Role of indian_logistics_industry_in_international_trade-dissertation-ac


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Role of indian_logistics_industry_in_international_trade-dissertation-ac

  1. 1. dissertation 2014 HEISENBERG/AC/2014/Do Not Copy “STUdy of The Role of indian logiSTicS indUSTRy in inTeRnaTional TRade” A Dissertation Report
  2. 2. CONTENTS __________________________________________________________________ Executive Summary Chapter 1 Introduction 1.1 Introduction 1.2 Role of Logistics in International Trade 1.3 Problem Statement Chapter 2 Review of Literature Chapter 3 Research Methodology 3.1 Objective 3.2 Scope of research 3.3 Sources of data Chapter 4 Trade and Logistics Analysis 4.1 Trade Analysis 4.2 Logistics Analysis Chapter 5 Infrastructure of the Indian Logistics Industry 5.1 Seaports 5.2 Railways 5.3 Roadways 5.4 Air cargo and Airports 5.5 Warehousing Chapter 6 Private Public Partnership Models 6.1 Challenges in PPP 6.2 Key Sectors/Industries for PPP Chapter 7 FTA, FTZ, FTP 7.1 FTA 7.2 FTZ 7.3 FTP Chapter 8 Recommendations and actions required Chapter 9 Conclusion References Annexure
  3. 3. EXECUTIVE SUMMARY __________________________________________________________________ With increasing globalization, there has also been an increase in the trade volumes between nations. Developed countries have and will continue to form trading blocks, which might jeopardize the developing and emerging economies, because of their lack of infrastructure, poor policy and regulatory environment, technology, skills and manpower. Even though Asia is said to become the trading hub in the near future, the question remains if India will play a major trading hub in Asia. To sustain and drive economic growth, the movement of goods associated with a mature economy will require a vastly superior service sector as well as physical logistics infrastructure. The transformation of India‘s logistics landscape needs a clear, long-term and sustainable vision encompassing initiatives that are proactive rather than reactive to leverage India‘s economic potential in the future. This study proves that a country‘s ability to trade globally depends on its traders‘ access to global freight and logistics networks. And the efficiency of a country‘s supply chain (in cost, time and reliability) depends on specific features of its domestic economy (logistics performance). Better over-all logistics performance and trade facilitation are strongly associated with trade expansion, export diversification, attractiveness to foreign direct investment and economic growth. This study analyzed the current trade and logistics scenario of India. In the trade analysis, India is compared with the other BRIC nations, Germany and Poland, with respect to cost and quality of trade. With the help of the Logistics Performance Index, these countries are graphically ranked. In the logistics analysis, we study the industry characteristics, infrastructure status, various private partnership models and other policy and regulatory concerns. Towards the end of the study, various recommendations are provided.
  4. 4. CHAPTER 1: INTRODUCTION __________________________________________________________________ 1.1 Introduction: Economists have known that international trade is one of the most important ways in which societies can increase their standard of living, since the time of Adam Smith and David Ricardo, with their work on specialization and comparative advantage. The connection between international trade and economic growth is supported by evidence from every period of human history. The Roman Empire was rich in part because it was able to trade over long distances. The spice trade between Europe and Asia was the first example of how trade between these two continents could enrich both places. The 19th century saw an unprecedented rise in trade, with a big reduction in piracy and huge improvements in the quality and speed of shipping. Nineteenth century ―clipper ships‖ established that there really was a market for premium priced speedy logistics, and that such a market was large. This was also the period in which modern economic growth first became established. Between the wars, in contrast, the rise of protectionism and the collapse of world trade exacerbated and extended the Great Depression, bringing and extending economic misery to millions of people. The post world war saw trade increase dramatically, bringing with it new found and unprecedented prosperity. International trade increased the standard of living, both for those in developed and for those in developing countries. The modern world trades like never before. In simple weight terms, more than seven times as many goods are traded now as fifty years ago. Even more impressively, after stripping out the effects of inflation, the value of goods traded internationally has increased by more than 16-fold in the last half century. That the value of international trade has been increasing more rapidly than the weight of goods traded tells us that immediately that the types of good being traded have changed. Although bulk cargoes such as grain and oil remain important in volume terms, today high value added merchandize is critical to trade performance. The increasing value of goods shipped means that, now more than ever, time matters. No longer is trade simply concerned with low value bulk goods that can be stored on arrival until needed. Trade today is increasingly dominated by high value, time critical goods, both as part of global supply chains and for the final customer. Moreover, the direction of global trade is set to change as a mega agreements like the Trans- Pacific Partnership (TPP) and Trans-Atlantic Trade and Investment Partnership (TTIP) come into force. The TPP includes 12 of the pacific rim countries including the US and Australia, whereas TTIP is between the US and European Union. Respectively they represent around 39% and 60% of the world GDP. They have the potential to adversely affect excluded countries such as India by diverting trade and investment away from them and weakening their positions in global value chains.
  5. 5. As a result of TPP and TTIP, India‘s nominal GDP is expected to be reduced by more than one per cent and the resultant negative multiplier effects on revenue ad employment generation will be substantial. Much of this impact will not be on account of reduction in tariffs in TPP and TTIP countries (as they are already low), but as a result of removal and/or harmonization of non- tariff measures, particularly in respect to process and product standards, the application of intellectual property rights and other behind-the-border trade facilitation measures. As a result, some of the TPP and TTIP countries are expected to enhance their internal supply potential which can further shrink their existing export markets that India enjoys with them. Which is why, now more than ever, India needs to improve its trade scenario. And not just with the exports and imports, but it is important to improve the countries‘ logistics infrastructure, regulations and policies surrounding the tariffs and non-tariff measures in order to put India on the mark. 1.2 Role of Logistics in International Trade: International trade does not happen by itself. Companies make conscious decisions as to where to produce their goods, where to sell them, and how to move them from one to the other. There are many aspects to that decision, but one important aspect is the quality and cost of logistics. It is of no use having very low production costs in a particular place if the finished product cannot be moved easily, cheaply and reliably to the customer. There are two principle aspects to good logistics. The first is cost: lower costs are self-evidently attractive to firms. The second is quality: logistic reliability is paramount for many companies. There are clear interactions between cost and quality, but these are not straightforward. At one level it is always possible to pay more for better quality. But it does not follow that higher costs in a country necessarily imply higher quality logistics. Some countries have higher wage rates, or greater restrictions and regulations that increase cost without increasing quality. Other countries have regulations and restrictions that make logistics unreliable, or poor quality infrastructure that means that delays are common. It is therefore necessary to consider that these two aspects of logistics separately. It is also necessary to remember that individual firms will have different preferences over cost and over reliability. Producers of relatively low-costs goods will be willing to take more risks on reliability in exchange for lower costs. In contrast producers of relatively high-value goods, especially high-technology or other products with limited shelf life, will be more willing to pay higher prices for greater reliability. The last 25 years have seen a particular increase in the quantity of high-technology goods that are exported, often over very long distances. For that reason we concentrate particularly on the effects of logistics quality on trade. It is also worth noticing that it is transport and logistics cost, not tariffs that are the biggest barrier to trade While reductions in tariffs would be extremely beneficial for particular products, reductions in transport costs are more important for trade as a whole. These reductions can be
  6. 6. achieved both by governments reducing obstacles to trade, and by private sector logistics firms becoming more efficient. 1.3 Problem Statement: With the increasing pace of global integration, there is a need for India to compete in terms of its ability to link with global and regional markets - competitively and effectively. This study focuses on the status of the Indian logistics industry and the various facets of improvement required in its trade logistics. Improving the quality of logistics and transport systems and simultaneously reducing costs improves international market access, and leads directly to increased trade.
