Manufacturing needs sound warehousing

Warehousing sector is expected to witness colossal investments aided by the government’s push towards increasing local manufacturing. Sandeep Menezes looks at the huge challenges to be faced while turning around India’s antiquated warehousing infrastructure in support of local manufacturing.

Since Independence, there has been lack of sustained investment in the warehousing sector. Besides, most of the existing warehousing capacities available in the country are of poor quality, small, fragmented and do not meet requisite infrastructure standards.

The government aims to spur local manufacturing activity through its ‘Make in India’ campaign. But local manufacturing cannot succeed till the logistics link is strengthened. This is where warehousing can play a vital role.

Current Scenario:

According to a recent Ernst & Young report warehousing accounts for around 5 per cent of the Indian logistics market (excluding inventory carrying costs, which amount to another 30 per cent). The size of the Indian warehousing industry (across commodities and modes) is pegged at about Rs.560 billion (excluding inventory carrying costs, which amount to another Rs 4,340 billion). The industry is growing at over 10 per cent annually.

Areef Patel, Vice-Chairman – Patel Integrated Logistics explained that the country needs not only warehouses of high capacity but it should also have modern technology to make it effective. Government spending on infrastructure is going to rise tremendously in the next 3-4 years. The 7 per cent growth cannot happen with existing infrastructure. Warehouses are needed considering the expansion India is going to witness mainly in the rural areas and in Tier-2 & Tier-3 cities. India doesn’t have a good cold storage warehouses. Business is going to increase and when you deal with different regions of the globe the requirements will also equally increase. To cater to such requirements one should have such services like cold storage, bonded warehouses, etc.

Unorganised Market Prevents Upgradation:

The warehousing industry is dominated by unorganized players, accounting for ~85 per cent of the market. Modern warehousing (organized players) accounts for only 15 per cent share; although, this segment is growing at a CAGR of 25 per cent–30 per cent, the Ernst & Young report mentions.

Due to the domination of small unorganized players the required capital inflow has not been possible in recent decades. This has resulted in a grim situation wherein about 80 per cent handling and warehousing facilities are not mechanized and involve traditional manual methods for loading and unloading. However, the warehouses which are mechanized have just forklifts or hydraulic hand pallet trucks. These numbers clearly indicate that there is an acute shortage of organized and good quality warehousing and storage infrastructure in the country, for both, agricultural and industrial commodities.

Challenges Impede Upgradation & Growth:

Warehousing is a capital intensive sector and without availing finance from banks and other financial institutions, warehousing facilities cannot be created by the entrepreneurs. Besides, land requirements for construction of the warehouses are difficult to meet nowadays due to high cost of land. Although 100 per cent FDI and some benefits are allowed for the warehousing sector, there has been moderate growth in the private warehousing sector.

Warehousing has not been accorded the status of full-fledged infrastructure and all financial and other benefits available to infrastructure sector are not available for warehousing sector. Till recently modern technology was not introduced in the warehousing sector.

Deepak Baid, Director – Siddhi Vinayak Logistics Ltd stated that the warehousing sector in India forms 20 per cent of the logistics market but continues facing challenges in the form of inadequate skilled labour, lack of infrastructure, lack of funds etc. The shortfall can be met by the government investing in the infrastructure development projects, changing regulatory setup, increasing transparency in policies and relaxing tax structures.
Adarsh Hegde, Executive Director, Allcargo Logistics Ltd predicted that with more seamless taxation regime, more coordination between state and Centre for economic growth, the need for professional warehousing will also increase exponentially. The way to capitalize on the opportunity is to work on a PPP basis wherein public as well as private players come together to establish the foundations of the industry. Also technology and innovation of infrastructure will also play a bigger role, as it will reduce the dependency on financial requirements and optimize investments. Private enterprises with adequate support from government in terms of tax sops, investment assistance and single window clearance can meet this requirement faster than government, given its shorter decision making window.

GST to Bring Change:

After a long wait, the new government has stated that GST will be finally implemented next fiscal. This is a huge move that will benefit that Indian economy, although many months and lot of issues remain that still have to be streamlined.

Vikas Anand, Managing Director – DHL Supply Chain India Pvt. Ltd stated that the warehousing infrastructure in our country has been based on the tax structure, with different states having multiple taxes, leading companies to set up their production base according to this. With the impending introduction of GST there will be a marked change in the warehousing industry.

It will be possible to operate large scale shared facilities with multiple users which will set the platform for consolidation in the post GST scenario. GST will make large regional warehouses economically viable as opposed to the multiple small ones set up to deal with the current tax structure, Vikas Anand added.

Private Participation:

Unfortunately, even the private sector initiatives till recently were small and sporadic in this vital sector. The main reason for lack of private participation until recently could be due to inadequate returns on investment in this capital intensive segment. Also the policy framework did not support growth of warehousing segment while not providing adequate incentives to prospective private participants.

But now that the government intends to spur local manufacturing, the need for adequate and top-notch warehousing infrastructure will have to be met by private participants to support their manufacturing ambitions.

Private players will have a huge role to play as it will turn out to be one of the revenue models for companies. Private players will invest heavily in warehouses and probably rent it for other players who are more into business which requires such an arrangement. Setting up warehouses will marginally decrease the cost of operation and can give a competitive advantage to companies. Many of the Large E-tailing firms have started setting up their own warehouses for their business needs, Areef Patel added.

Deepak Baid felt that privatization will aid to cope with the challenges in this industry. It will enable to acquire expertise in warehousing technologies, well trained manpower, a well equipped infrastructure, improved standardization, clear tax regimes and land availability thereby contributing in transition of vertical sector in to an organized sector.

Growth Drivers:

Growth in warehousing across India will primarily be driven by the burgeoning manufacturing activity, increasing international trade and the emergence of organised retail in the country. Increasing private and foreign investments in infrastructure and easing government regulations shall further bolster the growth of the warehousing sector in India. Also, the policy reforms from government including the establishment of logistics parks in the PPP model, the implementation of the Warehousing and Development Act 2007 and serious attempts to roll out Goods & Services Tax (GST) are added reasons for the expected expansion in the warehousing sector.

Conclusion:

India can emerge as a manufacturing hub only if it modernizes and expands its warehousing infrastructure. With proper warehousing infrastructure, India can decrease manufacturing costs while saving on time and improving quality thereby making its products more competitive globally.

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