Implications of Granting Infrastructure Status to the Logistics Sector

[Harini Sutaria is a final year student at ILS Law College, Pune]

Introduction

In a bid to boost the logistics sector in the country, the Government has granted it an infrastructure status. This grant of status is a positive move by the Government and is an acknowledgement of the growing dependency of the success of other industries on logistics. A notification was issued by the Department of Economic Affairs (DEA) in November 2017, widening the category of infrastructure sub-sectors to include transport and logistics. This decision would enable companies in the logistics sector to access funds at a cheaper rate and consequently benefit the economy in the long run. This would also encourage manufacturing and job creation, thereby boosting the domestic and external demand for Indian goods.

What Does Infrastructure Status Entail?

Despite being recognized as one of the fundamental ingredients for economic development, the term ‘infrastructure’ has not been given a definite meaning in India. In common parlance, infrastructure is understood as an elementary structure or service required for an economy to function. Different organizations and committees have given varied interpretations to the term. Dr. Rakesh Mohan Committee defined infrastructure to include electricity, gas, water supply, telecom, roads, industrial parks, railways, ports, airports, urban infrastructure and storage. For the purpose of external commercial borrowing funds, the Reserve Bank of India (RBI) has defined infrastructure to include power, telecommunication, railway, roads including bridges, sea port and airport, industrial parks, urban infrastructure (water supply, sanitation and sewage projects), mining, exploration and refining. Due to this lack of uniformity in usage of the term, the Cabinet Committee on Infrastructure^[1] introduced a harmonized master list of five main infrastructure sectors and 29 infrastructure sub sectors to guide all the agencies responsible for supporting infrastructure in various ways. A conscious effort was undertaken to ensure that the list was made flexible enough to accommodate further additions as and when required. However, it was decided that new sub-sectors would be included only when it fulfilled six characteristics of infrastructure. These include natural monopoly, non-rivalness in consumption, high sunk costs and asset specificity, possibility of price exclusion, non-tradability of output, presence of externalities and one or more of the three parameters, namely its importance to the scheme of economic development, its ability to contribute to human capital and the specific circumstances under which it has developed in India.

The Need

The need for an integrated logistics sector development has been recognized for quite some time now. This can be traced back to 2010, wherein, in a study conducted by the Government,  it was found that the annual value of harvest and post-harvest losses of major agricultural produces at the national level was to the tune of Rs. 92,651 crore. One of the major contributing factors towards this loss was the lack of storage and transportation facility in the country. While the Government has been working on improving the road (Bharatmala Project) and waterways (Sagarmala Project) network in the industry, storage and warehousing facilities are not developing at the same pace. The need for an integrated development is mainly required due to the logistics cost in India being very high in comparison to other developed countries. In fact, in a report published in 2016, a group of experts opined that India could save up to 50 billion dollars if logistics costs are brought down from 14 percent to 9 percent. This makes Indian goods relatively more expensive thereby reducing their competitive value in global markets. A number of experts in the field have revealed that about 14 per cent of the total value of goods goes into logistics cost in India. On the other hand, in other major economies, this figure is restricted to a meagre 6-8 per cent of the total cost. Thus, in order to rectify these flaws, the Government created a separate logistics division under the Ministry of Commerce on 7 July 2017. Further, by way of a notification issued on 17 November 2017, the logistics sector was included in the Harmonized Master List of Infrastructure Sub-sectors under a new head ‘Transport and Logistics’, and categories such as multi-modal logistics park, cold chain facility, and warehousing facility were defined.

Implications

Once an industry is accorded infrastructure status, the sector is entitled to a number of benefits and concessions. This grant of status enables an industry to raise money from insurance companies, pension funds, and international lenders with a longer tenure and on easier terms. Infrastructure status gives industries access to cheaper foreign currency funding through the external commercial borrowing route. Falling under infrastructure category helps the sector get credit at competitive rates and on long-term basis with enhanced limits. Furthermore, the logistics sector will be also be eligible to borrow from India Infrastructure Financing Company (IIFCL).

These benefits coupled with the consequences of implementation of good and services tax, will decrease the overall costs of logistics, in turn boosting the demand for Indian goods. Additionally, this will also contribute towards furthering the objective of the “Make in India” initiative.

Apart from the inclusion of cold chain facilities and warehousing facilities in the definition of logistics infrastructure, the definition also includes Multimodal Logistics Parks. This is likely to attract a great deal of private investment in the sector as the cost of funding will be at a concessional rate and the players will have a plethora of options to raise money.

In addition to the benefits that would accrue to the companies engaged in the logistics sector, this move of the government will also be instrumental in the expansion of other sectors that are dependent on logistics, such as pharmaceuticals, textiles, cement, etc. The changed status will enhance the viability of opening up businesses in different regions, thus translating into more demand and growth, a possibility that was not previously considered viable.

Another significant implication of this step would be job creation. On account of the benefits mentioned hereinabove, the sector would attract a huge number of investors, both Indian and foreign thereby creating employment opportunities in the country. In fact, the creation of the Sagarmala and Bharatmala Projects have already generated jobs for around 3 crore individuals. Thus, the creation of jobs as a result of the grant of infrastructure status can be surmised with certainty.

The Challenges

The logistics sector is highly fragmented and is not adequately regulated. This causes different players in the sector to follow different practices, leaving no room for uniformity. Further, a massive improvement in road infrastructure at a much faster pace is critical to minimizing losses, both economic and environmental. Only when this is achieved on the right scale will the logistics sector achieve ideal growth. Lastly, the task force employed in the sector is not adequately trained thus reducing the possibility of reaching its actual potential. Hence, although this grant of infrastructure status is undoubtedly a welcome change, the road ahead is not devoid of impediments.

– Harini Sutaria

^[1]The Cabinet Committee on Infrastructure was formed in 2009 under the then Prime Minister. It is a standing committee constituted for making focused and speedy decisions for infrastructure. It replaced the Committee on Infrastructure which was formed in 2004.