  7. 7. CHAPTER 2: REVIEW OF LITERATURE __________________________________________________________________ As the pace of global integration continues, developing countries will compete increasingly in terms of their ability to link with global and regional markets competitively and efficiently (Schware and Kimberly, 1995). In making trade happen, both government and private sector play roles, which may either improve or worse the conditions for trade (Tim Leunig, Chris Minns and Diana Weinhold). In their study – International Trade, Express Logistics and Globalization: part and parcel of the solution to current economic problems, they explained that those countries that create the best conditions will attract companies that are part of the global economy. This is particularly important for developing countries for which access to world markets is an absolutely critical part of their drive for prosperity. Although innate geographical location and hard-to-change wage and skill levels explain a great deal of world trade, our research sows that trade infrastructure, both physical and legal, matter a great deal in explaining which countries are most successful in international trade But why focus on logistics? Because reducing cost and improving the quality of logistics and transport systems improves international market access and leads directly to increased trade, ad through this to higher incomes and the scope for significant reductions in poverty (Robin Carruthers, Jitendra N. Bajpai, David Hummels). In their study – Trade and Logistics : An East- Asian Perspective, they have noted that East Asia‘s progress on logistics has failed to keep pace with its growth in trade. Developing countries in other regions are now catching up, and so faster progress on logistics development will be crucial to sustaining East Asia‘s competitive advantages. For most countries in East Asia, including India, high logistics cost derives from poor transport infrastructure, underdeveloped transport and logistics services, and slow bureaucratic procedures for dealing with both exported and imported goods. The balance among these three varies among countries, but in each country a complementary approach to address all of them will be needed to produce a sustainable improvement in competitiveness. Recent studies have indicated the importance of efficient ports (in terms of operational and document facilitation) for trade competitiveness, but the arguments presented in this study shows that ports are only one aspect of the connection between logistics and trade growth. While understanding the total cost of getting products from producers to markets, ‗land transport to ports‘ accounts for a higher proportion than processing within the port or the maritime voyage itself; its improvements in land access that offers the greatest scope for increasing trade competitiveness. AWorld Bank Study by Wilson and others (2002) shows that APEC (Asia Pacific Economic Cooperation) countries differ substantially in the quality of their logistics and trade facilitation across a broad range of measures, including port infrastructure, customs clearance, regulatory administration and e-business use. They find these differences are significantly related to
  8. 8. differences in trade performance, and conclude that substantial growth in trade within their block could be accomplished by bringing lagging countries up to media performance levels. Logistics, organizing the movement of goods over time and space, has evolved from its 19th century military roots to today‘s international supply chain. As the backbone of international trade, logistics encompasses freight transportation, warehousing, border clearance, payment systems, and many other functions. These functions are performed mostly by private service providers for private traders and owners of goods, but logistics is also important for the public polices of national government and regional and international organizations. The improvements in global logistics over the past two decades have been driven by innovation and a great increase in global trade, as mentioned in Conecting to Compete: Trade Logstics in the Global Economy (2012), a study by World Bank. According to this study, the LPI (Logistics Performance Index) measures the on-the-ground trade logistics performance, helping national leaders, key policy makers and private sector traders understand the challenges they and their trading partners face in reducing logistical barriers to international commerce. As discussed in Deloitte‘s Knowledge paper on Intermodal and Multimodal Logistics, India has experienced fast-paced growth over the last decade. Though the growth has primarily come from the services sector, manufacturing and exports have also risen substantially. Logistics as a function is being increasingly outsourced by manufacturers. However, the Indian logistics sector I may ways still lags behind the global standards of performance. This is evident from the fact that we are ranked as low as 46th among 155 countries in the World Bank LPI. Comparatively, our neighbor China got the 26th rank. The average logistics cost in India is around 13% of GDP. Given there is a substantial need to invest in, and improve efficiencies in, intermodal and multimodal logistics sector so that the friction costs do not impede the desired shifts. Coming back to India‘s trade, in the process of globalization which is escalating India‘s position in world trade, transport volume has climbed rapidly in recent years. In the study done by DHL, Discover Logistics, it is said that a vital step in developing Indian infrastructure is expansion of road and rail networks, and also modernizing harbors and airports. However, the expansion of the logistics infrastructure has been incapable to keep up with this pace. For this reason, transport capacities have already reached their limits. The transshipment times for ships in Indian harbors are three to four times longer than the average time in the west. Logistics costs are also very high in international comparison because of the poor infrastructure. For this reason, India will have difficulties positioning itself as a global logistics hub in years ahead.
  9. 9. CHAPTER 3: RESEARCH METHODOLOGY __________________________________________________________________ 3.1 Objective: With increasing globalization and growth in India‘s manufacturing sector, trade volumes from and to India have been increasing. To cater to the growth in export and import, it is necessary to step ahead and focus strongly on improving logistics and trade infrastructure. The study therefore lies in finding out the gaps in the existing systems and revolves around the questions ―What India must do to improve its logistics performance?‖ and ―How India can become a major trade hub in Asia?‖ 3.2 Methodology: This is a descriptive study done on the industry and trade scenario of India. The study is done based on previous research and material. A qualitative analysis is done on the logistics industry, and on the basis of that various facets for improvement are studied further. 3.2 Scope of research: This study will cover analysis of logistics and trade scenario pertaining to India, with a few references (for purpose of comparison) to the other BRIC nations, Far East Asia , Europe and America. The research done for the study is descriptive. This study is therefore doe on a collection of research papers, articles, blogs and white papers to help gain an idea of the current logistics industry and trade outlook of India. Based on the research done, both trade and logistics analysis of the Indian industry is done. 3.3 Source of data  Internet  Reference books  Research articles  White papers  Blog pages
  10. 10. CHAPTER 4: TRADE AND LOGISTICS ANALYSIS __________________________________________________________________ 4.1 Trade Analysis: In this section we will concentrate on the experience of companies who trade with four important nations: Brazil, Russia, India and China. All of these countries are large and important in themselves, together accounting for 40% of the world‘s population and 15% of the global economy, and in addition they also serve as exemplars of the situation of other emerging economies. Brazil is in many ways the most developed of these economies, but despite its greater wealth it is in many senses less developed in terms of its role in world trade. Russia is notable for the extent of its mineral wealth, and its trade position is determined to a much greater extent by the commodity cycle. India is the least developed of the four nations, but in many ways the export sector, with a high emphasis on services, is remarkably modern. And China, of course, is now the workshop of the world. In order to place the experience of these four nations into context, we will also include two other countries in our analysis. The first country is Poland. Poland is also an emerging economy, but one that is remarkably different because of its position within the European Union. This matters both in general and obviously for logistics: it is very easy to move goods from Poland to Western Europe. And finally we will consider the position of Germany, which we use as a representative developed nation. Emerging economies increasingly benchmark themselves not only against each other, but against developed nations such as Germany. 4.1.1 Cost The two most important means of transporting goods for international trade are by air and sea. Freight sent by air express will always be more expensive than sea borne freight, but there is no constant ratio between these two costs over time. The responsiveness of air express supply to changes in demand is reasonably high, since additional aircraft can be usually leased at relatively short notice. In addition, a significant proportion of air express is carried on passenger flights, where additional capacity is usually available. The ability of supply to respond effectively to peaks and troughs in demand is one of the attractions of air-borne freight, and keeps the price constant year on year. Of course, the cost of air express varies over time, with fuel prices playing an important role in determining the charges in this sector The cost of sea-borne freight varies more dramatically, as shipping capacity is essentially fixed in the short run - it is hard to lease additional ships, and only little cargo can be carried on passenger vessels. When demand rises, cargo ships take time to build, so prices can rise substantially in the short run. And since ships, unlike planes, require significant levels of maintenance even when not being used, shipping companies
  11. 11. generally prefer to have their ships sailing even when the returns are low. This means that when demand falls, prices can fall dramatically. The prices of sea-borne freight are also volatile because ships built to carry one type of cargo cannot easily carry other sorts of products. A liquefied natural gas tanker cannot carry cars, a car carrier cannot carry grain, a grain carrier cannot carry oil, and so on. In addition, some ships are too large o be used o some routes or in some ports : Post-Panamax freight ships for example, are too large to pass through the panama canal, while only a handful of ports in the world are large enough to fully laden ultra large crude carriers. It is clearly not feasible to show the cost of freight to and from each and every country in the world. Therefore, I have concentrated on the four most important emerging countries, Brazil, Russia, India and China, as well as a representative of the Eastern European EU accession states, Poland. In some cases we also include data for Germany, as an example of good practice. It is not that case that Germany is the ―best‖ country for logistics, but it is a good example of a country with a reasonably high performing logistics sector. In each case data for the United States, or any other developed nation would be very similar to that presented for Germany. The cost of air-borne freight is relatively constant for the countries in this sample. At one level, this is to be expected, because international air service is a relatively standardized service, with broadly the same type of planes flying to different locations, lading at airport with relatively similar facilities, and so on. But despite these apparent similarities, it is worth noting the strong performance of China, which has significantly lower costs than other competitor countries. This is due to their efficiencies and economies of scale : if planes are full, then the cost of the plane can be divided up across more packages. Air-borne frieght costs Prices are quoted regularly by all major international logistics firms The standard cargo is generally small, and measured in kilogram rather than by the ton. Sea-borne freight costs The most relaiable measure is the cost of transporting a container The cargo are generally larger, and measured by volume
  12. 12. Source : DHL (Please check annexure for further details – table 1) The cost of sea-borne transport varies much more dramatically around the world. It costs, for example, four times as much to import and export goods into the Russian Federation as it does into China. Conventional ports for cargo vessels are not nearly as homogenous as airports. They vary much more in terms of the sorts of vessels that they can accommodate, and their efficiency is heterogeneous. It is also worth noting that high wage countries such as Germany do not have the highest logistics costs: they are able to offset much of the high cost of labor by technological and organizational efficiency. Once again, China stands out as having exceptionally low logistics costs. Source: pdf - World Bank Logistics Performance Index 2007
  13. 13. 4.1.2 Quality Measuring quality is more complex, because there are many aspects of quality and reliability. Many countries appear to have very efficient practices on paper, but the reality does not always live up to the country‘s aspirations. It is therefore critically important that this measure is based on customer‘s reports about how things actually work, not a country‘s claims as to how well they work. Because of the critical importance of quality, particularly for the sort of high-value imports ad exports that are now so important to trade, we will examine a number of different measures of quality. These consists of :  Number of days that importers and exporters report that it takes for shipment to clear customs  Likely of goods going through physical inspection  Lead times necessary to import or export  Ability to request a review if your goods are delayed (please check annexure for further details – table 2 and 3) 1. Time to clear customs The time that importers and exporters expect a cargo to take to clear customs is a critically important measure of a country‘s attractiveness as a place in which to do business. Being able to move swiftly trough customs procedures is important for any legitimate business. Customs processes generally work most efficiently in developed economies, and in that context it is o surprise to find that, Germany ( the representative of a developed economy) performs most strongly, with an average time to clear customs of less than one day. China and Russia stand out as having effective customs operations, with Brazil proving a real laggard.
