The dwindling economy of the country has posed serious challenges to the logistics industry. Umesh Shetty, Executive Director, Allcargo Logistics, takes a look at the current market scenario and is optimistic that the right policy can give a much-needed boost to the cement sector.
India’s economy has seen some of the toughest times over the last two years in terms of its economic growth. All key macro-economic variables have been under tremendous stress, from domestic manufacturing, exports, heavy dependence on imports, especially fuel, inflation, currency fluctuation and the policy logjam. These challenges were severely fuelled by the global economic gloom and monetary crunch. Given India’s demographic and economic proximity to global markets, the country has faced major challenges in sustaining its past growth, too. In retrospect, it seemed impossible that India could get in this situation in such a short period of time, but that is what exactly has happened to the economy, contrary to all expectations.
However, the bright side of the story is that India’s opportunity is here to stay. The country is still the second largest developing market in Asia just after China. More than fifty per cent of its population is below the age of 35 years. Thus, this segment of the market is a huge base for consumption of domestic and global products. For instance, this is evident from the fact that mobile phones has seen the fastest penetration in the Indian market over the last few years with more than forty five per cent of the population owning a mobile phone. Over a hundred mobile companies are presently selling numerous varieties of handsets to Indian consumers. The growth of the automobile market, especially two and four- wheelers, has seen one of the most rapid rise in terms sales and market development. The real estate market is also one of the most important indicators of a country’s growth. In India, this segment has seen one of the fastest growth in terms of per unit cost of properties. Domestic consumption of property is the major chunk of this market. Although the real estate market is also facing a cyclic down curve, the demand and shortage of supply situation seems here to stay.
Typical of a developing economy, India’s high dependence on imports such as oil will be a factor prominent in our growth for decades to come, as the country utilises this raw material for producing finished products which are either exported as well as consumed domestically. Underlying in our economic environment are some of the core sectors which drive new growth, development, employment and investments, sectors such as power generations, exploration of oil and gas, alternative energy generations, development of urban infrastructure, development of ports and transportation mediums.
All policy decisions devoid of emphasis on these core sectors will always fall short of its objectives. These sectors have the potential to rejuvenate our economy into a hyper growth drive, if the policy machinery uses these sectors as an asset and initiate transparent effective plans to implement these projects into the economy.
Logistics infrastructure
This is India’s biggest challenge as well as the largest opportunity. One that is crucial to our economy and particularly for trade will be the logistics infrastructure of our country. It poses the biggest challenge to our sustained growth as well as the largest opportunity to rise as an economic powerhouse. The competitive economies of China, Singapore, Dubai or even European countries have always had the advantage of world class roads, rail connectivity, ports, warehouses, best in class supply chain, etc, while competing with BRIC economies. India has always had to play catch- up. Our economy is driven by the mindset that infrastructure is second fiddle rather than the most critical component of growth. But due to globalisation and integration of trade agreements, that mindset has seen rapid change over the last few years. Thus, today infrastructure development has become one of the topmost priorities of the government in kick-starting the economic engine again. This is evident from the fact that the Prime Minister’s office is aggressively pushing for infrastructure development plans to be implemented as a priority. Given India’s unique demography and over 7,000 odd kms of coastline, the country needs strategic infrastructure to propel growth and act as a catalyst to reduce the cost of doing business in India, as compared to other regional economies, especially China.
Cement industry
This is the driving force of India’s infrastructure. Our country’s growth story will not be complete unless we take into account the crucial ingredient of infrastructure development, which is cement. All the above core infrastructure projects would need cement as a basic material for managing and completing mega projects. Thus, policy framework for boosting growth for this particular sector is also crucial from a macro perspective. A report titled ‘Indian Cement Industry Outlook 2015` from RNCOS, a leading industry research and consultancy firm, has estimated that the total installed capacity of cement in India will increase with a compound annual growth rate (CAGR) of around seven percent during 2012-13 to 2014-15. The production of cement has increased at 10 per cent CAGR over FY07-11. The market size of the industry is expected to grow to reach 550 MTPA by FY20. The cement companies in India are receiving full attention from the private equity firms for funding their business plans.
India’s cement sector currently stands at an overall capacity of 350 MTPA. As per the 11th Five Year Plan (2007-12), the industry added 120 MT of new capacities and is expected to reach close to 470 MT by 2017. As per the Department of Industrial Policy & Promotion (DIPP), the cement and gypsum products sector has attracted foreign direct investments worth US$ 2,656.29 million between April 2000 to June 2013.
During the 12th Five Year Plan period (2012-17) the industry is estimated to add a capacity of 150 MT. Giving impetus to the market, the Government of India plans to roll out public-private partnership (PPP) projects worth Rs 1 trillion (US$ 16.33 billion) over the next six months. The Principal Secretary in the Prime Minister’s Office (PMO) will monitor these projects.
New trends in supply chain
Coastal shipping could be the major medium of transportation. There are two critical challenges in front of the cement industry- the volatile fuel costs and protecting the environment. Given India’s unique demography, coastal shipping and inland waterway is the best and the most eco-friendly medium of transportation as compared to road or rail. Waterways emerge to be preferred options primarily due to the sub-optimal condition of our roads across the country.
Another important factor is the constant hike in fuel prices leading to frequent escalation of transport charges. Speaking about rail as a medium, the lack of integrated rail connectivity from sourcing locations to plants and then from plants to last mile distribution, is a considerable challenge for creating efficiencies in logistics of cement in India. This mode will be crucial in its ability to leverage the opportunity, given that it is expected that India needs about US$ 1 trillion from 2012-13 to 2016-17 to fund infrastructure such as ports, airports and highways to boost growth, thereby promising a good outlook for the industry. At Allcargo Logistics, we have already seen many of our coastal shipping customers preferring transportation of commodities like cement through waterways, to optimise their investment in these though economic conditions and also for the timely movement of their cargo.
Umesh Shetty, Executive Director, Allcargo Logistics,