India loses $45 billion yearly due to inefficient logistics

Losses due to inefficiency in logistics infrastructure in India could treble to $140 billion annually in the next one decade from $45 billion in 2007 if increased usage of rail and optimal utilisation of waterways is not achieved, consultancy firm McKinsey & Co said.

About $500 billion of investment in envisaged in the logistics infrastructure in the next ten years in the country.

The McKinsey report, ‘Transforming the nations logistics infrastructure’, estimates that by 2020 India would require five dedicated freight corridors (DFCs) against the currently planned 2.

It also recommends around 30 expressways against the 6 expressways during the period.

It emphasises on increasing usage of rail and waterways in India, against burdening the road network. “If India fails to achieve this, waste caused by poor logistics infrastructure will increase up to $140 billion by 2020. Freight movement is expected to increase three fold in the next decade,” the report said.

McKinsey said India needs to increase investments in logistics infrastructure from the planned $500 billion to $700 billion in the next decade. “Our analysis suggests that if investments are increased from $500 billion to around $700 billion by 2020, the losses in the system would decline from over 4% to under 3% of GDP in 2020.”

Current losses due to an inefficient logistics system account to around 4.3% of today’s gross domestic product (GDP), which are expected to increase to up to 5% of the GDP by 2020, it said.

The total estimated loss has been calculated by a detailed analysis of a flow of three main commodities — coal, auto components and agricultural goods.

About 57% of India’s freight traffic movement in 2007 was by roads, 36% by railways, 6% by waterways and less than 1% by air.
If the current trajectory continues, movement by railways is likely to reduce to 25% and waterways to 5%, while major pressure would continue to remain on the road sector, which would see its share in the freight movement rising to 69% by 2020.

On the other hand, if India succeeds to shift more than 45% of its freight movement to the railway segment by 2020, losses could be reduced to up to 4% of the GDP against the estimated 5% of the GDP for 2020 if the current trajectory continues.

McKinsey recommends a new modal mix wherein freight traffic movement would comprise 47% by road, 46% by rail, 6% by water and less than 1% by air.

To have a balanced modal mix of this kind the country needs a road- rail balanced network of five rail DFCs — Delhi- Mumbai, Delhi-Kolkata, Mumbai-Chennai, Delhi-Chennai, Mumbai-Kolkata — and two coastal corridors — Kandla-Kochi and Kolkata-Chennai. These corridors will need to be supported by 20 to 30 expressways, road and rail links across the 150 connectors and 700 last mile links.

The report also seeks a change in the pattern in which these investments are likely to be disbursed across segments.