A logistics policy without a location policy?

A national logistics policy was announced recently. It builds on the ‘Gati Shakti’ initiative. The objective is to improve Indian competitiveness by reducing the country’s logistics costs from the current 13-14 per cent of GDP to a single-digit number (in the US, it is 7-8 per cent) by ensuring seamless movement of goods and services across the country.

The Gati Shakti initiative essentially aimed at creating a web-based GIS (Geographic Information System) platform, capturing utilities and network clusters to allow government stakeholders to coordinate project development. The new logistics policy has four critical features: Integration of Digital Systems (IDS), Unified Logistics Interface Platform (ULIP), Ease of Logistics (ELOG) and Systems Improvement Group (SIG).

Under IDS, 30 different systems of seven departments (road transport, railways, aviation, customs, and various commerce departments) are to be integrated to permit faster cargo movement. ULIP will make all available transport modes visible to stakeholders to permit informed decision-making. Under ELOG, rules will be simplified. The SIG will monitor all logistics projects regularly and act as a conduit between government and industry to enable stakeholders to raise queries and flag issues so that inter-ministerial groups can find solutions.

These measures, combined with the ongoing construction and enhancement of high-speed expressways, railways, airports, ports, and riverine transport, are expected to provide the desired logistics efficiencies. However, though these measures are laudable, they may not by themselves deliver the desired results as there is no accompanying ‘locational policy’.

Locational policies aim to enhance economic competitiveness by developing place-specific assets most competitive for a particular setting. A Locational Policy Framework captures the wide array of alternative policy endeavours that cities can use to gain competitive strength. It aims at improving the locational quality so that existing companies become more competitive, entrepreneurs find it attractive to start their business there, and external investors prefer it in their locational decision. Accordingly, it will motivate some cities to specialise as industrial clusters while others may focus on profiting from educational tourism or health or sports or natural beauty to drive and guide economic activity -- the deciding criterion being the local natural endowment.

We need to appreciate the critical advantages of having an efficiency-oriented approach to location planning. Take, for instance, our textiles sector, which ranks No 3 globally. It contributes around 2-3 per cent of India’s GDP, 7 per cent of industrial output and 12 per cent of export earnings, employing some 45 million people. It has long been a beneficiary not only of various generic export promotion and priority lending schemes but also of well-funded special textile-focused assistance schemes, and yet it is perennially a “stressed sector”. A significant number of textile companies are always in the ‘stressed asset’ list of banks (apart from those already liquidated in the previous decades). Interestingly, the sector is spread over 50 clusters. Various experts have long blamed India’s scattered and fragmented textile supply chain for increasing shipping costs (inward/outward) apart from adding to manufacturing lead times.

All these result in our textiles struggling to compete even with countries like Bangladesh and Vietnam. An Indian manufacturer takes 90-120 days to ship an order of 20,000-30,000 pieces, say industry experts. In Bangladesh and Vietnam, it takes 14-21 days. This is not because of greater transportation efficiencies but because in Bangladesh, for example, their entire textiles sector is in two enclaves -- one each near the Dacca and Chittagong Ports. The supply chain is automatically more clustered. Whether by accident or design, the locational distribution in both Bangladesh and Vietnam is as clustered as that found in China.

To illustrate, Shaoxing (a city similar to Coimbatore or Ludhiana in size) exports the equivalent of half of what the entire Indian textile sector exports. Its companies enjoy huge cost economies because of the sheer scale effects created by co-location, resulting in the famed Chinese pricing. The competitive edge of Indian companies is lower because they are distributed across a greater number of smaller clusters located at far-off distances, and thus lack the benefits of scale their competitors in China, Bangladesh and Vietnam enjoy.

It is not only Indian textiles that suffers from inefficiencies on account of a scattered and fragmented supply chain. It pervades all aspects of economic activity. Illustratively, we lack educational hubs like Oxford, Cambridge and Boston, and likewise medical hubs. Consequently, our VIPs go abroad for treatment/education.

The current lack of focus on creating tightly efficient supply chains through concentrated belts is a surviving legacy of the planning era, a ‘cut and paste’ of Soviet decision-making systems. The Soviets were impatient with concepts of profitability and efficiency and thus paid less attention to supply chain efficiencies. The USSR finally collapsed because of these and various other internal inefficiencies. In India, some imitative weaknesses were eliminated in the 1991 liberalisation and connected reforms. Several weaknesses, such as the lack of importance attached to ‘locational’ cost/benefits, still remain. While the logistics policy will improve movement efficiencies, it may not fully compensate for the lack of an accompanying location policy that is equally imperative if our companies are to become globally competitive.