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Infrastructure Status for Logistics Sector: A major growth catalyst

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The Indian sector being granted infrastructure status is a landmark move with wide-ranging implications for an industry now set to grow 10-15 per cent annually. Specifically, the sector is now included in the harmonized master list of infrastructure sub-sectors under a new head ‘transport and ’, and categories like multi-modal park, cold chain facility, and warehousing facility have been clearly defined.

Infrastructure Status for Logistics Sector: A major growth catalyst
Taking a long-term perspective, the most encouraging impact of the development will be on the investments coming into the logistics sector

This will have decidedly positive implications, making the sector a sought-after asset class for investments:

Investments to Rise

Taking a long-term perspective, the most encouraging impact of the development will be on the investments coming into the logistics sector. The new status makes it easier for companies operating within these segments to raise long-term credit from banks and other financial institutions at lower rates, and also attract foreign investments.

According to the Government’s notification, the inclusion also makes it easier for logistics companies to:

– Access larger amounts of funds as External Commercial Borrowings (ECB)
– Access longer-tenure funds from insurance companies and pension funds, and
– Be eligible to borrow from India Infrastructure Financing Company Limited (IIFCL).

Warehousing is already seeing big-ticket investments in the country. In one of the biggest investment deals so far in the country, JLL India facilitated the Canada Pension Plan Investment Board (CPPIB) in acquiring a majority stake in IndoSpace, the warehousing and logistics real estate arm of Everstone Group. As part of this deal, CPPIB will acquire 13 industrial and logistics parks totalling 14 million sq.ft. of space.

The Government plans to work with the state governments and the private sector to set up 34 mega logistics parks across the country. It has already allocated Rs 100,000 crore for such targeted development.

Supply of Logistics Facilities to Increase

There is now more clarity on the minimum land requirement for setting up logistics facilities. To get the infrastructure tag, minimum investment and area requirements for each category of logistic facilities have been spelt out:

– A Multi-modal Logistics Park comprising Inland Container Depot (ICD) need to have a minimum investment of INR 50 crore along with a minimum area of 10 acres
– A Cold Chain Facility must have a minimum investment of INR 15 crore and cover a minimum area of 20,000 sq.ft.
– Warehousing Facilities must have a minimum INR 25 crore investment and a minimum area of 100,000 sq.ft.

This also means that development firms with larger land parcels can utilise their excess land holdings to develop more such facilities, thereby boosting the supply of warehousing facilities.

Logistics-Dependent Sectors to Benefit

India is already home to leading industries such as automotive components, pharmaceuticals, cement, textiles, FMCG, and e-commerce. Private sector companies across these sectors, whose operations depend hugely on warehousing and logistics, are now likely to register tremendous growth in Tier II and III cities. These companies will need a stronger network of warehouses and logistics facilities in smaller cities for growth. The changed status, in turn, will boost the viability of opening up businesses in different regions, translating into more demand and growth.

Tier II and III cities will become growth centres: According to a recently published JLL report ‘The Dawn of India’s Future Cities,’ India’s logistics and warehousing sector is already destined for a quantum jump with the advent of the unified Goods and Services Tax (GST) and associated infrastructure push to improve surface and air connectivity across the country.

India is ranked 35 out of 160 countries on the World Bank’s Logistics Performance Index (LPI). Between 2014 and 2017, the country’s ranking has moved up by 19 spots – evidence to the solid performance of the sector so far. The LPI measures the state of trade and logistics based on parameters like customs, infrastructure, international shipments, logistics quality and competence, tracking and tracing, and timeliness.

In the future, warehousing and logistics are likely to find good a foothold in emerging urban and semi-urban centres. Developers and several foreign private equity players are now foraying into warehouse developments across Indian cities, coming up with large-scale, high-tech warehousing/logistics spaces with state-of-the-art facilities. The relatively easier availability of land in Tier II and III cities compared to the larger metros, along with improving connectivity through infrastructure developments, make for a winning combination in these cities.

Ongoing Impediments

While there are growth opportunities for the industry, some existing challenges must be addressed. Immediate problems, such as an inadequate road network and losses that occur during transportation, must be resolved. Improvement of India’s road infrastructure at a much faster pace is critical to minimize losses, both economic and environmental. Only when this happens on the right scale will the logistics sector achieve optimal growth.