  14. 14. 1. . Chance of physical inspection: It is not only the speed to pass through customs that matters to those involved in international trade, but it is also the chance of a delay. This is particularly important for cargoes that are time sensitive (this by definition includes all air-freight cargo). The big question here is whether all cargo should be physically inspected. All states have the right to ensure that the cargo entering the country is keeping with the documentation, but effective customs procedures should be able to tell legitimate imports and exports from those that need to be inspected without having to physically inspect a particularly high proportion of goods entering and leaving the country Once again, developed countries always do well on measures such as these. Their long- standing relationships with trading partners generate good information on which cargoes are legitimate and do not need to be physically inspected. German authorities inspect only 2% of the cargoes, and Polish only 3%. These countries are confident that they have other ways of detecting the entry of illicit cargoes. China leads the way among emerging economies, posting a significantly better performance than Brazil, Russia or India. Cargoes are almost four times more likely to be inspected by Indian authorities than the Chinese, and in total Indian authorities inspect 25% of shipments. When one in four cargoes are stopped and physically inspected it is clear that those involved in importing and exporting have to include a time allowance to take account of this threat. This sort of uncertainty is a particular problem for those who intend to import or export time sensitive goods, including high-value added electronics, and thus makes Russia and India less attractive places to produce such goods.
  15. 15. 2. Availability of Reviews Both delays in customs in general, and the inspection of cargoes are legitimate actions that states need to take time from to prevent smuggling and to ensure that tariffs and quotas are correctly applied. Nevertheless, there will be times when importers and exporters feel that the rules have not been enforced in a manner that is fair and impartial, or proportionate to the likelihood that the rules have been transgressed. At such times it is useful to be able to have the decisions reviewed. Furthermore, the very existence of such review procedures makes it more likely that the initial decision will be correct, since the person making the decision knows that it can be contested. In theory, almost all countries have such procedures, but to be effective they have to be quick, cheap and impartial. Interestingly, international trade believes that the review of procedures is notable, more by their absence than by their existence in many countries. Germany again stands out: traders believe that they can cheaply and efficiently contest any decision made by German customs agencies if it seems to be unfair. Developed countries have such review procedures, and they are tremendously trade enhancing. Unfortunately, such review procedures are questioned to be a reality in India and China, and are held to be non- existent in Russia, Brazil and Poland. 3. Lead Times Goods have to be brought from the factory to the sea or air port, and after customs clearance, to the customer. Efficient infrastructure makes a country appealing to importers, exporters and those who need to move goods from one part to another. If the ports are congested, the cargoes have to wait to be loaded; or if the road and rail systems are slow or prone to delays, those who want fast and reliable connections may well look elsewhere.
  16. 16. Unsurprisingly, developed countries, which have far more infrastructure than developing and emerging economies, top the poll. German infrastructure is considered to be adequate for journeys that international traders fid necessary. Of course, in part that reflects not only the quality of infrastructure, but also the proximity of industrial locations relative to ports. In particular, locating factories near to ports and airports will reduce the time taken to move cargoes from factory to its point of departure. Therefore, location as well as infrastructure matter. 4.2 LOGISTICS ANALYSIS It has been seen that globally the key driver of demand for world-class logistics services is a critical mass of multinational corporations (MNCs), who typically require low-cost manufacturing locations connected to highly efficient supply lines. Although India is already an important sourcing country, the surge of business is not coming to the country on account of the fact that some pieces of logistics hardware are not up to the global standards. At the ports, ships have to wait long in the channel for berthing, and productivity in loading and unloading is low. There are gaps in hinterland connectivity as well. While significant progress has been made in improving the roads in the Golden Quadrilateral, there are deficiencies in the full network connecting cities and production and consumption centers. Ribbon development and mixing of motorized and non-motorized traffic slow down the movement of vehicles. In addition, there is a lack of capabilities in some segments of the supply chain, absence of common standards for equipment and technology, and inter-state as well as intra-state barriers. These factors lower India‘s attractiveness as an investment destination. An effective logistics provider should have the expertise and global connectivity to manage cargo through an integrated network from the time the cargo leaves the origin and upto the time it reaches the destination. Expertise in freight analysis, audit, and payment, plus service-level reporting move freight more efficiently. Transportation is an essential and a major sub-function of logistics that creates time and place utility in goods. In fact, the backbone of the entire supply
  17. 17. chain is the transportation management that makes it possible to achieve the well-known seven ‗R‘s—the right product in the right quantity and the right condition, at the right place, at the right time, for the right customer at the right cost. Transportation decisions affect the other sub- functions, and there is a close linkage between them. 4.2.1 Industry Characteristics The Indian logistics industry has seen the emergence of a large number of players, both organized and unorganized, in the recent years. The dynamics of market competition and demand from consumers has brought forth certain characteristics of the industry, as indicated below: 1. The logistics industry is highly fragmented. The road transportation service provider segment is completely dominated by small trucking companies and individual truckers. The freight forwarding service provider segment is also represented by thousands of small Customs brokers and clearing and forwarding agents. Few service providers have the capability to provide more than one service and it is very rare that a single service provider has the capability to provide all the logistics services. Such fragmentation has led Indian industries to outsource packets of individual logistics functions to different service providers while retaining the overall control of logistics in-house, at heavy administrative and infrastructural costs. 2. The logistics industry in India is seeing intense competition between the established and new players, resulting in lower prices. In order to sustain their profitability, these players are tempted to even lower the quality of services offered and evade taxes. The standards of service are further eroded by cost-cutting measures involving non-compliance of the
  18. 18. operating norms stipulated in the various regulations and acts, such as the Motor Vehicles Act relating to drivers and vehicles, volume and weight restrictions, etc. 3. Due to its highly fragmented and underdeveloped nature, the Indian logistics industry is characterized by the absence of economies of scale. Typically, the expansion of scale and scope of operations generate reductions in costs. Differing rates of State Value Added Tax (VAT) are an additional disincentive for the Indian logistics service providers to increase in size by expanding their operations across states. 4. Apart from the non-uniform tax structure, logistics providers have to face multiple check posts and harassment by the enforcement agencies. According to one estimate, informal taxes on account of police, check posts, and others may constitute well over 20 per cent of the freight cost. High costs of operation and delays involved in compliance with varying documentation requirements of different states further raise the costs of operations. 5. Indian shippers expect 3PL providers to own quality assets, provide more value-added services to act as an integrated service provider, and establish world-class information systems for greater visibility and real-time tracking of shipments. At the same time, there is also customer pressure to keep the prices low and competitive and stagger the schedule of payments, often resulting in inadequate working capital for the logistics operators. Moreover, the inability of service providers to go beyond basic services and provide value-added services such as small repair work, kitting/dekitting, packaging/labelling, order processing, distribution, customer support, etc. has demotivated shippers from going for outsourcing in a big way. The development of the logistics sector in India is hampered by poor physical and communications infrastructure. Slow movement of cargo due to bad road conditions, multiple check posts and documentation requirements, congestion at seaports due to inadequate infrastructure, and delay in procedural clearances, coupled with unreliable power supply and slow banking transactions, make it difficult to meet the deadlines for international customers. Low penetration of Information Technology (IT) and lack of proper communications infrastructure also result in delays and lack of cargo in-transit visibility and real-time tracking ability. The absence of a seamless flow of information among the constituents of logistics service providers creates a lot of uncertainty, unnecessary paperwork and delays, and lack of transparency in terms of cost structures and service delivery. For example, presently, there is no real-time process by which a shipper may know about the availability of trucks and going rates at the destination market. Therefore, since return loads cannot be ascertained, the shipper has to pay a higher freight rate if it cannot ensure return load. With the availability of market information to both the shipper and the service provider, the service provider can ensure return load from the
  19. 19. origin itself and the shipper does not have to pay a higher rate for his shipment. This can enable rationalization of rates as the service provider‘s cost structure would become in line with the actual market rate. A similar example is that of Less-than-Truck-Load (LTL) shipments costing more than Full-Truck-Load (FTL) shipments. At present, due to the absence of shipment tracking systems, a shipper booking a LTL shipment cannot track the status of the shipment after it leaves the warehouse at the origin and before it reaches the warehouse at the destination. The service provider may convert this LTL shipment into a FTL shipment at its own warehouse before delivering at the destination. However, the shippers are placed at a disadvantage as they end up paying LTL rates for a FTL shipment. Information availability before and during delivery can address this problem and benefit both the shipper as well as the service provider. Indian freight forwarders face stiff competition from multinational freight forwarders for international freight movement. Because of their size and presence in many countries, multinational corporations (MNCs) are able to offer low freight rates and extend credit for long periods. Indian freight forwarders, on the other hand, because of their smaller size, lack of access to cheap capital, and the relative infancy of the Indian logistics industry, are unable to match the same. Moreover, clients of MNCs often want to deal with single service providers and, especially for free-on-board (f.o.b.) shipments, specify the freight forwarders, which most of the time happen to be the multinational freight forwarders. This is unfair for Indian freight forwarders. However, as the Indian logistics industry develops, it will enable Indian freight forwarders to bring down costs and improve their service and price offers. The above features of the Indian logistics industry are reflected in varying degrees in the characteristics of the individual industry segments. The following industry segments constitute the overall logistics industry: (i) Transportation infrastructure providers [through rail, road, air, waterways (sea, coastal, and inland), etc.], carriers (rail-roads, motor carriers, parcel companies, barge lines, air freight), and facilitators (port/airport and Customs authorities, and Central and state government departments related to logistics activities); (ii) Warehouses, Inland Container Depots (ICDs), and Container Freight Stations (CFSs); (iii) Intermediaries [Freight forwarders, Non-Vessel Operating Common Carriers (NVOCCs), Inter-modal Marketing Companies, Customs House Agents (CHAs), etc.]; (iv) Logistics providers: 3PL and 4PL providers.
