India’s tax overhaul unleashes logistics revolution

      01/08/2018

Indian lorries are perhaps the world’s most colourful, typically smothered with gaudy artwork depicting anything from peacocks to Bollywood stars.

But for all its aesthetic richness, India’s trucking system has long been a laggard in efficiency. A damning 2014 World Bank report warned that up to 60 per cent of an Indian truck journey consisted of time spent stationary — much of this resulting from state border checks often more arduous than those at international crossings.

India’s historic goods and services tax, which came into force in July, aimed to address this chronic drag on the economy. With the value-added taxes imposed by India’s 29 states now subsumed under a single national system, the need for tax enforcement at state border checkpoints has vanished, and most have been shut.

The results have already been dramatic, says Shivkumar Rao, co-founder of R&Y Logistics, a freight-forwarding company. “Our trucks used to cover 250km per day; now they’re doing up to 325km,” he says.

R&Y is based in Nagpur, one of the cities that stands to benefit most from a GST-driven transformation of India’s logistics system. Located at the country’s geographic centre, it would have been an obvious distribution hub for the surrounding region — were it not for the nearby borders with the states of Telangana, Chhattisgarh and Madhya Pradesh, all guarded by tax checkpoints.

“Warehousing in Nagpur never made sense, because every time you crossed a state boundary, you had to pay sales tax,” Mr Rao says. “But GST is likely to change the whole warehousing and distribution paradigm.”

A short drive away, the approach to Mahindra Logistics’ office in Nagpur is lined with shining red tractors, produced by its parent company Mahindra & Mahindra, which still accounts for most of its business storing and distributing goods across India.

But the new tax system is set to accelerate Mahindra Logistics’ drive to attract external custom, as other companies use its warehouses in strategic cities such as Nagpur to ensure faster and smoother deliveries, says chief executive Pirojshaw Sarkari.

The previous system encouraged manufacturers to distribute their goods from warehouses within each state, encouraging the growth of a huge, fragmented network of small warehouses. Others simply avoided using warehouses — to protect their cash flow from the lag between paying tax at the state border and receiving payment for a sale — and instead supplied dealers directly from their factories.

The GST era will upend this paradigm, benefiting large players such as Mahindra Logistics, which will be able to offer economies of scale at their regional hubs, Mr Sarkari says.

“The logistics network was based on tax efficiency rather than operational efficiency, so a lot of small warehouses were set up. Some of them were just individuals who would build a warehouse on a piece of land and try to compete on cost — they won’t now be able to compete with the larger warehouses.”

The full benefits will take time to feed through, says Keyur Pandya, an analyst at brokerage Prabhudas Lilladher. India’s warehouse network will begin to close the technology gap with those in developed countries, making more use of automation in warehouses now large enough to justify the investment. But many companies are taking a cautious approach to rejigging their distribution networks, he adds, amid a welter of tweaks and revisions to the new tax code.

Still, the gathering shift in behaviour has already galvanised rapid growth for companies such as Boxmyspace, founded in 2015 as a technology-driven provider of flexible warehouse services. “We’re now seeing about 20 per cent month-on-month growth in square footage, from 5 to 7 per cent before GST,” says founder Pratyush Jalan.

A further boon for the sector came in November when the government announced that logistics companies would be treated as part of the infrastructure sector, allowing them to benefit from more liberal regulations when raising funds.

“We’re now able to avail longer term capital at a lower cost: that's a huge benefit to our sector, opening up opportunities we had never imagined,” says Anshul Singhal, chief executive of warehouse operator Embassy Industrial Parks.

But the government must still do more to unlock the benefits of GST for the sector, says Cyrus Guzder, former chairman of the transport and logistics council at the Confederation of Indian Industry. 

The “troublesome and burdensome” procedure for complying with GST is eroding the benefits for many trucking companies, most of which are small businesses with at most a handful of vehicles, Mr Guzder says. Some regional transport offices “are still harassing drivers across the country” even after the removal of border posts, he adds, while the need to pay in cash at many highway toll gates continues to slow deliveries.

“I think [GST] is a game-changer, although it hasn’t changed the game just yet,” he says. “But five or six years from now, the map of logistics in India will be very different.

by Simon Mundy in Nagpur