Whalesbook
1. THE SEAMLESS LINK (Flow Rule):
The perception of India grappling with unusually high logistics costs is being re-evaluated, with new data indicating a significant misunderstanding rooted in incomplete international comparisons. While the World Bank's Logistics Cost Index (WBLCI) historically presented an unfavorable picture, its methodology primarily captured international port-to-port transit times, overlooking the substantial domestic logistics expenditure that constitutes the bulk of door-to-door delivery expenses. This oversight has led to an inflated view of India's logistics burden.
2. THE STRUCTURE (The 'Smart Investor' Analysis):
Global Rankings Under Scrutiny
Analysis by the Department for Promotion of Industry and Internal Trade (DPIIT) and the National Council of Applied Economic Research (NCAER) offers a more granular view. Their "Assessment of the logistics cost in India" for 2023-24 reveals a total logistics cost of 7.97% of India’s nominal GDP, and 9.09% of its non-services output. This figure is notably competitive when compared to international counterparts. For instance, Thailand's logistics costs registered at 14.1% of its GDP, while South Korea's stood at 13.5% in 2023, and Indonesia reported 14.3% in the same year. China's logistics costs were 14.4% of GDP in 2023, a reduction from 18% in 2012. These metrics suggest that countries consistently outranking India on the WBLCI often have higher overall logistics expenditures as a proportion of their economic output.
Unpacking the WBLCI's Limitations
The World Bank's WBLCI, which previously showed India's rank fluctuating from 54th in 2014 to 38th in 2023, has been criticized for relying on 'perception-based' surveys among international freight businesses, potentially introducing bias. Crucially, it omits 84% to 90% of total door-to-door delivery costs, which are domestic in nature. International maritime shipping, though time-consuming, typically accounts for only 5% to 10% of the goods' value, according to UNCTAD data. Anecdotal evidence suggests the international segment's share of total logistics costs might range from 10% to 16%. The new Indian study's inclusive approach provides a more accurate picture of India's logistical efficiency.
The Evolving Nature of Services Logistics
The notion that India, as a services-dominant economy, should inherently possess lighter logistics needs is also being challenged. While services constituted 49.9% of India's GDP in 2024, this is marginally below the average for lower-middle-income economies. Furthermore, the material intensity of modern services, particularly digital and financial sectors, is increasing. These industries depend on energy-intensive infrastructure like data centers and robust telecom networks, introducing significant, often unmeasured, logistical demands. This trend contradicts the traditional view of services as 'infrastructure light.'
Regional Disparities and Infrastructure Gaps
Despite the improved national cost assessment, significant regional disparities persist within India. The North-East region, for example, experiences logistics costs up to 50% higher than other areas, primarily due to poor road infrastructure and elevated border transaction costs. Poor road conditions alone can impose an additional 20% penalty on logistics costs. The Western region is noted as being at least 20% cheaper for road transport compared to other regions. Fuel costs, a substantial component at 42% of road transport expenses, also vary by state, indicating potential for cost reduction through rationalized state taxes on fuel.
Outlook and Policy Implications
India's 2022 Logistics Policy aims to reduce logistics costs to 8% of GDP and position the country among the top 25 globally. The findings from the DPIIT-NCAER study provide a more accurate baseline for achieving this target. Future efforts will likely focus on addressing domestic infrastructure deficits, improving regional connectivity, and enhancing the accuracy and comprehensiveness of national statistical data to better inform policy decisions and measure development outcomes.