  20. 20. 4.2.2 Porter’s five forces analysis of the Indian Logistics Industry Bargaining power of customers: The logistics market in India is not regulated and prices are market determined. The market is fragmented and competition among existing players is high. The homogeneity of the logistics market and the ‗ready to offer‘ services of logistics players make it easy for companies to shift from one logistics player to another without incurring significant collateral costs. Moreover, players in the warehousing, trucking and 3PL segment incur significant capital cost and hence need high volumes in order to recover the capital costs. These factors result in high bargaining power of customers. Bargaining power of suppliers: Suppliers to the logistics industry can be primarily classified into infrastructure providers and services providers. Infrastructure providers include government, truck manufactures, container suppliers and construction companies. Service providers primarily include employees and providers of technology. Government is dominant player since it not only sets up the policies but also actively participates in evaluation of the bids for infrastructure projects involving public private participation. As far as other providers are concerned, there is intense competition with no dominant player in the market. This lowers the bargaining power of suppliers(except the government). Threat of New Entrants: There are high barriers to entry in the sector. To offer differentiated services such as PAN-India service/integrated service/outsourced logistics, new players need to make significant investment to set up the infrastructure This makes the sector unattractive for Bargaining power of customers (HIGH) 1. Prices are market driven 2. Homogeneous markets makes it easy for companies to change logistics providers Bargainig power of suppliers (LOW) 1. Intense competition among the infrastructure providers Threat of new entrants (LOW) 1. Highly competitve market 2. Requires significant investment in infrastructure Threat of substitutes (LOW) 1. Trend reflects increasing share of outsourced logistics to total logistics. Rivalry (HIGH) Numerous players with not much differentiation. No single player domiates the market
  21. 21. players who are unable to raise the requisite capital. There are numerous players offering basic services in the Express cargo and courier segment. High competition will make it difficult for a new player to grab a reasonable share of the market. Hence threat of new entrants is low. Threat of Substitutes: The main threat faced by the logistics players in India is from their customers opting to handle logistics in-house. However, past trend suggests that the share of outsourced logistics is increasing steadily. This ratio is expected to increase further as more companies start seeing outsourced logistics and the resulting gains in efficiency in supply chain management, as a tool to gain competitive advantage. Rivalry between existing players: Competition between existing players is high as there are many players (organized and in the unorganized sector) offering only one or two services such as Express cargo and Courier services. There is not much differentiation between players, hence there is intense rivalry leading to price wars. The study aims to find ways to improve the competitiveness and effectiveness of India‘s trade, and that only means improving the structure of the India logistics industry and improving the quality of regulations and policies. For this it is important to have strong financial funding also, which the government alone may find difficult to fund for. Only through improved quality of logistics and transport systems, which inherently should reduce costs, will help in better international market access, leading to improved trade. The following chapters will focus on these aspects. Improved Trade Improved Logistics Infrastructure Better regulations and trade policies Better financing through PPP models
  22. 22. CHAPTER 5: INFRASTRUCTURE OF THE INDIAN LOGISTICS INDUSTRY __________________________________________________________________ Infrastructure development is a critical enabler to economic growth of a country. Logistics infrastructure, which covers the road, rail, waterways and air network of a country, is the backbone on which the nation marches ahead. The need to develop infrastructure had been realized almost a decade ago, but the task still seems daunting. The present infrastructure is insufficient, ill-equipped and ill-designed to support the expected growth rates of 7-8% over the next decade. And the expected 2.5 fold growth in freight traffic will further increase the pressure on the existing infrastructure, if immediate actions for improvement are not taken. India needs to pursue an logistics infrastructure strategy that minimizes investment, maximizes cost efficiency, reduces losses for users and is energy efficient. We will now focus on each of the modes that comprise logistics infrastructure in India. 5.1 Indian Sea ports India‘s ports serve as gateways to India‘s international trade and facilitate 90 percent by volume and 70 percent by value of India‘s external trade via maritime traffic. The country‘s long coastline spans across 7,500 kilometers (kms) with 13 major ports governed by the Centre and about 176 non-major ports, of which only 60 are operational, governed by respective state governments and union territories. Of its major and non-major ports combined, 139 are along the west coast, while the remaining 50 ports are along the east coast The Indian port market has witnessed significant growth over the last decade, growing from 368 MMT in 2000–01 to 898 MMT in 2011–12 at a CAGR of 8.5 percent. Following a temporary deceleration in cargo traffic (at a CAGR of 6 percent) — due to the global economic slowdown between 2007–08 and 2011–12 — cargo traffic across India‘s ports is expected to touch 1,304 MMT by 2016–17 at an accelerated CAGR of 8 percent. 5.1.1 Issues related to sea ports The following shortcomings impact on the performance of Indian ports and lead to escalation of logistics cost:  Ships have to wait long in the channel for berthing, and productivity in loading and unloading is low. The national average turnaround time of vessels for dry bulk and containers is estimated at 5.7 days and 1.9 days, respectively.  The ports are labour-intensive and the mechanization process is slow. Equipment used is outdated and obsolete, causing further reduction in efficiency and productivity.
  23. 23.  Restrictions in navigation channels do not allow bigger vessels to be berthed. The hinterland links to ports are insufficient and need to be improved.  Delays in co-ordination between ports and the Customs authorities delay quicker. Port-side constraints further contribute to increases in dwell time before both incoming and outgoing cargo is cleared. Outlook on traffic at Indian ports Source: KPMG in India analysis The Government of India has planned to replace the National Maritime Development Program (NMDP) with the Maritime Agenda 2010-2020, with the objective of increasing the port capacity. It aims at increasing the port capacity of both major and minor ports, and bring the port performance of Indian ports at par with international standards. An estimated amount of 2,870b INR will be invested to generate port capacity of 300 MMT and cater to cargo traffic of 2,500 MMT by end of 2020. Source: Maritime Agenda 2010-2020, Ministry of Shipping Website
  24. 24. In order to develop capacity of port sector, it is important to focus:  Development of Non-major ports  Development of east coast ports  Containerization 1.Development of Non – major ports: The cargo traffic at no-major ports increased at a CAGR of 13%, over a CAGR of 2% at major ports, during 2007-08 and 20122-12. Its share increased to 39% from 28%, clocking 338 MMT in total traffic versus the 560 MMT at major ports. During the same period, the cargo handling capacity at non-major ports also witnessed a higher growth than that of major ports. The development of non-major ports was fuelled by capacity overruns at major ports, aided by a substantial increase in the cargo traffic of fertilizers, building material and coal. Under the Maritime Agenda, maritime states have set ambitious targets to create additional capacity of 1,290 MMT at an estimated investment of INR 1,680b between 2010-11 and 2019-20. Growth of non-major ports have been primarily led by the development of ports in Gujarat (Mundra, Pipavav, Hazira), which aimed at catering to the north Indian industrial belt, and thereby reducing load on JNPT and Mumbai ports. Market Share of major and non-major ports Source : KPMG In India analysis 2. Containerization: The growth in the container market (CAGR of 12% in past five years) is expected to continue in the medium term, as a result of rising containerization levels and growth in trade. However, at 51 % the containerization level in India continues to fall short of that in developed countries, which have achieved significant levels of 70-80%.
  25. 25. Container traffic and containerization levels Source: Ministry of Commerce, Indian port association database, KPMG in India analysis The following trends are expected to drive growth in containerized cargo:  Increasing containerization level for break-bulk commodities (e.g. steel, cement, rice, sugar)  Healthy growth prospects for industries contributing to container cargo (e.g. textiles, food products, machinery, paper, scrap)  Development of dedicated freight corridors (DFC) and the Delhi-Mumbai Industrial corridor (DMIC) along the north-west corridor, is expected to drive the demand for container logistics infrastructure.  Growing thrust on developing container terminals on the east and west coasts of India  Development of dedicated logistics parks for handling container and bulk cargo. 3. East Coast Ports: With their contribution to India‘s total trade expected to increase from 23 % (in 2010) to 34 % (In 2014), east coast ports are expected to significantly drive the growth of port sector. Through the Maritime Agenda 2010-2020, he GOI plans to create additional port capacity of 900 MMT and invest INR 1,126 b to boost cargo- handling capacity at ports along the east coast. East coast ports are closer to iron ore/coal deposits, power , steel or fertilizer plants, and therefore have traditionally handled bulk commodities; whereas west coast ports have mainly handled POL and container cargo. Container handling capacity along east coast ports are expected to increase from 2 million TEUs(In 2009) to 10.8 million TEU (by 2020)
  26. 26. Capacity at east coast ports 5.2 Railways Spanning 64,456 km with more than 7,133 railway stations, India‘s rail network is the largest in Asia and the second largest in the world (behind the US). The Indian Railways operates 19,000 trains daily, transporting 2.65 MMT of freight and 23 million passengers across the country. However, India‘s rail infrastructure suffers from chronic under investment, due to which its potential for freight movement remains largely untapped. Rail freight has grown at around 7 % over the past five years, and is expected to touch the 1 billion ton mark in 2013, with a 31% share of total freight movement across all modes of transport. Rail has consistently lost out to roads as the preferred mode of transport. 5.2.1 Issues related to railways Even though IR has made notable strides and achieved remarkable growth in freight transportation in recent years. However, there are  Capacity constraints and freight tariffs are still higher than in the developed and advanced developing countries.  Moreover, freight transportation by rail lacks reliability and trackability and is deficient in terms of quality of operations, speed, and customer orientation. For many customers, whether manufacturers or end users, assured delivery of consignments, and the ability to verify periodically that the delivery schedule will indeed be met, is as important as the freight cost. Since the IR cannot provide assurance of delivery and arrangements for tracking consignments are not in position, the shippers prefer higher cost road transport, thus increasing the logistics cost.  Absence of competition and lack of regulatory oversight further affect the quality of service and also keep the tariffs higher than the levels prevalent in the developed and advanced developing countries.
