Over the years, the Government of India has taken several initiatives to strengthen the logistics infrastructure in the country and facilitate seamless freight transportation. Estimates suggest that India spends about 14 percent of its GDP on the supply chain and logistics sector, which is almost double the average logistics cost in advanced economies such as the US, Japan, South Korea, and Singapore.
Even among the comparable BRICS country grouping, India’s logistics costs are higher. This adversely impacts the global competitiveness of Indian products. While India ranks 44 out of 163 countries in the latest Logistics Performance Index released by the World Bank, attributes such as timeliness and infrastructure have emerged as two leading factors that raise logistics costs, thereby reducing our market competitiveness. Grade A warehousing infrastructure serving as logistics nodes can immensely improve the flow of products. Further, the seamless transfer of freight between road transport and other modes of freight transport could reduce logistics costs. The government’s thrust on developing Multi-Modal Logistics Parks (MMLPs) holds promise to cut logistics costs and minimise transportation delays.
MMLPs are logistical facilities developed with support from state and union government agencies and active collaboration from the private sector. They are envisioned to have the necessary infrastructure to support containerised cargo, bulk cargo, liquid cargo, grain silos, and other logistics modes based on regional economic needs, and facilitate seamless logistics operations.
The recently launched National Logistics Policy 2022 envisages the development of MMLPs for improved connectivity and efficiency. However, there are several challenges to achieving this, such as securing large capital and contiguous land for development and creating attractive policies to incentivise developers. Thus, a multi-pronged approach would be required to create an enabling environment to lay a strong foundation for MMLPs. A stable environment in terms of efficient investment and financing mechanisms, a stable policy ecosystem, and clear governance mechanisms are some of the critical components required to build a solid foundation for an MMLP-backed logistics network in the country. Additionally, well-defined operational models focusing on interactions among government agencies, the private sector, and industries would be needed to ensure the success of MMLPs.
Launched in 2017 under the Logistics Efficiency Enhancement Programme (LEEP) of the Ministry of Road Transport and Highways (MoRTH), MMLP has become the most important transformational multimodal project of the Indian Government. As an integrated freight handling facility, MMLPs are designed to effect seamless intermodal shifts in transportation and perform an array of value-added services to make the entire supply chain lean and efficient. MMLPs would function in a hub and spoke model wherein they would serve as the central warehouse catering to freight operations from the surrounding regions. MMLPs mark a remarkable shift from the mere creation of infrastructure to the creation of efficient infrastructure that enhances the competitiveness of our production systems and economy. With independent research and inputs from experts, we identify the determinants associated with a successful MMLP implementation.
Location identification: Facility location has always been the key strategic decision for infrastructure projects. For MMLPs, the cost is not just linked to the fixed cost of identifying a large land parcel but also in considering the variable transportation costs associated with the potential inbound and outbound movement of freight flows. Here, the location problem is not an isolated decision but integrated with the associated modes of transport. PM Gati Shakti-driven digital models can be adopted to identify optimal MMLP site locations, which can also be linked to existing or proposed modal assets such as ports and rail terminals (PMGati Shakti National Master Plan).
Stakeholder collaboration: Governance and operational models should be based on collaboration among stakeholders — namely, the private sector and the government. MMLPs will be governed by State Industry Development Boards that act as the nodal agency responsible for acquiring land and providing infrastructure and utilities. Special Purpose Vehicles (SPVs) should be formed for land acquisitions, infrastructure creation, and operations.
Financing: Competitive financing and investment mechanisms would be crucial to invite interest from capable private sector operators. The private sector would set up and operate logistics, preferably under a Design Build Operate Transfer (DBOT) model. Since these projects are capital intensive, it would be prudent to consider all MMLP projects including rail stock as infrastructure projects which provide the operators with sustainable long-term debt financing helping them reduce project risks. Private Equity and Venture Capital investments and financial instruments such as Infrastructure Investment Trusts and Real Estate Investment Trusts could also be a promising route to equity financing MMLP projects. Greater collaboration among stakeholders would provide operational efficiency, help private sector investments to be frictionless, and incentivise investors through concessions.
Development and operationalisation policy: A conducive policy ecosystem would be necessary to encourage active participation from the private sector. Tax benefits such as GST relaxation and input credit on capital expenditure would go a long way in boosting investor confidence and encouraging investments in MMLPs.
