Where India stands on logistics, the likely key driver in our post-GST road

Posted by Daily Shipping Times on 16-04-2018        Tweet

By Bibey Debroy - Chairman, Economic Advisory Council to the Prime Minister

NEW DELHI: The World Bank has a logistics performance index (LPI). Logistics means different things to different people. When Hannibal led the Carthaginian army over the Alps, he also thought of logistics, among other things. World Bank’s LPI is not about that kind of logistics, though there are parallels.

LPI is based on a Country’s performance under six heads—efficiency of clearance process at the border (such as Customs), quality of trade and transport-related infrastructure (ports, railways, roads, information technology), ease of arranging competitively priced shipments, competence and quality of logistics services (transport operators, Customs brokers), ability to track and trace consignments, and timeliness of shipments reaching destinations. As is obvious, whatever indicator one chooses under these six heads, hard objective data aren’t going to be available.

Therefore, there will have to be subjective responses to questionnaires, always dicey in cross-Country comparisons. That doesn’t nullify the importance of such studies. But they have greater utility in measuring a specific country’s improvement (or deterioration) over time, rather than the cross-Country comparative angle. In addition, cross-Country reportage tends to focus on ranks, which are relative and depend on performance of other countries.

Scores, which drive ranks, are more revealing. All too often, one tends to assume something like LPI is solely a function of what Government does.

The World Bank’s detailed LPI report also provides the questionnaire, with specific questions. Consider items like port charges, airport charges, road transport rates, warehousing or trans-loading service charges, agent fees, warehousing or trans-loading facilities, quality of road transport service providers, quality of warehousing or trans-loading service charges, agent fees, warehousing or trans-loading facilities, quality of road transport service providers, quality of warehousing or trans-loading and distribution operators, Customs brokers, trade and transport-related associations, quality of consignees or shippers, quality of private logistics services. Many of these are not G2B (Government-to-Business), but B2B (Business-to-Business), and are less amenable to both government control and regulation.

Import, Exports

Large chunks of the economy are still informal and unorganised. Transition to greater formalisation is correlated with development, and this happens incrementally. It is not something that can be done by fiat. Ipso facto, efficiency gains consequent to formalisation don’t occur overnight either.

Consider a question from imports, about whether Customs permits prearrival processing of import shipments. Surely, the answer to this depends on whether there are several small and fragmented players or a few large ones. Because of historical reasons, both on the export and import side (preferential licensing and tariffs), incentives were linked to the physical act of exporting or importing. Therefore, as a Country, we had too many exporters and importers. This is not a question of survival, since that survival is no longer contingent on physically exporting and importing.

Similarly, consider a question from exports. What are the costs and time involved in sending a full container, as opposed to part of a full load? This, too, has a similar dimension.

For exports (imports are a mirror image), a shipment has to go from point of origin in the seller’s factory to the buyer’s warehouse in a different Country.

It transits through the port, but has to cross the hinterland too. That is the reason logistics is not just about trade at the border. Especially for a large and heterogeneous Country like India, there are variations among States and the World Bank’s LPI captures this imperfectly.

Logistics Index

A few days ago, Union Minister for Commerce and Industry Suresh Prabhu announced that GoI is planning (presumably undertaken by a third party) a logistics index to benchmark and rank States. That will be a useful supplement.

Having said this, how does India perform on LPI in 2016, the last year for which we have data? India’s overall score is 3.42 (the maximum score is 5, and the higher the value, the better), giving it a rank of 35th out of 160 countries. (There are other cross-Country indices on which India performs far worse, and if you look at the cross-Country plot, India performs better on LPI than its per capita GDP would have suggested.)

As a measure, LPI has been around only since 2007. Whether it is overall, or under the six individual heads, improvements have been sharper between 2014 and 2016.

Will such improvements continue?

I think so, not only because of Multi-Modal Transport initiatives (in logistics, and not just trade), but also because logistics is important enough to have a logistics division in the Department of Commerce since July 2017. Add the goods and services tax (GST) to that, not only because of e-way bills.

Export-import procedures also become complicated because of export incentives and countervailing duty, both linked to domestic indirect taxes.

If domestic indirect taxes become transparent, these compliance costs also decline. Somewhere down the line, basic Customs duties will also become simpler.

At least on the G2B or even G2C (Government-to-citizen) bit, recommendations and directions of reform are clear. They are also talked about.