Accurate Data is the First Step in Bringing Down Logistics Costs in India

Why in News?

• The world of logistics is a complex and crucial component of any nation's economic landscape.
• India's improvement in the LPI rankings over the years signals positive developments in its logistics landscape, demonstrating a commitment to enhancing its global competitiveness and efficiency in trade logistics.
• Therefore, the assessment of India's logistics scenario, analysing key indicators, methodologies, and recent reports are necessary to gain a nuanced understanding of its performance and challenges.

The Logistics Performance Index (LPI)

• The Logistics Performance Index (LPI), developed by the World Bank, serves as a pivotal tool for assessing a country's efficiency and effectiveness in trade logistics.
• The LPI comprises six key dimensions that collectively provide a comprehensive overview of a nation's logistical capabilities.
• These dimensions include customs, infrastructure, international shipments, logistics competence, tracking and tracing, and timeliness.

India’s Standing in the LPI

• Despite potential methodological caveats inherent in survey-based indices, the 2023 LPI positions India at 38 out of 139 countries, an improvement from its 2014 rank of 54.
• This positive trend aligns with India's 2022 vision to reduce logistics costs, improve LPI rankings, and establish a data-driven decision support mechanism.
• In addition, there is PM Gati Shakti, which was launched in 2021. However, because of understandable time lags, the impact of this does not show in LPI 2023.

An Assessment of Logistics Costs in India

• Economic Survey 2022-23
  • The Economic Survey 2022-23 highlights that logistics costs in India have persistently ranged between 14-18% of the Gross Domestic Product (GDP).
  • This figure starkly contrasts with the global benchmark of 8%, underscoring the challenges India faces in achieving optimal efficiency in its logistics operations.
  • The survey draws attention to the discrepancy between India's logistics costs and international standards, emphasising the need for strategic interventions to reduce these costs.
• Dun and Bradstreet (D&B) 2018 Report
  • A port logistics report adds depth to the discussion by focusing on the cost of doing business at sea ports.
  • The report found that the cost was approximately 15-16% of the consignment value.
  • Notably, there was considerable variation across ports, emphasising the need for a nuanced approach when assessing logistics costs within specific segments of the supply chain.
• CII-Arthur D Little Report (2020)
  • It delves into logistics costs across the entire supply chain, estimating them to be around USD 400 billion, equivalent to 14% of India's GDP.
  • Comparisons with global peers, such as the United States, Europe, and China, reveal a competitiveness gap of USD 180 billion.
  • The report highlights the urgency of addressing these high logistics costs to enhance India's economic competitiveness on the global stage.
• NCAER Report (December 2023)
  • The National Council of Applied Economic Research (NCAER) introduced a fresh perspective in its report on logistics costs in India.
  • It acknowledges the absence of official estimates for logistics costs as a percentage of GDP and references various private sector and academic institutions' estimates.
  • The report's meticulous methodology, employing supply and use tables, provides a nuanced and precise estimation.
  • According to this report, logistics costs in 2021-22 ranged between 7.8% and 8.9% of GDP, showcasing a decline over time, with a transient increase in 2017-18 and 2018-19.

Challenges/Nuances for Policymakers to Formulate Effective Strategy for India’s Logistics Sector

• Methodological Variances
  • One of the primary nuances in interpreting logistics cost reports lies in the divergent methodologies employed by different studies.
  • For example, the above reports adopt varying approaches to estimate logistics costs, ranging from consignment value percentages to supply and use tables.
  • The differences in methodologies contribute to the variation in reported figures, necessitating careful consideration when drawing conclusions.
• India's Competitiveness on the International Stage
  • The persistent comparison with global benchmarks, such as the 8% GDP threshold for logistics costs, raises questions about India's competitiveness on the international stage.
  • Reports consistently highlight a competitiveness gap, with logistics costs significantly exceeding global averages.
  • This has implications for India's ability to attract investment, engage in global trade, and position itself favourably in the increasingly interconnected world economy.
• Disparities on State-Level
  • The Logistics Ease Across Different States (LEADS) report sheds light on state-level variations in logistics performance.
  • States categorised as achievers, fast movers, and aspirers display divergent capacities in managing logistics operations.
  • Coastal states like Andhra Pradesh, Gujarat, Karnataka, and Tamil Nadu emerge as achievers, emphasising the importance of regional dynamics in shaping the overall logistics landscape.
  • The report's suggestion for states like West Bengal - to formulate logistics master plans and policies underscores the need for tailored, state-specific interventions.

Evolving Narratives on India’s Logistics Costs

• Challenging Some Established Perceptions
  • The evolving narratives on logistics costs in India challenge some established perceptions with respect to the costs of logistics in India.
  • As methodologies become more refined, and newer reports provide precise estimations, the narrative may shift from a blanket acknowledgment of high costs to a more nuanced understanding of the sector's dynamics.
  • This evolving narrative has implications for businesses, investors, and policymakers, urging them to stay updated of the latest data and adapt strategies accordingly.
• Positive Trends Amidst Existing Challenges
  • While challenges are apparent, positive trends also emerge from the data.
  • The improvement in India's LPI rankings over the years and the declining trend in logistics costs, as indicated by the NCAER report, present a more optimistic outlook.
  • These positive signals suggest that efforts to enhance logistics efficiency and reduce costs may be gaining traction, reflecting a positive trajectory for India's logistics landscape.

Conclusion

• The landscape of logistics in India is multifaceted, with indices like LPI, diverse cost estimations, and state-level dynamics contributing to a comprehensive understanding.
• The recent NCAER report provides a valuable methodological foundation for future discussions, challenging prevailing notions and underscoring the need for precise measurement in evaluating India's logistics performance.
• As India strives to enhance its global standing in logistics, a nuanced approach, encompassing both macro and micro perspectives, is imperative for sustainable growth and efficiency improvements across the nation.

Q1) What is the Logistics Performance Index (LPI), and why is it significant for assessing a country's logistics performance?

The Logistics Performance Index (LPI) is a benchmarking tool developed by the World Bank that measures and evaluates the efficiency of logistics and supply chain management in different countries. It considers various factors such as customs efficiency, infrastructure quality, shipment timeliness, and logistics competence. The LPI provides a comprehensive assessment of a country's logistics performance, offering valuable insights for policymakers, businesses, and investors. A higher LPI score indicates better logistics performance, facilitating smoother trade, reduced costs, and improved competitiveness for the country.

Q2) How does the Logistics Performance Index impact global trade and economic development?

The Logistics Performance Index (LPI) plays a crucial role in influencing global trade and economic development. Countries with higher LPI scores are likely to experience improved efficiency in their logistics and supply chain networks, leading to faster and more cost-effective movement of goods. This, in turn, attracts foreign investment, enhances trade competitiveness, and stimulates economic growth. Additionally, a strong logistics performance fosters better integration into global value chains, promoting international trade partnerships. Policymakers and businesses often use LPI data to identify areas for improvement, implement targeted reforms, and enhance the overall logistics ecosystem, contributing to sustained economic development.

Source: The Indian Express