Logistics as a Lever of Economic Growth

Published by MBA Skool Team, Published on January 21, 2013

It is important for the Country’s today to look at alternative ways to be effective in the dynamic business scenario and global competition. The logistics/ supply chain management is one such area to make the improvisation.  A lowering of logistics costs by 1 percent of GDP translates to savings of over 7.5 billion dollars. In spite of the huge potential for growth, the sector didn’t keep pace with the India’s wider economy and threat to the future competitiveness.


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It is estimated that a whopping $ 65 billion is lost every year on account of inefficient supply chain system in India. The logistics costs India are about 12-13 per cent of the GDP as compared to 7- 8 percent in the developed countries. Hence the country loses around 4.3 per cent of GDP. This can be attributed to the lack of adequate infrastructure and supporting mechanism in the country. For example it is estimated that India burns 2.5 billion dollars worth of fuel on account of trucks standing idle on state check posts.


The logistics spend in India is significantly high due to the diverse geographical spread, inadequate infrastructure, complex tax regime, and insufficient storage systems.

Since independence only 20 per cent capacity has been added to the railway network but the traffic has increased ten times. The case of road infrastructure is no different: national high ways account for 2 per cent of the roads but transport 40 per cent of the freight tonnage. 57 % percent of the total freight is still transported on the road network. The main reason for heavy dependence on mode of road transport is the lack of rail system responding to the needs of the industry. Logistics parks, warehousing and other support infrastructure are also at an early development stage.

The transportation costs comparison by mode with the U.S demonstrates that India’s logistics infrastructure is quite subdued. For instance, rail and coastal shipping costs in India are approximately 70 per cent higher than those in U.S. Likewise, road costs in India are higher by about 30 per cent. This not only results in higher prices and lower competitiveness, but also hampers economic growth.

Projections for the future

It is estimated that by 2025 India will be one of the world’s five largest economies. India has formulated some of the initiatives like National manufacturing policy which aims to accelerate the growth in manufacturing sector. This is also aided by the options being considered by the players in China who want to diversify into other countries for market access and generating facilities across all the important emerging markets.

The sector is expected to grow at a CAGR of 26 per cent during 2011-13 on a very low base.

  • The freight is expected to grow three fold in the coming decade on the back of the growing economy.
  • If India fails to invest well in the logistics infrastructure then it will lead to consolidate lose of 140 billion dollars by the year 2020.
  • Till 2015, nearly 35 million truck drivers would be required every year.
  • The demand for skilled workers is expected to be around 20 million from the current 10 million workers.

Source: KPMG, Mc Kinsey, CII

The way ahead

The Indian logistics sector is on the cusp of the new chapter. Unique Indian best practices coupled with international learning’s would need to be applied to ensure that growth possibilities as well as future opportunities are fully seized. The following are the possible courses of action which can be undertaken by these stakeholders.


  1. The government needs to draw up a comprehensive National logistics policy. Currently the various components of logistics (surface transport , railways, shipping air) are all separate entity . There is a need to drive the policy in a synchronized manner.
  2. The development of logistics and infrastructure should be a national policy. This means direct investment into alternative modes to road , particularly rail and costal shipping , in order to bring down costs , ease traffic congestion and minimize carbon emission.
  3. There is an acute talent shortage in the industry, government should launch course specific to logistics and improve the logistics to make logistics an attractive career option.
  4. The last mile connectivity is still a major problem for the logistics. Initiatives to improve the rural infrastructure would go a long way in helping the logistic service providers and also reduce the cost of goods/ services in rural areas.
  5. Logistics park’s should be setup at appropriate places for developing the trade. It is estimated by CII that setting up of the logistics park’s will result in savings of 13 to 16 billion dollars in logistics cost per years.


Industry needs to proactive in recognizing the growth potential and developing strategies to be better handle their Logistics. Industry can contribute to the growth in the following ways

  1. There is an increased need for the private players in the development of the infrastructure. As the government plans to spend 500 billion dollars, it expects the private sector to contribute around 50% of the budgeted expenditure in the form of Public private partnership.
  2. End – end logistics service providers are lacking in the Indian logistics sector. Industry should catch up to the growth potentials and offer tailored services customized to the organizations.
  3. 100% FDI is allowed in all logistics services,  This can be leveraged to form Joint ventures with best logistics service providers globally to bring in world class standards in Indian Industry.
  4. Logistics service providers need to embrace technology for efficient operations and delivery of the services; this would enable reduction in the costs and prevention of loses.
  5. Adapt the best practices in the logistics sector from across the world for a better service to the customers of the organizations.


Effective methodologies discussed above would pave the way to improve logistics efficiencies and providing with the required competitiveness for logistics sector.

Government measures to make logistic industry competitive by increasing rail freight and developing the public transport infrastructure with better policies and governing bodies is a positive note.

The major stakeholders, logistics service providers are hindered  by the complexities involved, so the initiatives suggested will lead to having sustainable cost savings and drive themselves into the global league of efficient, Simple, effective, customer centric and lucrative businesses.

Taking action to improve the sector will lead to building better supply chains. Then logistics will be a critical enabler in driving growth.

This article has been authored by A V S Srikanth from NITIE.

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