine overhaul and
components. Together, these account for around 60 per
cent of MRO services business in terms of value.

• High waiting time and congestion in airports causing

The Civil Aviation Ministry has
huge wastage of fuel
• Airlines incurring losses
set a target of getting around 500
• Taxation issues
• Aviation security
airports operational in the
• Shortage of skilled technical manpower
• High airport and security charges
country by 2020
• Inadequate night parking facilities
• Less number of gates and counters
• Inadequate security machines and shortage of security
personnel
• Requirement of good baggage system
• Lack of maintenance facilities at airports

42

Ownership pattern of the airports/ airstrips (operational /
(2008)
4%
17%
20%
40%
7%
12%
Line Maintenance Airframe (Heavy)
Components Engine Overhaul
Modifications Others
Source : www.reserachwikis.com
Recently, three different joint ventures between Indian
companies and foreign companies like Airbus, Boeing
and SIA Engineering have embarked upon setting up
of MROs. A satellite MRO centre is planned at Chennai
Aero Park. Gujarat government is examining the
prospects for developing MRO business and making
Gujarat, a MRO hub in the region.
Airport and ground support equipment
Airport and ground support equipment segment
presents another opportunity with estimated market
size of US$ 359 million in India for 2008 and expected
to cross US $ 400 million over next three years. With
up-gradation and modernization in place, demand for
technology driven ground support equipments is set
to grow. Needless to say, modernization of airports
to world class standards in the country will make it
imperative to equip airports with the best airport and
ground support equipments. Increased safety and
security concerns and up-gradation of navigational
aids, traffic control services and adoption of traffic
management technology will further strengthen the
demand.
The systems for which demand is expected to rise
include Dedicated Satellite Communication Network
(DSCN), Automatic Message Handling System
(AMHS), Flight Information Display System (FID),
Aeronautical Telecommunication Network (ATN), Voice
Communication and Control System (VCCS) among
others. India imports more than 60% of airport and
ground handling equipments currently. The AAI alone
has an annual budget of US$ 60 million for equipments
purchase. This represents a lucrative opportunity for
suppliers of ground support equipments based on latest
technology which increases efficiency and are cost
effective in operations. Global manufacturers, by setting
up manufacturing plants in India, can take advantage
of lower input costs, lower labour rates and liberalized
aviation policies and manufacture high technology
equipment at relatively lower costs in India.
India—as an air cargo hub
India has a great potential for becoming a possible
cargo hub for SAARC and ASEAN countries and its
strategic location as a transit destination connecting
the eastern- western global corridors. The Civil Aviation
ministry has identified Nagpur as India’s national cargo
hub and has promised an aviation policy for providing
significant concessions for air freighter operations out
of Nagpur. There are also plans of creating a national
grid for cargo hubs at various airports in India with cold
storage and warehousing facilities. The Government has
chalked out various policies and plans for development
of the air cargo infrastructure thereby providing
opportunities to the various entities involved in the
value chain. Civil aviation ministry proposal to set up
dedicated cargo airports and Government’s plan to
allow cargo airports within 150 kms radius of existing
airports through automatic routes are major steps taken
to the cause of developing India as a cargo hub.
43
5.6 Infrastructure finance
Infrastructure projects being capital intensive, with long
gestation periods; the Financial Institutes (FIs) and the
banks need to create new structures to facilitate the
funding. Most infrastructure projects are financed at a
debt: equity ration of 70: 30. The following agencies
usually finance the debt portion:
• Multi lateral agencies like World Bank, International
Finance Corporation (IFC), Asian Development Bank
(ADB).
• Development Financial Institutions like Industrial
Finance Corporation of India (IFCI), Industrial
Development Bank of India (IDBI), Small Industries
Development Bank of India (SIDBI), Infrastructure
Development Finance Corporation (IDFC), Power
Finance Corporation (PFC) etc.
• India Infrastructure Finance Co Ltd (IIFCL), a 100 per
cent government owned infrastructure financing SPV
formed in January, 2006.
• Foreign Commercial Banks
• Domestic Banks
Domestic banks have traditionally been reluctant to
finance infrastructure projects due to long gestation
period, low commercial viability and unpredictable
revenue stream. However with several positive
developments in policy and legislation, banks are slowly
evolving appropriate financing structures for funding
infrastructure projects. Project financing remains the
basic form of infrastructure development. The lenders
are also developing innovative structures depending on
the extent of government participation, loan tenor and
risk associated with the project. Avenues like corporate
bond market; securitisation of receivables etc is slowly
44
Civil aviation ministry proposal
to set up dedicated cargo airports
and Government’s plan to allow
cargo airports within 150 kms
radius of existing airports
through automatic routes are
major steps taken to the cause of
developing India as a cargo hub
becoming a fairly acceptable form of financing. Other
typical ways of funding are rupee term loan, extending
of foreign currency loans, providing non fund based
credit facilities such as opening of project letter of
credit, issuing of bank guarantee for the project.
New ways of structuring like take-out financing, roll
over financing, put-call options, hedging / swapping of
exchange / interest rate risks etc are also being offered
for funding of long gestation projects. The projects are
funded on their viability, projected cash flow and their
ability to service the debt. The user’s willingness to pay
for the services availed affects the cash flow. Sectors
such as power, roads, ports, airports and telecom have
been able to raise funds due to level of clarity of govt
policies, historical performance of the sector and the
user’s willingness to pay. The strength and experience
of the promoters, concession framework, tax benefits to
the project, inputs / off-take arrangements add to the