Warehousing and value-added services: Warehousing (Source: Statista 2020) in the Indian logistics cost mix, is almost thrice the cost mix of the US. The Indian logistics industry faces the problem of scattered, small-scale, and unorganised warehouses. This leads to a spike in warehousing costs due to a lack of economies of scale and inadequate investment, which translates into a lack of mechanisation. MMLPs can prove to be a game-changer in tackling warehousing-related challenges in India. MMLPs, along with the PM Gati Shakti initiative, are leading to the physical convergence of all infrastructure projects via institutional integration, which brings together multiple stakeholders from different ministries and private players digitally to ensure coordinated planning and quick regulatory approvals for logistics projects. MMLPs aim to consolidate fragmented warehousing in India to achieve benefits of scale and attract private investment into it. If the government facilitates zoning and relaxation of floor space index requirements, MMLPs can help scale up warehousing capacity manifold through multi-level storage facilities. Another priority is the mechanisation of warehouses using advanced engineering solutions such as conveyor belts and electric-operated cranes (EOC), and deploying AI and robotics in warehouses to ensure speedy and efficient material handling. Such regional parks can help optimise inventory planning and shorten the supply chain by providing cross-docking and consolidation services.
The co-location of value-added services such as customs clearance, freight aggregation, sorting, weighing, and packaging, along with transportation and warehousing will drastically reduce secondary freight movement costs involved in transporting and handling shipments to different centres providing these services. The aggregation of multiple functions and shared infrastructure in these parks will make these projects commercially viable and reduce supply chain lead times. There is also a need to include special storage facilities like cold storage and hazardous chemical storage in MMLPs. These parks can also help achieve standardisation and uniformity in warehousing services which are challenging in the current setup of a fragmented and unorganised warehousing ecosystem.
Single window processing: A single-window portal is required to bring all the stakeholders and activities onto a single platform. This will help ensure information symmetry and formulate data-backed policies. PM Gati Shakti and the Unified Logistics Interface Platform are a few initiatives that have been taken in this direction. However, proper implementation is required to ensure that we can reap the benefits of these initiatives. By providing the right incentives and streamlining approvals for MMLPs, the government can make MMLPs more attractive to private players. Pre-approval or deemed approval mechanisms for MMLP facilities should be established to ensure quick and hassle-free construction of these parks. Scale and sustainability incentives should be tied to MMLPs to attract investments and reduce the logistics cost of the economy. The development of warehousing and material handling based on global benchmarks is crucial for reducing the cost-to-GDP ratio of the industry and bringing in both speed and cost efficiencies. MMLPs can become the future of scalable, modern, mechanised, and efficient warehousing in India, which can enhance India’s export competency, accelerate trade, and reduce regional disparities.
Sustainability: Apart from the success determinants discussed earlier, the focus should also be on sustainability. Initiatives to decarbonise the logistics sector would reduce carbon emissions and help India fulfil its commitments towards Nationally Determined Contributions (NDCs). There has been an increased focus on the decarbonisation of the transportation sector in India since it contributes to almost 14 percent of carbon emissions. The strategic location of these parks on the outskirts of major urban areas will help decongest city centres while ensuring a seamless multidirectional flow of goods and services through the hub and spoke model. Decongested city roads will also help cut storage and handling costs, save fuel wastage due to the idling of vehicles in traffic, reduce delivery time, and bring down carbon emissions and pollution. Providing emissions-linked incentives to MMLPs will help achieve sustainability in the logistics sector and improve their value proposition to investors and other stakeholders.
Strengthening the logistics sector in the country would allow us to bring down costs and make trade more competitive. It would also enable logistics service providers to evolve and provide more value-added services allowing higher value-based pricing, resulting in greater returns. Such developments would benefit industries and consumers and enable India to emerge as a more prosperous economy. Therefore, it is crucial that all the stakeholders: the government, investors, and enterprises, come together and aim to strengthen the logistics sector in the country.
The authors: Pranjal Chugh and Varundesai Sudhindra, are IIM Ahmedabad PGPX students; Avi Dutt is Assistant Vice President of the IIM Ahmedabad Centre for Transportation and Logistics; and Debjit Roy is the IIM Ahmedabad Chair Professor and founding co-chair of the IIM Ahmedabad Centre for Transportation and Logistics. Views expressed are personal.
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