  27. 27. Rail freight Furthermore, passenger traffic enjoys significant priorities over freight traffic; passenger rates are highly subsidized by freight operations and utilize up to 60 % of network capacity but contribute only 30% to revenue. Nonetheless, rail continues to remain the most fastest and economical mode of transport. The capital cost of setting up rail capacity is around 40 % lower than that of comparable modes such as expressways, when measured on a ton-kilometer basis. Further, costs of rail transportation specifically on high traffic density corridors are considerably lower than for other modes. Additionally, rail offers speed and capacity related benefits. One of the important developments in the rail sector is the Dedicated Freight Corridor (DFC), which is expected to mark at paradigm shift in the transportation scenario In India. This will help cater to high speed movement of freight cargo, with no hindrance from passenger traffic, and thus improve service delivery and generating additional freight-carrying capacity. The project envisages the construction of two corridors, one each on the west and east routes, spanning a total length of about 3,300 km. The Eastern corridor, starting from Ludhiana in Punjab will pass through the states of Haryana, Uttar Pradesh and Bihar and terminate at Dankuni in West Bengal. The Western corridor will run from Dadri to Mumbai, passing through the states of Delhi, Haryana, Rajasthan, Gujarat and Maharashtra. Timely completion of the WDFC and EDFC will result in an increase in total rail freight volume movement along particular routes. However, given that the project is significantly behind its original timeline, the potential increase in freight volume has been analyzed I two distinct scenarios, such as ―The DFC Scenario‖ and ―The No-DFC Scenario‖. In a ―No-DFC Scenario‖, freight would continue to move along existing rail and road network resulting in gradual saturation of the rail network over a period of time. This would increase the modal share of road transport from 25% in 2016-17 to 36% in 2021-22. In a ―DFC Scenario‖, the share of rail would
  28. 28. significantly increase due to added capacity and efficiency of new infrastructure. This will mark a shift in the modal mix increasing the share of rail from 84% in 2016-17 to 87% in 20221-22, along these routes. 5.3 Roadways Roads continue to constitute the most significant component of India‘s logistics industry, accounting for 60% of total freight movement in the country. As the demand for goods – either for mass consumption or industrial development – grows beyond the conventional demand- supply hubs of metropolitan cities to a number of widely dispersed tier 1 and tier 2 cities, the share of road transport can expect additional growth, give its ability to facilitate last-mile reach and limited supporting rail infrastructure. Road freight has increased to 1,250 BTKMs in 2011- 12. Over the next five years, from 2012-13 to 2016-2017, assuming a GDP growth of 8% road freight is expected to grow at a CAGR of 9.6% taking the total road freight opportunity to 1,700 BTKMs. The length of district, rural and other roads is 4,455,511 km, followed by 163,898 km of state highways and only 70,934 km of national highways. Of this, approximately, half of the total road length is paved. Consequently, road networks continue to lag behind world averages, with road density at 2.83 km per 1,000 people and 770 km of road length per 1,000 sq. km as compared to 6.7 km and 840 km, respectively, globally. India‘s low average trucking speed of 30-40 km per hour (kmph) as against the global average of 60-80 km per hour (kmph) can thus, be attributed to the constrained and poor quality of the country‘s road networks. However, the completion of the National Highways Development Programme (NHDP), which is aimed at developing 50,000km of national highways by 2015 in seven phases with an investment of INR 3,000 billion and modernization of the road cargo transport community will be game changers for the road transport sector. (Annexure – table 4 and 5) 5.3.1 Issues related to road freight  The existing Indian road freight transport industry is highly fragmented, with 70-75 % of truck owners operating a maximum of five trucks each, while operators owning more than 20 trucks constitute about 9-11 % of the ownership pie. This disaggregated ownership has resulted in fierce competition amongst operators resulting in truck owners resorting to overloading to recover investments which in turn impacts service quality and overall economics of road transportation, as a result of increased incidents of accidents, breakdowns, spoilage and pilferage. Also due to the limited investment capacity, operators have been unable to high average age of trucks at 10 years and limited adoption of technology for tracking and fleet management.  High delays caused at border crossings/checkpoints. This happens when there is physical inspection of the freight or also because of overloading of freight, because of which freight does not get clearance immediately.
  29. 29. 5.4 Air Cargo and Airports Air cargo serves as a vital link between domestic and international markets. The contribution of air cargo, thus needs to be adequately and appropriately focused upon, so that India‘s fast growing international and domestic trade by air is facilitated, integrated and expanded. While the total volume of air cargo traffic currently constitutes about 1% of total trade, it accounts for close to 29% of total trade value. Over the next decade, total air cargo traffic is expected to grow at a CAGR of 10.3% to reach 5.9 MMT, with domestic and international cargo expected to grow at CAGRs of 11.6% and 9.5% respectively, and contributing 2.4 MMT and 3.5MMT, respectively by 2020. 5.4.1 Issues related to air cargo and airports Although the air traffic growth in recent years has surpassed industry expectations and is in fact expected to rise further, air freight has remained neglected for many years. Certain issues have resulted in hindering the smooth movement of cargo and the expectations of the customers for timely and prompt delivery have remained unfulfilled. These include:  The absence of integrated cargo infrastructure  Inadequacies in gateway and hinterland connectivity through rail and road;  Need for streamlining of Customs procedures in air cargo;  Need of technological upgradation of cargo handling processes  Formulation of performance based service Air cargo throughput for all Indian airports
  30. 30. Three trends are expected to cater to the growth of air cargo industry:  Emergence of tier-II cities, as new cargo centers While metros have led the initial charge, opportunities in the air cargo sector now extend to tier-II cities, which constitute the majority of the country‘s population. Against a CAGR of 10.5 % at metro (tier I) cities between 2006-2011-when volumes increased from 1.3MMT to 2.1MMT- the tier II cities witnessed increased growth of 14.5% during the same period, with volumes increasing from 0.13 MMT to 0.26MMT. Among the relatively large micro-markets, Pune, Kochi and Kozhikode showed significant growths of around 14-16% between 2006 and 2011. In markets that handled sub 10,000 tonne cargo, Amritsar and Nagpur, catering to India‘s regional pockets, displayed CAGR of over 25% over the same period. While Jaipur with a growth rate of 27.3% is expected to be the next crucial destination catering to increasing freight demand in north-western India. In the north-eastern region, Guwahati (CAGR 13.1%) and Agartala (CAGR 19.2%) have been the traditional leaders.  Increasing participation of service providers Opportunity attractiveness for 3PL players and freight forwarders Source: KPMG in India Analysis  Improved air cargo infrastructure at airports A comparison of air cargo infrastructure at India airports with global practices highlights the prevailing lack of focus on air cargo infrastructure:
  31. 31. Global best practices Cargo operations in India Segregated facilities for different types of cargo Most terminals do not offer separate facilities, except cold rooms Dedicated perishables handling facilities that cater to supply chain requirements Investment in cold storage infrastructure (trucks and warehouses) to handle agriculture, pharma and other perishables is inadequate Promotes transshipment handling/hub operations Cargo terminal operators need to have separate license area for transshipment operations Suitable waiting area for trucks Cargo terminal landsides are used as parking/holding area for trucks, which leads to congestion. Agent warehouses, office areas and other facilities situated near terminals Agent warehouses are often located within cities Dedicated facilities for air-express operations, with air-side and city-side access, multiple freighter parking bays There is no fixed model, and cargo handlers are dependent on decision of individual airport operators. Very few dedicated freighter parking bays exist at present. Source: “Air cargo logisitics in India” – AI-SATS, MoCA An increase in the spending in airport infrastructure through various airport projects is expected to improve air cargo infrastructure across the country. Investment in airport infrastructure has grown substantially over the last three Five-year plans. The twelfth Five year plan (2012-17) outlines investments worth INR 675 billion, an increase of 86% over the eleventh Five year plan allocation. 5.5 Warehousing In recent times, the Indian warehousing segment has evolved significantly, resulting in a gradual metamorphosis from the traditional concept of godowns to modern formats. Further, interest and traction in the potential advantages that free trade warehousing zones (FTWZs) offer has increased. The market in India consists of industrial and agricultural warehousing, with both segments expected to witness a significant evolution in their shares (by value) over the next 5 years. The share of the industrial segment, which includes both bulk and non-bulk commodities, is expected to increase from about 86 % in 2010-11 to around 90% in 2015-16. This is likely to be at the cost of a corresponding decrease in the share of agricultural warehousing in contrast to the industrial warehousing segment, which is highly fragmented. The agricultural warehousing segment is dominated to the extent of two-thirds by government entities such as Food Corporation of India, The Central Warehousing cooperation and all State Warehousing cooperations. This trend is likely to vary relatively less in the next few years.
