India is the world's second-most populous country and its fastest-growing major economy. Nonetheless, even with the World Bank predicting a growth rate of 7.3 percent this year, the country faces major challenges. A creaking infrastructure, including clogged roads and a painfully slow rail freight network, alongside one of the world's highest freight tariffs, have been a drag on businesses.

Ambitious plans are now underway, however, to bolster the infrastructure, which could slash transportation costs and enable the speedier movement of goods. The plans include multimodal logistics parks (MMLPs), a program to build highways and ports, as well as the full utilization of Special Economic Zones (SEZs).

The MMLPs are aimed at providing modern warehousing, freight aggregation and distribution, customs clearances, value-added services such as labeling, and faster links to different modes of transport.

Last July Nitin Gadkari, India's minister for road transport and highways, announced the government aimed to develop 35 large MMLPs.

Gateway to Southeast Asia

One of the first will be located at Jogighopa, a nondescript town on the banks of the Brahmaputra River in the northeastern state of Assam. It will have access to roads, rail lines and waterways with links to ports and airports.

The project, which could become operational in three years, is located 160 kilometers from the region's biggest city of Guwahati. It will offer a gateway to the North East of the country as well as to South East Asia. The park will also connect to the East Coast corridor - a string of port-linked industrial clusters stretching from Kolkata to Kanyakumari at the southern tip, a distance of 2,500 kilometers -, which is being developed in phases.

The eastern coast is relatively underdeveloped, a result of India's concentration of trade linkages with Europe, the Americas and the Middle East. This has changed over the last two decades, and this corridor is expected to leverage industrial growth riding on the back of closer integration with markets to India's east.

Challenges for MMLPs

Each MMLP costs about $300 million to develop, with the funding coming from local state governments, the central government and private developers.

Location will be key to the success of MMLPs. If located near transport infrastructure, with easy access to main clusters of consumption and production, the MMLP would be a success. However, if the location becomes more of a function of where state government can make cheap land available, the park might find it difficult to attract business because of added costs to users in terms of proximity to markets and customers.

"The logistics sector (in India) is poised to grow by roughly 1.2 times the level of national GDP growth until 2032, by which time it is expected to generate $360 billion in value-add, up from $115 billion now," Hoe Yun Jeong, a principal economist at Asian Development Bank (ADB), wrote in a blog last September.

India's logistics costs almost doubled over 14 years to about 14 percent of GDP in 2014, he noted, because of clogged transport networks, a skewed mix of transport modes, insufficient storage and handling facilities for in-transit commodities, and regulatory hurdles. In developed economies such as the U.S. logistics costs account for only 8 to 10 percent of GDP.

HARD-HEADED: India recognizes the business sense of building more ports and economic zones.

Highways, ports

To address these issues India will build 34,000 kilometers of roads by March 2022, connecting 550 districts to national highways compared to about 300 districts today. Upon completion, India will have 50 national corridors compared to six at present, allowing for 70 to 80 percent of freight to move along national highways compared to 40 percent today.

Another program, which began in 2015, will boost the share of coastal shipping and inland navigation. Over a 20 year period, six new ports are to be developed, alongside 14 coastal economic zones and a host of other infrastructure, at a cost of $123 billion.

Special economic zones

Then there are the SEZs, which were launched in 2005 to emulate China's manufacturing success and built upon the free trade zones that had been established in the 1960s.  Businesses operating within the SEZs enjoy fiscal and non-fiscal incentives to facilitate exports.

However, SEZs have had operational hurdles related to taxation and regulatory rules. The Indian government is actively examining these problems. Commerce Minister Suresh Prabhu has set up a panel to come up with policy measures to close these gaps.

Despite some of these regulatory issues, SEZs have proved a boon for manufacturing and New Delhi is pushing them as the engine for the government's "Make in India" campaign, especially for global companies looking to avail of the country's skilled workforce.

"Free Trade Warehousing Zones (FTWZs), which are part of the SEZ scheme, are a good proposition for inventory management for industries that have a lot of imported inputs," said Dr. Pritam Banerjee, Head of Corporate Public Policy, South Asia, Deutsche Post DHL Group. "One new growth area in this context is the renewable energy sector. FTWZs also offer a great value proposition for e-commerce."

Mumbai-based Vivek Kele, until recently president of the Association of Multimodal Transport Operators of India (AMTOI), said India's huge market, including a steadily growing middle class, stability in government and rapid growth rates, should be sufficient incentive to build manufacturing bases. "Big multinational companies will have to come to India out of compulsion, not choice."
—  Ranjit Gangadharan

Published: June 2018

Images: Bloomberg/Getty Images