bankability of the project.
5.7 The PPP approach
Sustaining and accelerating India’s economic growth
would require substantial investments in infrastructure
development. Infrastructure development in India would
require a massive investment of US$492 billion during
the 11th Plan Period, according to an estimate by the
Planning Commission. Since such massive investments
cannot be undertaken by public financing alone, the
government has identified and is encouraging public
private partnership (PPP) in infrastructure development.
PPP offers a distinct possibility for increasing total
investments by using a limited amount of public
resources to leverage a much larger amount of private
investment. Given the bottlenecks and inefficiencies
often encountered in public infrastructural investment,
such PPPs could also increase economic efficiency and
lower the capital requirement, provided that regulatory
mechanisms are adequate.
In India, due to policy changes and reforms, Public
Private Partnerships (PPPs) have increasingly become
slowly the preferred mode for construction and
operation of infrastructure services such as highways,
airports & ports. PPPs can be undertaken through a
range of alternatives such as BOT, BOOT etc, with the
Infrastructure development in India would
require a massive investment of US$492
billion during the 11th Plan Period, according
to an estimate by the Planning Commission
Model Concession Agreement (MCA) being used to
provide a stable regulatory and policy framework. The
MCA regulates the PPP contracts by defining the rights
and obligation of all parties concerned. In case a project
is not viable due to either long-gestation periods or
inadequate returns, the government is committed to
provide up to 40% funding by way of grants in some
cases, called viability gap funding.
There are four major areas that needs to be addressed
for the PPP model to be successful:
• A stronger policy and regulatory framework both at
the centre and states
• Appropriate market instruments and capacity to raise
long term equity and debt
• Credible and bankable infrastructure projects
• Strengthening of government capacity to manage PPP
projects.
PPPs present an opportunity to meet India’s investments
needs that can be translated into a win-win situation
for all.
45
6. Conclusions
The logistics industry will continue to be the focal point
of strategy formulation, operational excellence and
information technology to make maximum contribution
in value creation for customers. Globalization,
consolidation, technology advancements and
outsourcing have only led to growth in the logistics
services market and this industry will continue to evolve
in the coming years.
Industry research suggests that the following
interdependent factors will shape the Global Logistics
Industry over the next 5-10 years:
• Globalization and consolidation - Mergers and
acquisitions of firms are leading to formation of
entities having capability to provide a “single point
of contact” to manage global supply chains for their
clients. Globalization of traditional businesses is
driving the logistics industry to address considerations
like market expansion, new sources of supply,
international trade, etc.
• Increased outsourcing - Companies are utilizing
logistics outsourcing more and more in order to
increase flexibility and responsiveness in their supply
chain. Global supply chains are getting increasingly
complex to manage and companies are focusing
more on core competencies.
• Security and risk management - Supply Chain Security
and Risk Management will be a key area to prevent
disruptions due to factors like weather, labor issues,
strikes, diseases like SARS, or terrorist attacks.
• Technological advancements - Rapid advancements in
supply chain technology enablers (like RFID) will lead
to increased functionality and greater potential to
improve performance of supply chains.
46
• Increased customer expectations - Customers will be
moving away from tactical transactional based service
outsourcing to solutions that are more strategic in
nature and supported by leading edge technology
and systems.
Firms can enhance their market competitiveness by
reducing their logistics costs, thus lowering the total
costs of goods and services. Any impetus to improve the
competitiveness of the firms at the national platform
would enable the nation to register a dynamic economic
performance in a global environment. USA has
successfully reduced its logistics cost as a percentage of
GDP from 17% in 1980 to its present level of 9.5 % by
incorporating macro level reforms in the transportation
infrastructure coupled with micro level upgradation of
logistics facility in individual firms. India has therefore
got a huge opportunity of reducing its national logistics
cost by studying and benefiting from other success
stories. Indian logistics firms will have a major role in
achieving this cost reduction.
This may include upgrading the macro logistics
infrastructure to world class standards and by providing
a facilitative role to the SME players in the logistics
sector to improve their service level competitiveness.
Government initiatives like development of SEZs,
logistics parks, infrastructure building, privatization of
transport operations, implementing PPP models etc.,
will encourage private sector investment and lead to
greater demand for logistics services. Moreover, growth
of user industries like retail, telecom, consumer goods,
automotive, pharmaceuticals, foods and beverages etc.
notwithstanding the current economic slowdown will
provide further impetus to logistics services
across sectors.
Drivers like these and the push / pull pressures
created by the market forces will not only trigger
structural changes in the logistics industry resulting India has got a huge opportunity
in specialization, consolidation, outsourcing, service
migration, new markets, new services but will also of reducing its national logistics
create challenges around service, delivery, quality and
cost as customer needs become more demanding cost by studying and benefiting
and complex.
from other success stories
SMEs, forming the core of the logistics industry, will
be impacted by this transition in a major way and
will have to focus on improvement of its internal
operations, processes, technology upgradation, resource
utilization, service quality, customer relationships, market
intelligence, and financial strengthening, in a nutshell in
overall capability enhancement - in order to respond to
and gain from the changing environment.

