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4 ways how logistics sector is driving FDI in Manufacturing

Listed here are some key growth factors in Logistics, that have favoured the growth of the Indian manufacturing sector.

November 29, 2021 12:14 IST | India Infoline News Service
Covid-19 threw a slew of challenges at every sector, but few had the pressure to rise up to that challenge like the logistics and supply chain industry did. After all, they had to find a way to initiate and maintain a seamless flow of essential commodities at a time when the whole nation feared they would run out of them. But the Indian logistics industry rose to the challenge and ensured not only a watertight flow of goods but also played a critical role in rolling out the vaccines at breakneck pace.

The reputation of India’s logistics and supply chain industry was only enhanced during the pandemic, with the significant support and boost it offered to the other sectors, in ensuring a speedy recovery post COVID. Manufacturing, undoubtedly, was the biggest benefactor of this new, stronger Logistic and Supply chain sector.

Logistics and supply chain networks have always played a pivotal role in the success of Manufacturing. With COVID, the manufacturing sector was marred with several challenges, like lack of manpower, shutting down of international borders which cut off access to raw materials and reach to international markets. However, post COVID, the recovery of the sector has not only been good but has also enhanced the potential of growth, thanks to the now strong and evolved Logistic and supply chain infrastructure.

Listed here are some key growth factors in Logistics, that have favoured the growth of the Indian Manufacturing sector:

1. Enhanced reach

The Indian logistics network has expanded its reach in the last decade, covering every corner of the country with at least one route. More importantly, delivery times have improved significantly, thanks to an uptick in infrastructure quality and introduction of technology in the industry. Also, total warehousing coverage in India has grown astronomically - jumping from 99.9 million sq. ft in 2015 to 252.7 million sq. ft in 2020 - which facilitated the expansion of the supply chain network, and bringing more manufacturing units and Indian towns under its ambit.

2. Pan-industry tech adoption

The last half a decade has witnessed accelerate tech adoption in the industry, and that, arguably, is the #1 factor responsible for revolutionizing the logistics sector. Technology can help the sector counter rising supply chain pressures and accentuate operational efficiency.

The Indian logistics industry has already started looking at the Internet of Things, Automation, Blockchain, Cloud Computing, AI & ML, and even Robotics to deliver end-to-end, streamlined logistics solutions, lift service quality, minimize costs and eliminate human errors. Technologies like cloud computing, GPS, and smart sensors have become cheaper and more accessible to even the smaller players in the market, thus enabling them to modernize their systems and improve efficiencies.

The World Economic Forum predicts that digital transformation of the Logistics sector could translate into a value of USD 1.5 trillion for the participants and an additional USD 2.4 trillion worth of societal benefits by 2025. And India being ranked 2nd by the Agility Emerging Market Logistics 2019 suggests that we could reap a large chunk of the benefits of digital transformation predicted by the WEF.

3. Supportive Government policies

The GoI has been very proactive in strengthening the logistics sector. The government, through the Indian Railways, is taking on an ambitious Dedicated Freight Corridor (DFC) Project that could turn out to be a gamechanger for Indian freight transportation. Last month. Union Transport Minister Nitin Gadkari announced a plan to launch 35 multi-modal logistics parks in the country. This project is expected to further expedite the growth of the logistics industry and subsequently boost the manufacturing sector through enhanced ground coverage and cutting-edge logistics services. The GoI also announced a comprehensive National Logistics Policy (NLP) that will attempt to cut logistics costs and create more business and investment opportunities in the sector. Lastly, the government has also promoted digitisation through breakthrough initiatives like E-way bills, E-invoicing, and GPS-based toll.

4. FDI in logistics

The transport and logistics sector was granted ‘infrastructure status’ in 2017. This status provides the industry access to cheaper foreign currency funding and enables them to raise larger capital investment through the External Commercial Borrowings route. It also helps the sector obtain credit at more competitive rates, for a longer duration, and of larger sums. Besides, storage and warehousing are now allowed to secure 100% FDI, which opens up a plethora of opportunities for the industry as well as for overseas investors looking to tap into India’s flourishing economy.

In line with the above factors, the Indian manufacturers now enjoy better domestic reach, enhanced tech enabled storage and real time tracking facilities, and cheaper collaborative approach to reach international markets.This has, in turn, caught the attention of the international manufacturing and investor community, that is on a lookout to dilute the hold of China as the global manufacturing hub and is looking towards potential markets. Although factors like pro-business policies, stronger focus on Make in India, and the availability of labour and resources, have always made India a favourable manufacturing hub, but the enhanced logistics and supply chain has just propelled the interest of international business community.

The author of this article is Mr. Hector Patel, Executive Director, and Board Member

The views and opinions expressed are not of IIFL Securities, indiainfoline.com

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