National Logistics Policy: Will it reduce logistics costs to a single digit and make India globally competitive?

Currently, the logistics costs in India make up 13%-14% of our GDP. In developed economies, it is 8%-11%. The National Logistics Policy aims to bring India on par.

Logistics is the backbone of any economy. The ease of movement for goods, services, and human resources is a must to make an economy competitive at the domestic and international levels. The Indian Government has launched the National Logistics Policy to provide a comprehensive agenda for the development of the entire logistics ecosystem in the country. This article will explain what National Logistics Policy is and how it will help accelerate India’s overall growth.

National Logistics Policy (NLP) vision

The vision of the National Logistics Policy (NLP) is to develop a technologically enabled and integrated logistics ecosystem throughout India. The logistics ecosystem will be cost-efficient, resilient, and sustainable. It will accelerate and drive inclusive growth.

India has already proved its prowess in Information Technology (IT) at a global level. The Government aims to use this strength to digitise our logistics ecosystem. Currently, the various modes of transport (such as roadways, railways, and waterways) mostly operate in silos. The aim is to bring all modes of transport together with the establishment of multi-modal transport systems for ease of goods and human resources transport. Thus, an IT-enabled and integrated multi-modal transport system will bring in cost efficiencies.

With the NLP, the Government aims to shift from roadways (currently the major form of transport) to railways (smaller source) and waterways (negligible source). The railways and waterways are environmentally friendly modes of transport, apart from being cheaper than road. The shift to cheaper and environmentally friendly modes of transport will align with ESG goals and make it sustainable.

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National Logistics Policy (NLP): What it targets

These are the three major targets of the NLP:

1. Reduce India's logistics costs to make it comparable to global benchmarks by 2030
2. Create a data-driven decision support mechanism for an efficient logistics ecosystem
3. Improve India's Logistics Performance Index (LPI) so that it ranks among the top 25 countries by 2030

The strategies for achieving the above targets include the following:

1. Reducing India's logistics costs - The policy aims to reduce logistics costs by migrating toward relatively more efficient, economical, and environmentally sustainable multi-modal interconnected infrastructure. The policy will enable adequate development of warehouses and facilitate improvement in efficiency, productivity, and quality services in warehousing. There will be an improvement in inventory management with the promotion of digitisation. A regulatory and policy environment will be developed wherein government policies will promote and support investments by all stakeholders.
2. Improving the Logistics Performance Index (LPI) - The policy will facilitate the identification and resolution of issues related to logistics capacity, last-mile connectivity gaps, ground-level operation, and infrastructure. These measures will help improve India's Logistics Performance Index (LPI) ranking.
3. Developing data-driven systems - Data-driven systems will monitor the various components of the logistics ecosystem to enable higher logistics efficiency.

Implementation of the National Logistics Policy (NLP)

The Indian Government will implement NLP through a Comprehensive Logistics Action Plan or CLAP. The

CLAP has been divided into specific key action areas, some of which include:

1. Integrated Digital Logistics Systems - The Government will develop, operate, and maintain a Unified Logistics Interface Platform (ULIP) to integrate all logistics-related digital portals and IT solutions. The data will be shared amongst various line ministries involved.
2. Logistics Human Resource Development and Capacity Building - The Government will develop an overarching logistics human resources strategy. Under the strategy's guiding principles, the line ministries will develop action plans to address skill development-related and internal capacity-building challenges in the respective sectors.
3. Export-Import (EXIM) Logistics - An efficient and reliable logistics network will be created to address infrastructure and procedural gaps in India’s EXIM connectivity. It will improve India’s trade competitiveness and integration with regional and global value chains.
   
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4. Facilitation of development of logistics parks - A network of logistics parks will be created by mapping them on the PM Gati Shakti National Master Plan (NMP). It will enhance visibility, improve logistics efficiency, and optimise the utilisation and connectivity of the logistics parks.

