Poised for Growth: Storage and logistics sector trends and outlook

Storage and logistics sector trends and outlook

India’s logistics and storage segments are on the cusp of a revolution. There is a lot of emphasis on reducing logistics costs from the current 14 per cent to 9-10 per cent of the gross domestic product (GDP). The market size of the logistics industry has grown at a CAGR of 12 per cent from $80 billion in 2011 to $160 billion in 2017, while the total warehousing stock reached 238 million sq. ft in 2020. The goods and services tax has made way for the hub- and -spoke model of warehousing, which is both cost effective and operationally efficient. The Covid-19 pandemic has also highlighted an ever-increasing requirement for efficient logistics and warehousing services, and has led to an exponential increase in demand for healthcare and temperature-controlled logistics services. Meanwhile, organised warehousing is gaining traction owing to the increase in regulatory requirements and the demand for economic efficiencies from new businesses.

Key government initiatives

The soon-to-be-released National Logistics Policy is being touted as a game changer for the logistics industry. It will clarify the roles of the central government, state governments and regulators. Besides, the policy will create a single-window e-logistics marketplace and focus on the generation of employment and skills, and making micro, small and medium enterprises competitive. Moreover, the development of multimodal logistics parks at strategic locations has been envisaged as a key policy measure to rationalise the cost of logistics in India and improve its competitiveness.

In August 2020, in a bid to deal with the lack of adequate cold chain and post-harvest management in the vicinity of farmgate, the central government announced the creation of the Rs 1 trillion Agri-Infrastructure Fund for farmgate infrastructure for small and medium farmers, most of whom are marginalised. The development of warehouses on a public-private-partnership basis has also been proposed. The central government is also readying the broad contours of an integrated warehousing network, with the aim of operationalising a national warehousing grid to effectively integrate the country’s highly fragmented warehousing market. The scheme aims at the broad integration of warehousing capacities. Currently, approximately 90 per cent of the warehousing space is controlled by unorganised players, with small warehouses of less than 10,000 sq. feet each. Meanwhile, the government’s Covid-19 vaccination drive has provided a much-needed boost to the cold storage infrastructure in India.

Rising private investment

The logistics segment has been witnessing a lot of interest from private investors. Between 2011 and 2020, the sector garnered over $6 trillion in private equity/venture capital investment. Of this, over 65 per cent investment came during the period 2017-20. Meanwhile, the storage segment has also seen a surge in private equity activity over the years with the participation of a wide range of foreign investors. Real estate developers are making a foray into industrial warehousing while investor interest remains unscathed, as they consider industrial warehouses to be a safer, resilient and scalable asset class. Between 2017 and the first half of 2020, the storage sector garnered a considerable 17 per cent share of total private equity real estate investments. Brookfield, Warburg Pincus, Morgan Stanley, the Abu Dhabi Investment Authority, and CPP Investments are among the notable investors in the warehousing space. Recently, the farm-to-fork model has seen an uptick in India. The high potential in the agri-tech space has attracted venture capital funding. The Covid-19 outbreak has further expanded the scope of farm-to-fork interventions in the foodgrain supply chain.

E-commerce and 3PL fuelling demand

One of the major trends observed during the pandemic-induced lockdowns has been the substantial rise in the e-commerce segment, leading market players to re-evaluate their logistics footprint and seek a decentralised approach that can offer greater flexibility and proximity to major urban centres, and insulate their supply chains in a better manner against such unprecedented events. Third-party logistics (3PL) providers and e-commerce players also form the biggest market for organised warehousing. Storage demand in Tier II cities is rising as user industries, 3PL companies and e-commerce players are rapidly expanding into these areas owing to increasing consumer demand, low rentals and better transport connectivity.

Focus on technology

The Indian logistics and storage market has been observing a measurable emphasis on technology lately. With the entry of multi-national companies, along with growth in various industries in India, there has been an increased demand for smart logistics and efficient supply chain management. Improved technology has led to increased productivity, faster delivery, increased customer satisfaction and minimal costs and errors in the supply chain. The Covid-19 pandemic has further necessitated automation and smart technology for seamless operations. Logistics companies are adopting new technologies and integrating the same into their operations, while investing in new information and communication technologies to gain maximum benefits. Companies are now working towards automating and digitalising several back-end as well as on-floor activities, leading to cost and time efficiency and, consequently, greater productivity. Technologies such as artificial intelligence, internet of things, robotics and process automation are gaining traction.

Key challenges and outlook

The outbreak of the Covid-19 pandemic and subsequent lockdowns have ensured that logistics, which was once assumed to be a supporting service sector, is transformed into an essential one. The logistics sector helped ensure that the global flow of goods, particularly essential items, remained largely unhindered despite the lack of transport and disruptions in the supply chain. The pandemic has created an opportunity for India to diversify its supply chain and increase trade with other countries, so as to reduce dependence on China. Meanwhile, the technology-led transformation has opened up a new vista of opportunities for stakeholders. As per a report by JLL, the logistics sector is poised to expand at roughly 1.2 times the rate of India’s GDP through 2032. However, there remain significant challenges to the sector’s development. Indian industry is burdened with high logistics costs, which account for about 13 per cent of the value of goods sold in the economy, against 8 per cent in other major economies. The logistics sector in the country is marred by an unbalanced logistics modal mix, high indirect costs, poor infrastructure, fragmented networks, and lack of technology adoption. Around 71 per cent of India’s freight is transported through road, and only 17.5 per cent through rail. Road transport is not only more energy and CO2 intensive, but also more costly and accident-prone than other modes of transporting freight such as rail and water.

Going forward, the dedicated freight corridors (DFCs) and the Delhi-Mumbai Industrial Corridor are expected to be the biggest drivers of change. The DFCs will increase rail network capacity and support improved rail mode share. Under the Union Budget 2021-22, the government has significantly increased the allocations for infrastructure development, with a focus on new economic corridors,

improved road/railway infrastructure, and a push towards digitalisation. Such projects will lead to more business opportunities for warehousing and transport service providers along the industrial corridors, as well as enhance efficiency in storage and logistics. Additionally, initiatives such as Make in India and Atmanirbhar Bharat will continue to push the creation of a robust logistics framework in the country. Further, growth in the cold chain and container segments is also expected to boost the logistics industry. Finally, with more players joining the e-commerce bandwagon, the sector is set to witness a new phase of growth.