  32. 32. Warehousing market size Source: CRISIL report on warehousing industry, November 29, 2011; KPMG in India analysis Factors influencing warehousing market Inhibitors Drivers Difficulty in access to capital Increasing outsourcing/demand for modern assets Low level of customization Rising share of organized retail Issues in land acquisition/project implementation Expected rollout of GST Overall production and consumption growth The share of modern warehousing is anticipated to grow from 15% (62 million sq.ft) in 2010 to 30% (178 million sq.ft) by 201548. This sharp growth is expected to be driven by rising domestic and EXIM freight volumes, increased outsourcing to 3PL players, strengthened investment in infrastructure, organized retail and the impending implementation of Goods and Services Tax (GST). However, several challenges may hamper the warehousing sector‘s wider growth potential. High price sensitivity among customers and infrastructure issues tend to limit the ability of service providers to offer world-class services; their usually underdeveloped capabilities to offer industry specific solutions, the asset heavy nature of their business, the need for substantial capital and concerns related to land acquisition make operations increasingly difficult. Apart from the significance of location in the modern warehousing era, industry stakeholders need to be wary of two crucial aspects – customer‘s key buying criteria and critical service factors. Price sensitivity, strategic location and manpower availability rank as leading buying criteria; however, service providers need to offer high-quality, industry specific value added solutions, skilled manpower-both management and operational- and IT/technology solutions such as ERP, put-to-light, and GPS. Focus must also be on developing strong
  33. 33. relationships with customers, as well as facilitating long-term contracts and, thus, regular and predictable volumes. FTWZ: The Free Trade Warehousing Zone model offers significant potential to overhaul the supply chain. Given the high level of fragmentation associated with the transportation and logistics segments, the quality of warehousing in particular and, service levels in general, are grossly sub-optimal. These hindrances ultimately lead to unreasonably high logistics costs. Against this backdrop, the FWTZ concept plays a pivotal role by offering world-class, single- window solution for multiple logistics activities, with special focus on EXIM flow. It is widely believed by industry experts that with excellent infrastructure, mechanization and regulatory incentives, the FTWZ model offers significant potential to save costs in the overall supply chain. Key Parameters Dubai Singapore China India Time frame for evolution (years) Brief insights Well developed port infra Yes Yes Yes No 5-10  Development of mega terminals at major ports (JNPT, Chennai)  Additional capacities at major ports(Ennore, Vizag)  Development of large private ports (Gangavaram, Dhamra)  Development of transshipment hubs (Vallarpadam) Strong hinterland connectivity Yes No Yes No 10  Development of DFCs  Development of expressways and NHAI-led highways(GQ, EW_NS fed routes) Favorable positioning on trade lines Yes Yes No No N/A Indian ports are not on key international trade lanes. Strong manufacturi ng support Yes No Yes No N/A India scores low on manufacturing support for FTWZ demand High export potential No Yes Yes Yes 5-10 Over the next 5-10 years India is expected to evolve as a moderate-sized export hub for key sectors such as automotive, engineering goods, pharmaceuticals and processed foods. High import potential No No Yes Yes 2-3 Consumption led economic growth is likely to continue supporting imports Well defined regulations Yes Yes Yes No 2-3 Policies in India are still evolving to support FTWZs (e.g. 2011 Budget treatment of MAT) Processing cost arbitrage/ pricing flexibility No No Yes Yes 2-3 Like China, India offers a significant cost of arbitrage opportunity when compared with other regions.
  34. 34. CHAPTER 6: PUBLIC PRIVATE PARTNERSHIP MODELS __________________________________________________________________ A public private partnership is an agreement between the government and the private sector for the purpose of provisioning of public services or infrastructure. With a common vision in place the public and private sector brig to their table their own experiences and strengths resulting in accomplishment of mutual objectives. The PPP model is increasingly seen as a means of harnessing private sector investment and seeking operational efficiencies in the provision of public assets and services. While the preferred form of PPP models is the one in which the ownership of the underlying asset is lying with the public entity during the contract period and the project gets transferred back to public entity on contract termination, the final decision on the form of PPP is determined using the Value for Money Analysis. The following are the PPP models supported by the government: Modified design-build (Turnkey) contracts •The designbuild contracts yield benefits in the form of time and cost savings, efficient risk sharing and improved quality. •The Turnkey approach with milestone-linked payments or penalties or incentives can be linked to such kind of contracts. BOT (Build-Operate- transfer) model •The BOT form of models and its variants are the most common form of PPP models in India, accounting for almost 2/3rds of the PPP models in the country. The 2 types of this model are: •User-fee based BOT model (roads, ports, airports) •Annuity Based BOT model (rural, urban, health, education) Performance based management/maintenance contracts •The PPP models that lead to an increased efficiency are encouraged in an enviromet that is constrained by the ability of ecconomin resources. •The sectors meant such form of PPP models include water supply, sanitation, solid waste management, road maintenance etc.
  35. 35. The PPP process should comprise of 4 phases: PPP identification stage Development Stage Procurement stage PPP contract management and monitoring stage Consists of strategic planning, project pre- feasibility analysis, Value for money analysis, PPP suitability checks and internal clearances to proceed with PPP development Consists of project preparation (technical feasibility and financial viability analysis), project structuring, preparation of contractual documents and obtaining of project clearances and approvals. Consists of procurement and project reward Consists of project implementation and monitoring over the life of the PPP project.  GOI is likely to establish MIS for the continuous monitoring of the performance of PPP projects.  The development of a sustainable PPP program requires a strong and well defined institutional structure:  Supporting the creation of nodal agencies such as PPP cells at the state or sector level  Laying down of appraisal mechanism for PPP projects by the PPP Appraisal Committee (PPPAC) 6.1 Challenges of PPP in India: Regulatory environment •There is no independent PPP regulator as of now. In order to attract more domestic and international private funding of the infrastructure, a more robust regulatory environment, with an independent regulator is essential. Lack of information •The PPP program lacks a comprehesive database regarding the projects/studies to be awarded under PPP. An online database, consisting of all the project documents including feasibility reports, concession agreements and the status of various clearances and land acquisitions will be helpful to all bidders. Project development •The absense of adequate project development by authorities leads to reduced interest by the private sector, mispricing and many times delays at the time of execution.
  36. 36. While most of the above challenges are being worked upon by the GOI, the limited availability of sources of funding is the biggest bottleneck for success of the PPP model. 6.2 Key Industries/Sectors for PPP: 1. Highways PPP format Project Value (in INR billion) BOT - Toll 48 93.3 BOT- annuity 8 23.5 Special Purpose Vehicle Projects 24 46.8 Source: Ministry of Road Transport and Highways Several GOI initiatives to include private sector participation in road sector:  Viability Gap Funding in the form of capital grant subsidy of up to 40% of project cost  100% tax exemption in any consecutive 10 years out of 20 years  Duty-free import of certain identified high quality construction plants and equipments  Allowing FDI up to 100% in this sector and relaxed ECB norms  Long concession period of up to 30 years  Right to collect and retain toll  Model concession agreements for state highways  Standardizing model bidding documents Investments required: The national highways constitute just 2% of the entire road network, but carry approximately 40% of the total road traffic indicating existence of significant potential to be unleashed. Investments worth INR 4,902 billion had been planned as planned as part of 12th five year plan. The contribution of private sector is likely to range from INR 1,667 billon to INR 2,451 billion, for the same period. Lack of instituional capacity •The limited instituitional capacity to undertake large and complex projects at various central ministies and especially state and local body levels, hinder the traslation of targets into projects. Financing availability •The private sector is dependent upon commercial banks to raise debt for PPP projects. With commercial banks reaching sectoral exposure limits, and large Indian infrastructure companies being highly leveraged, funding the PPP projects is getting difficult.
  37. 37. 2. Railways The Railways sector just experienced 4 PPP contracts valued at 15.7 billion. The projects have been contracted either through domestic competitive biddings or through negotiated MOUs. Due to the large size of the projects, the PPP projects in railways have to be supplementary or an extension to an existing large railway network. The Recent PPP data indicates around nine projects being contracted so far in Gujarat (4), Orissa (2), Haryana(1), Karnataka(1) and Andhra Pradesh (1). The nine projects have BOT (or its variants) format (including one on DBFOT) PPP as the preferred BOT model. The PPP experience in railways has proved to be a mixed bag so far. In projects with clear cut demarcations of responsibilities, the model has proven successful in the case of last mile connectivity (for instance, the last mile connectivity to mundra port with the pallanpur-ghandhidham railway line). On the other hand, the railways have been facing problems in using the PPP route for manufacturing rolling stock and locomotives. Some of the PPP project initiatives taken by the railway sector include:  Container Corporation of India Limited (CONCOR) – for developing multimodal transport logistics infrastructure to support domestic container traffic.  Pipavav Railway Corporation Limited (PRCL) – to provide broad gauge rail link for Pipava port in Gujarat.  Rail Vikas Nigam Limited (RVNL) – for port connectivity works and improvement of the Golden Quadrilateral to meet future transportation needs. The project proposed for PPP format include:  High speed rail corridor  Dedicated freight corridor  Locomotive and coach factories  Multi-modal logistics hubs Investment Requirement: The Railways needed INR 5.2 trillion public investment during the Twelfth five year plan (2012-17), of which the Indian railway corporation will raise 1 trillion and the balance needs to be raised internally or though PPP. The IR announced its plans of restructuring to attract funding of INR 500 billion to meet its expansion targets proposed in the twelfth five year plan. To carry this out, the railways is currently working out strategies to design and award PPP projects.