47
Abbreviations
2pl Second party logistics
3pl Third party logistics
4pl Fourth party logistics
Aai Airports authority of india
Adb Asian development bank
Amhs Automatic message handling system
Apeda Agricultural and processed food products LSP Logistics Service Provider
export development authority
Asean Association of southeast asian nations
Atn Aeronautical telecommunication network
Bot Build, operate and transfer
Cfa Clearing & forwarding agent
Cfs Container freight station
Cmie Centre for monitoring indian economy
Concor Container corporation of india
Cpc Centre for perishable cargo
Cpi Consumer price index
Cst Central states tax
Dbfo Design, build, finance and operate
Dmic Delhi mumbai industrial corridor
Dscn Dedicated satellite communication network
Edi Electronic data interchange
Erp Enterprise resource planning
Exim Export import
Fdi Foreign direct investment
Fids Flight information display system
Fy Financial year
Gdp Gross domestic product
Gps Global positioning system
Gq Golden quadrilateral
Gst Goods and service tax
Hr Human resource
Icd Inland container depot
Idbi Industrial development bank of india
IDFC Infrastructure Development Finance
Corporation
48
IFCI Industrial Finance Corporation of India
IIFCL India Infrastructure Finance Company Limited
IRCTC Indian Railway Catering and Tourism
Corporation
ITES Information Technology Enabled Services
JNPT Jawaharlal Nehru Port Trust
MHE Material Handling Equipment
MIR Manufacturing Investment Region
MRO Maintenance and Repairs Overhaul
MT Metric Tonne
MW Mega Watt
NH National Highway
NHAI National Highways Authority of India
NHDP National Highways Development Programme
NMDP National Maritime Development Programme
NSEW North South East West
OECD Organization for Economic Co-operation
PFC Power Finance Corporation
PPP Public Private Partnership
RBI Reserve Bank of India
RFID Radio Frequency Identification
SAARC South Asian Association for Regional
Cooperation
SCM Supply Chain Management
SEZ Special Economic Zone
SIDBI Small Industries Development Bank of India
SME Small and Medium Enterprise
SOP Standard Operating Procedure
SWOT Strength-Weakness-Opportunities-Threats
TEU Twenty feet Equivalent Unit
VAT Value Added Tax
VCCS Voice Communication and Control System
WMS Warehouse Management System
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49
Contacts

Mr. Hemant Bhattbhatt

Senior Director
Deloitte Touche Tohmatsu India Pvt. Ltd.
31, Nutan Bharat Society,
Alkapuri
Baroda-390 007
Tel.: +91 (265) 2333 776
Mobile: +91 98240 14075
Fax: +91 (265) 2339 729
Email: hbhattbhatt@deloitte.com

50
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