National Logistics Policy (NLP) impact on the Indian economy

The NLP will have a positive impact on the Indian economy in multiple areas. These include:

1. Reduction of logistics costs - Currently, logistics costs in India are 13%-14% of the GDP. In developed economies, it is 8%-11%. The current high costs make goods expensive in our country and hamper the growth of our exports in the international markets. The NLP aims to reduce our logistics costs to a single digit and bring India on par with developed economies.
2. Attracting investment in logistics infrastructure - The Government will implement NLP through the Comprehensive Logistics Action Plan (CLAP), which is divided into specific key action areas. One of these is the development of logistics parks. It involves the draft framework guidelines to facilitate the development of logistics parks across India, with a focus on encouraging private investment. The policy will attract investment from domestic and foreign investors in setting up logistics parks. The policy will cover the setting up of multi-modal logistics parks, cargo terminals, inland container depots, air freight stations, container freight stations, etc. The investment will help improve India's logistics infrastructure, facilitating the faster and more efficient movement of raw materials and finished goods across the country.
3. Creation of more jobs  - The logistics sector currently employs around 22 million people across India. Jobs in this sector are expected to grow at 5% in the next five years. In the above section, we saw how the NLP would attract investment in logistics infrastructure. The construction and operation of the logistics infrastructure will create many job opportunities for our youth. However, this can create a shortage of skilled human resources in the logistics sector. To address this challenge, one of the key action areas of the CLAP is to work on skill development and capacity-building measures.
4. Improved competitiveness in the international markets - As mentioned earlier, India’s logistics costs are way higher than that of developed markets. It reduces our competitiveness in the international markets, hampering our export potential. We have seen in the past how exports have been an engine of economic growth for countries such as China. In FY 2021-22, India achieved the highest annual exports of USD 669.65 billion. This included merchandise exports of USD 419.65 and services exports of USD 250 billion. If the NLP reduces our logistics costs, it will tremendously improve our export competitiveness in the international markets. It will help us export more to our existing partners and explore new partners for exports.
5. Shift to environmentally friendly modes of transport - The Government of India plans to build integrated multi-modal transportation hubs with the NLP. Currently, most goods are transported through roadways (over 60% share vs 25% globally). A small portion of transportation happens through railways (30% currently vs 60% globally), and a negligible percentage happens through waterways (5% currently). Road transport is expensive and not environmentally friendly, unlike railways and waterways. With the NLP, plans are on to increase transportation through railways and waterways. This will help save on costs and shift to environmentally friendly modes of transport, which is in line with the Government's goal of reducing carbon emissions.

Impact of NLP on listed stocks

The listed stocks in the logistics sectors went up in anticipation of the announcement of the NLP and also on the day of the policy announcement. The NLP is positive for the listed logistics stocks. In the long run, some stocks that can benefit from the NLP include Aegis Logistics, Concor, Mahindra Logistics, Allcargo Logistics, TCI Express, Bluedart Express, Gateway Distriparks, GATI, VRL Logistics, etc.

As per an Economic Times report, brokerage firm Motilal Oswal is positive on four logistics stocks and expects them to rally up to 34%. These include Concor (target price Rs 870), TC Express (target price Rs 2100), Transport Corporation (target price Rs 860), and VRL Logistics (target price Rs 860).

The current run-up in logistics stocks seems to have priced in the NLP announcement. However, the NLP will be a long-term theme for the listed logistics stocks. So, investors should invest with the long term in mind to benefit from the power of compounding and wealth creation.

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In the past, the Government took various steps, such as Make in India and Production Linked Incentive (PLI) schemes, reducing the corporate tax rate, etc., to make India a global manufacturing hub. The National Logistics Policy is one more step in that direction. NLP is expected to reduce the overall logistical cost in India, attract investments in the logistics sector, create job opportunities for the youth, and improve India’s competitiveness in the international markets. Indeed, NLP has the potential to make India a global logistics hub.