  38. 38. CHAPTER 7: FREE TRADE AGREEMENTS (FTA), FREE TRADE ZONES(FTZ) AND FOREIGN TRADE POLICIES(FTP) __________________________________________________________________ 7.1 Free Trade Agreement (FTA): All countries, including the poorest have resources – human, natural, financial – which they can employ to produce goods and services for their domestic markets or to compete overseas. Economics tells us that we can benefit when these goods and services are traded. Simply put, the principle of ―comparative advantage‖ says that countries prosper by concentrating their resources in on what they can produce best, and then trading these products for products that other countries produce best. In other words, liberal trade policies – policies that allow the unrestricted flow of goods and services – sharpen competition, motivate innovation and breed success. The importance of global free trade can be grasped by the fact that there are currently 153 countries that are members of the World Trade Organization (WTO) – the international organization whose main function is to ensure that trade flows smoothly, predictably and freely as possible. Free trade, in its purest form, refers to the unfettered export and import of goods and services between one country and another, with no government intervention on either country‘s side. However, barriers to free trade are an observed phenomenon and manifest themselves as:  Tariff barriers: A ―tax‖ on imports that are invoked by counties mainly to protect the domestic industries from the possible consequences of greater competition.  Non-tariff barriers: These can be in form of quantitative restrictions on imports/exports or existing government regulations governing technical and safety standards for products that can have the effect of restricting imports. Another form of non-tariff barrier to free trade is found in ―Domestic Content Requirements‖ that are regulations wherein importers are forced to import goods that contain minimum prescribed amounts of domestically produced components. Such restrictions are commonly imposed on the domestic operations of foreign firms that engage in foreign direct investment in production facilities in the regulating country. Given the existence of trade barriers (regardless of origin) at any point in time, the question often arises as to what countries can do to lower or eliminate trade barriers among themselves. Efforts to do so are broadly referred to as ―trade liberalization‖ and can take several forms. Markusen et al., state that trade liberalization often occurs in the form of a multilateral agreement such as the various trade negotiation rounds of the General Agreement on Tariffs and Trade (GATT), or an agreement among smaller set of countries, typically with some geographically proximity. This
  39. 39. latter type of agreement is called a ―preferential trade agreement‖ (PTA). A Free Trade Area is the least restrictive of PTAs and consists of a number of countries that agree to eliminate all trade barriers among themselves while keeping intact their existing tariffs with non-member countries. The North American Free Trade Agreement (NAFTA) signed by the United States, Canada and Mexico is an example in this regard. 7.1.1 Beneficial Effects of FTAs:  Increase in Incomes/Growth: An FTA expands trade volumes among member countries and tends to increase incomes/growth of the members. Intuitively, starting from a situation of tariff-distorted trade, the elimination of tariffs allows each member to specialize in the production of the goods in which it has a comparative advantage and trade those goods in exchange for imports of other goods from fellow members.  Achievement of Economies of Scale: An FTA, by eliminating tariffs, expands a member country‘s export market thereby allowing it to expand its scale of operations and lower its average cost of production.  Reduction of Monopoly Inefficiencies: If inefficient monopolies exist in the domestic market, then increased competition from foreign products dampen domestic monopoly inefficiencies, if not eliminate them altogether.  Availability of Greater Product Variety: The opening up of free trade increases trade flows and expands the variety of products available to consumers in the home country. 7.1.2 FTAs in Asia: Market driven forces of cross border trade, FDI flows and finance as a result of multilateral and unilateral trade liberalization processes has deepened the economic ties in the Asian region. The last twenty years have witnessed an upsurge of bilateral trade agreements being convened in this part of the world. Asia is thus considered to be at the forefront of FTA activity. India has bilateral agreements with the following countries and blocks:  SAFTA (Bangladesh, Bhutan, The Maldives, Nepal, Pakistan, Sri Lanka and Afghanistan)  ASEAN (ASEAN-India Free Trade Area)  European Union (final stage)  Sri Lanka  Singapore  Thailand (separate from FTA agreement with ASEAN)  Malaysia (separate from FTA agreement with ASEAN)  Japan  European Free Trade Association (EFTA) (negotiation ongoing)  Canada (negotiation ongoing)
  40. 40.  South Korea (India-Korea CEPA) 7.2 Free Trade Zones (FTZ): Liberalized conditions for cross border trade, as signaled by free trade agreements, have been an important factor in the development of international trade flows. Such agreements are critical, however within regions, additional measures have been proven to be important in encouraging cross-border trade and capital flows. Many governments have established so-called special economic zones or free trade zones. Governments typically subsidize companies which relocate inside the zones, making them particularly attractive for manufacturing and exporting companies. Companies who move to free trade zones are rewarded with tax and customs exemptions and in some cases with streamlined procedures which reduce red tape. Some free trade zones are also specifically designed to serve the needs of particular industries, such as chemicals or pharmaceuticals. Often such areas create economies of scale in terms of transport, as the presence of multiple producers facilitate better capacity utilization. Free trade zones may also feature superior infrastructure, such as excellent connections to export facilities and ports. The main objective of free trade zones is to attract foreign direct investments by facilitating market entry for foreign investors. Foreign direct investment inflows may provide capital either directly or through other related enterprises. Foreign direct investment represents the most important source of capital for emerging markets. Free trade zones stimulate foreign direct investment inflows to a country, since companies looking to invest will benefit from better accessibility and reduced transport cost. Historically, the establishment of free trade zones has fostered the industrialization and economic growth of countries ( like Taiwan, South Korea and Singapore, which are some of today‘s most important industrialized economies). In the emerging markets, the number of free trade zones and similar arrangements is expanding rapidly. Currently 600 special economic zones are in the approval process in India. Free trade zones alone are no guarantee for obtaining higher growth rates or attracting foreign direct investments, however certain factors significantly increase the likelihood of success, such as:  Quality infrastructure, a supportive government, lighter regulation, strong export focus and large warehousing and handling capacities.  Free Trade zones will facilitate opening markets for international trading partners, providing benefits especially for those economies that are strong in export.  In addition, free trade zones can support further globalization if strategically located inventory buffers are established, allowing exporters to respond with quicker lead times to demand from the destinations which they serve.
  41. 41. In India, the following Free Trade Zones exist:  Madras Export Processing Zone  Noida Export Processing Zone  Falta Export Processing Zone  Navi Mumbai Special Economic Zone  Kandla Free Trade Zone  Santa Cruz Electronics Export Processing Zone  Vishakapatnam Export Processing Zone  Cochin Export Processing Zone  AP Special Economic Zone  Surat Special Economic Zone 7.3 Foreign Trade Policies (FTP): While India has gradually opened up its economy, its tariffs continue to be high when compared with other countries, and its speculation norms are still restrictive. This leads some to see India as a ―rapid globalize‖ while others see it as a ―highly protectionist‖ economy. Nevertheless, in modern years, the government‘s stand on trade and investment policy has demonstrated a marked shift from protecting ―producers‖ to benefitting ―consumers‖. This is revealed in its foreign trade policy of 2004-09 according to which, ―For India to become a major player in world trade we have to also make possible those imports which are required to stimulate our economy‖. Along with economic transformations, globalization of the Indian economy has been the leading factor in devising trade policies. The reform procedures pioneered in the subsequent policies have focused on liberalization, ingenuousness and lucidity. They have given export friendly surroundings by simplifying the procedures for trade facilitation. In the present Foreign Trade Policy 2009-14, the focus lies in reversing the declining trend of exports and to provide additional support to those sectors which have been hit badly by recession in the developed world. However, the long term objective is to double India‘s share in global trade by 2020. Also keeping in mind the mega agreements such as the Trans-Pacific Partnership (TPP) and the Trans-Atlantic Trade and Investment Partnership (TIPP), which when fully in force can alter the direction of global trade. They have the potential to adversely affect excluded countries such as India, by diverting trade and investment away from them and weakening their positions in global value chains. This calls for immediate actions including taking appropriate measures through India‘s Foreign Trade Policy.
  42. 42. CHAPTER 8: RECOMMENDATIONS AND ACTIONS REQUIRED __________________________________________________________________ 8.1 Actions required for improving the logistics infrastructure: 8.1.1 PORTS Indian ports do have significant potential for progress in the future, however many challenges still exist which impedes growth. In order to facilitate growth, both Center and States should address these challenges:  Coordination among sectors: An integrated transport system that facilitates the inter-coordination between roads, railways and shipping departments must be developed. This will help better movement of goods from ports to hinterland via road and rail.  Developing Mega-ports: Ports which have high-supporting surroundings have potential to become a mega-port. Such ports can provide further expansion in draft size or berthing facilities (Eg: Vishakpatnam and JNPT). Through the right policies, incentives and fast-tracking measures, the GOI can facilitate such projects.  Improving the capacity utilization: Ports which do not have hinterland connectivity need to develop operational efficiency, in order to compete with other large ports. This would help them remain profitable even at low traffic volumes.  Reduction in focus on sub-optimal ports: The increase in sub-optimal ports should be kept in check. For this reason, it is important to properly plan coastal shipping from both environmental and commercial perspective.  Improving port infrastructure: In order to facilitate easier cargo flows from larger vessels to ports, there needs to be improvement in berthing facilities and increase in draft size at ports. There is need for mechanization of ports, and this can be done by upgrading the quality of material handling equipments and also by use of improved IT infrastructure which will enable electronic flow of information.  Enhancing manpower skill: There is need to invest in institutes in order to provide key personnel with the best training, so as to improve develop the adequate skills required in the shipping sector and cut down on talent-pool shortages. Learning the best practices followed world over can be obtained through collaborations with foreign universities.
  43. 43. Parameters Indian ports International Ports Average number of containers handled per ship per hour 15-23 Colombo: 25 Singapore: 30 Annual container throughput capacity JNPT: 4.3m TEUs Hong Kong: 25 m TEUs Singapore: 30 m TEUs Maximum crane capacity – per quay crane per annum NSCIT: 188,000 TEUs Hamburg: 252,200 TEUs Hong Kong: 272,700 TEUs Maximum quay productivity JNPT: 2,000 TEUs per meter Hong Kong: 3,050 TEUs per meter Source: World Shipping Council Website, KPMG in India Analysis 8.1.2 RAIL  Capacity Creation: In addition to the WDFC and EDFC, there is need to create adequate freight-carrying capacity within the Indian rail network. The proposed creation of four additional DFCs – North-South (Delhi to Chennai), East-West (Howrah to Mumbai), Southern (Chennai to Goa) and East Coast (Kharagpur to Vijaywada) – would meet the increased freight demand and also elevate the quality of service to global standards. Moreover, the Indian Railways also needs to establish and improve connectivity with ports and road networks to form an inclusive intermodal strategy for first and last mile connectivity.  Rail-Siding Warehousing: It is necessary to create warehousing facilities along railway lines, so that direct unloading can be facilitated from wagons to warehouses. This would allow traders to avoid multiple handling costs, which are quite expensive. Rail-side terminals such as those being created by the Central Rail-side Warehouse Corporation (CRWC) – a subsidiary of Central Warehousing Corporation (CWC), could offer a win-win proposition for all relevant stakeholders. Rail-side terminals can further be expected to lower logistics costs, which also include inventory carrying costs, transit times and holding time for the warehouses.  Private Investments: The PPP model should be encouraged for the development of the route network, as well as for the modernization of coaches through the transfer of technology. This would likely drive India towards the status of an export hub for modern passenger coaches and stations to provide multifarious facilities such offices, retail, entertainment, restaurants, theatres, hotels and health and education services. Private freight terminals should be set u for bulk and container handling. 8.1.3 ROADS  Promotion of Fleet Exchange: Creation of an efficient marketplace similar to Stock Exchange or Commodity Exchange to bring together transport vendors for
  44. 44. the largely unorganized transport customers and transport could revolutionize the trucking landscape. Collaboration of fleet exchanges with the existing Road Traffic Offices (RTO) could be a win-win with Fleet Exchanges providing a online Real Time Technology platform while RTOs provide the on-field support. Such exchanges will not only reduce the element of cost that a middleman makes but will also give visibility of loads to the vehicle owner on PAN-India basis.  Electronic Toll Collection: Give that there are about 52545 toll plazas across India, the smooth application of ETC would amount to estimated fuel savings worth INR 10 billion annually. Although this may command significant investment from road developers/operators against a small contribution of about INR 100 from vehicle operators, the benefits are expected to result In a win-win scenario for all stakeholders. This would save significant avoidable logistics costs for the wider industry and the Indian economy.  Encourage use of larger trucks: Larger trucks are cheaper to operate as compared to smaller and medium trucks by over 25% and the incremental cost of a larger vehicle can be recovered in less than three years. Measures to encourage the use of larger trucks could be considered including excise duty reductions for larger vehicles, stringent monitoring of overloaded trucks and enforcing pollution and safety norms, which could result in the retirement of old trucks. 8.1.4 AIR CARGO  Development of air freight station (AFS): This will permit the transfer of cargo to designate/customs-notified freight stations – AFS or ICDs – and thereby would help reduce congestion at the airport premises. AFS, although notified by the Ministry of Finance, have yet to become operational. The barriers preventing the establishment of AFS should be removed, and Customs should be directed to issue concerned regulatory clearances.  Establishment of an Air Cargo Promotion Board (ACPB): The establishment of a ACPB ( comprising of members from the finance, commerce, industry and civil aviation industries) can facilitate organized growth in this sector by driving policies and the planned development of air cargo hubs in the country. Some of the initiatives it can lead are the introduction of a air cargo village concept at all hub airports, the development of an air-cargo vision 2020 and a time-bound roadmap, the development of air cargo hub airports in India, and the formulation of quality of services (QoS) parameters for all stakeholders.  Expansion of freighter fleets: There is an urgent need for policy support and robust infrastructure to drive efficiency in freighter operations in the country. In this context, a consistent policy for the allotment of dedicated facilities at any of the airports for dedicated freighter crafts should be developed. Further, dedicated
  45. 45. terminal space and facilities for express airlines should be provided to streamline operations. Restrictions on night operations and high lease rentals also need to be relaxed from a profitability standpoint.  Execution of 24x7 customs operations in phases: Customs authorities should consider the immediate introduction of round-the-clock operations that will expedite clearances, which include the processing of documents, assessments, and the examination and release of cargo. This model can be implemented initially at metro airports and gradually introduced in tier-II cities.  Professional training programs for air cargo: The GOI may consider setting up a top-notch cargo training institute in collaboration with the industry. The institute could offer courses encompassing policy, regulations, finance, operations, technology and human resource development, to name a few.  Circular flow of information between airports, airlines and operators: Inter- linkages and circular flow between airlines, airport operations and air freight stations, customs, banks, customs house agents (CHAs) and other allied agencies should be established to reduce unproductive delays. 8.1.5 WAREHOUSES  Implementation of GST: The Existing landscape of fragmented, unorganized small godowns will likely undego significant reorganization with the rollout of the much overdue uniform GST. The development of large hubs I key locations, coupled with smaller spoke warehouses closer to production and consumption centers, are expected to emerge following the rollout. This change in legacy tax structure is expected to be the largest driver of modern warehousing infrastructure in the nation. While several companies have initiated the consolidation and rationalization of existing warehouse networks, confirmed rollout dates have yet to be declared.  Skill development: The availability of skilled manpower-both management and operational-will likely be a constraint as the sector continues to evolve rapidly amid changing regulation and the entry of global retailers and service providers. By 2015, it is estimated that India will need approximately 30,000-35,000 warehouse managers alone. Government, policy makers and private sectors players must take cognizance of this and develop a collaborative approach to set up training infrastructure and incentives in the form of job opportunities for qualified personnel.  Development of new storage models and networks: The emergence of next generation storage models such as multi-modal logistics parks (MMLPs), mega food parks (MFPs) and FTWZs must be aligned with the development of key infrastructure projects related to port, highway and rail projects – such as the GQ project, the NSEW project and the DFC project – to facilitate cohesive network development.
  46. 46.  IT adoption: The rapid transformation of physical infrastructure for storage would be incomplete without the adoption of supporting IT. Technology is expected to constitute the backbone of a strong and efficient modern warehouse that encourages accuracy, inventory tracking and lowered operational costs. Today, the market offers multiple forms of warehouse management systems, and service providers can select off the shelf solutions that best suit their level of complexity. 8.2 Recommendations for developing PPP models: Policy recommendations Project development recommendations Financing recommendations Setting up independent institutional structure for handling PPP program Capacity building measures for the government Developing corporate bond market Development of sector specific regulatory mechanism Role of consultants Encouraging participation by pension funds and insurance companies Dissemination of information on PPP Project development activities Stimulating PE investments I infrastructure sector Optimum allocation of risks, authority and accountability Hedging mechanism for external borrowings and investments Selection of private sector partner 8.3 Recommendations for FTA, FTZ, FTP:  The new trade policy should have strong linkages with other major macroeconomic policies such as monetary, fiscal, manufacturing policies.  There should be specific emphasis on simultaneous reforms in the markets of factors of production for improving trade competitiveness, and existing free trade agreements should be utilized to its fullest.  Specific trade policy measures (including their compatibility with India‘s commitments to the WTO regime and its negotiating strategy with respect to free trade agreements should be taken to safeguard Indian exports and enhance its trade competitiveness against far-reaching expected changes in the global trade scenario over the next five years or so.
  47. 47. CHAPTER 9: CONCLUSION __________________________________________________________________ World trade has expanded rapidly over the past decades. This has been driven in large part, by the changing nature of both production and increased competition in international commerce. The most important criteria in international trade are price, quality and timely delivery. And it is not possible to meet these criteria without having proper logistics system. Every day new and innovative methods are found and improvisations are made in the quality of logistics, while simultaneously attempts are made to reduce cost. India has realized the potential of a fully developed logistics system, but there still lay 2 major constraints:  Inability to develop the necessary infrastructure due to lack of financial resources  Inadequate and legal environment which doesn‘t encourage growth India needs to develop a suitable logistics system for economical and efficient transportation from manufacturing centers to destination points. It has been estimated that the logistics costs of the product and any documentation aggregates to 20% of the final costs of the product and inadequacy and inefficiency have negative impact on trade competitiveness. Although the enhancement of trade competitiveness is a gradual and long-term process, negotiations and implementation of other free trade agreements can be effectively utilized to reduce trade costs and thus, partially improve trade competitiveness. Unfortunately, Indian industry has remained skeptical about many of these FTAs, particularly in respect to their effectiveness in the long-run, and has under-utilized these channels to get integrated into the global value chains. Integrating into and moving up the global value chains is essential condition for greater competitiveness and higher growth. Effective participation in global value chains is intrinsically linked with foreign direct investment, which can result in more trade through export obligations of FDI. India should effectively negotiate with key trading partners in order to gradually remove and/or harmonize on-tariff measures affecting trade among these countries and improve its domestic regulatory regimes for process and product standards, intellectual property rights and other behind-the-border trade facilitation measures. Simultaneously, there should be gradual reforms in the markets of factors of production – land, capital and other means of production-not only to make reforms in goods and services markets sequentially compatible with those in the factor markets but also more importantly to enhance India‘s trade competitiveness through stronger linkages between inputs and outputs for enhancing the incremental capital-output ratio of the Indian economy.