The logistics sector has been experiencing an upward trend, focused on improving efficiency. What was once merely about moving goods from one point to another has evolved into a comprehensive strategy encompassing supply chain optimisation, cost reduction in transportation, focus on multimodality, integrated planning and enhanced customer satisfaction. Technology plays a crucial role in this shift, from AI-powered route optimisation to drone deliveries and shared warehousing models. This transformation comes at a critical juncture as India aims to position itself as a global manufacturing hub, with the Viksit Bharat vision hinging on efficient logistics to support rapid economic growth.
Recognising the need for this competitive edge, the government has launched targeted initiatives such as the PM Gati Shakti Master Plan, strategic transport infrastructure projects specifically designed to solve first and last-mile connectivity challenges, the National Logistics Policy of 2022 to streamline goods movement, and the production-linked incentive (PLI) scheme. To support these initiatives, consistent budgetary allocations in core transport sectors, including roads, airports, railways, waterways and ports, have been made, helping them move closer to desirable outcomes. Further, the planned network of multimodal logistics parks is expected to address the unfavourable modal mix, freight aggregation and distribution, underdeveloped material handling infrastructure, and mechanised warehousing storage.
Moving away from an unfavourable multi-modal mix
India’s logistics sector exhibits a skewed modal mix, with roads accounting for the majority of freight transport. In the past two decades, the national highway network has grown at a compound annual growth rate (CAGR) of around 4 per cent and constitutes about 2 per cent of the overall road network, but carries over 40 per cent of the total freight traffic. The sustained high levels of e-way bill generation not only reflect enhanced manufacturing activity but also increased cross-sector consumption and improved compliance with GST regulations. The roads sector accounts for the majority of freight movement. However, this presents a challenge, as high dependence on the sector proportionally increases overall logistics costs.
Due to the high costs associated with road freight transportation, GatiShakti multimodal cargo terminals and dedicated freight corridors (DFCs) are being developed, with a focus on proliferating the growth of railway cargo traffic. In order to overcome challenges like outdated tracks, inadequate terminal facilities and connectivity issues, these are steps in the right direction. Indian Railways (IR) is working on improving the freight segment and increasing the modal share to 40-45 per cent. Railway freight traffic has increased at a CAGR of 5.41 per cent between 2017-18 and 2023-24 to reach 1,591 million tonnes (mt). Moreover, IR has set a target to reach 3,000 mt in freight traffic by 2030. As per Indian Infrastructure Research, to achieve this target, freight traffic is required to grow at a CAGR of 11.15 per cent. Meanwhile, based on historic CAGR, freight traffic is projected to reach 2,070 mt by 2028-29.
The ports and shipping sector, central to the export and import trade, has demonstrated marked improvement in cargo handling capacity and turnaround efficiency, driving significant traffic growth, with major and non-major ports managing a balanced distribution of 53 and 47 per cent, respectively. According to LEADS 2024, coastal states such as Gujarat, Andhra Pradesh and Tamil Nadu have done well in terms of developing terminal infrastructure and multimodal transport integration. Last-mile connectivity at inland container depots and container freight stations remains a key focus area.
Freight movement through air accounts for the lowest share among other modes, accounting for a mere 1-2 per cent. It is, however, notably the fastest mode for the transportation of commodities, especially for longer distances. That said, the cost factor tends to push for other modes, despite the advantages posed by air cargo.
Boosting rail cargo services via dynamic-pricing mechanisms
High fuel prices, exacerbated by India’s status as a top crude importer, intensify the logistics burden, necessitating a shift towards rail transportation to reduce costs. This shift will help reduce carbon emissions (with important rail routes now electrified), and lessen truck traffic, while improving IR’s slender operating margins.
In a welcome move, many industry experts have actively started discussing and analysing the hits and misses of rail freight services. A key takeaway has been the pricing framework, which has shaped the sector for many years. Railways has historically employed the Ramsey pricing mechanism, an approach based on commodity value and demand sensitivity. This means that high-value goods such as petroleum bear premium rates while essential items such as food grains receive favourable pricing. Over time, this pricing structure has triggered certain consequences. In a move to adapt to pricing pressures, alternative transport modes such as pipelines have come up for petroleum transportation.
IR currently employs a “distance slab” pricing system for freight that maintains identical costs within set distance ranges (say 501-550 km) before imposing substantial price increases when crossing into the next band (551 km), creating artificial thresholds unrelated to actual operating costs. A more rational approach would be to implement km-based pricing, where freight rates increase gradually with each additional km travelled, resulting in more accurate cost reflection, optimised network traffic distribution, and potentially higher revenues via economically sound pricing. It has become crucial to deploy this system due to the sector’s subdued share in freight transport despite the consistent growth in freight tonnes carried.
International benchmarking and best practices
Historic data by Edelweiss reveals that for long-haul freight routes, roadways are approximately 25–30 per cent costlier than railways for distances less than 500 km, much higher than the global standards, yet the preferred choice for logistics. Despite issues such as single lane access, lack of traffic management and tolls, and octroi charges – all of which increase the cost of transportation via roads – this route remains more reliable owing to predictable timelines and the flexibility of door-to-door services, whereas the absence of timetabled services, inconsistent rake supply, and poorly integrated first and last-mile connectivity significantly impact the transit time in railways (wagon placement, loading and unloading, etc).
China has demonstrated how advanced rail infrastructure can revolutionise freight economics. They have specialised container trains that efficiently connect major ports to inland destinations via dedicated railway lines. In addition, it uses double-decker container carriages to further optimise capacity. Superior maintenance standards have resulted in lower equipment failure rates, enabling faster wagon turnaround times and higher utilisation rates. This economic impact has proved to be substantial. In fact, as per a study by MIT, China’s rail freight cost (tonne per km) is three times lower than India’s.
Navigating the much-delayed course correction
The product mix transported by IR is primarily bulk commodities, especially coal. For instance, in 2018-19, coal constituted 50 per cent of the total rail freight movement. To some extent, this concentration indicates the sector’s inability to diversify its revenue sources for freight operations. More importantly, with the power sector now looking to reduce the reliance on coal and increase the share of renewable energy, IR’s coal-based financial strength is not sustainable in the long run. Despite introducing schemes like the long-term tariff contract, the sector has steadily lost market share of other commodities like cement to roads, primarily due to sensitivity to price hikes.
A holistic approach to pricing and policy-making is essential for railways, ultimately reducing the country’s logistics costs. This approach needs to factor in differential pricing strategies that respond to market realities while maintaining public service obligations. With enhanced rail cargo handling capacity owing to DFCs, pricing mechanisms must be revisited. By providing both dynamic and discounted fares, railways can ensure optimal passenger occupancy across routes while maximising its freight revenue. In the context of freight, with private players also now entering the space, the sector has moved away from its status of being a public monopoly. This increases the need for an independent regulatory framework. This will be crucial for ensuring a level playing field between IR and new private entrants. This balanced regulatory environment would not only protect public interests but also foster healthy competition that drives efficiency in logistics.
With regulatory and institutional support, efficiency gains are increasingly becoming visible, though some gaps remain. These efforts, to some extent, have reduced India’s historically high logistics costs to around 13-14 per cent. With ongoing efforts, this is further expected to go down to 8-9 per cent while also strengthening infrastructure to support efficient operations. Going forward, the road route will remain essential; however, the urgent current priority is to increase the share of rail in freight transport for sustainable logistics. This is key for cost-effective logistics movement as well as for meeting climate goals by decarbonising the transport sector. Moreover, as per industry experts, the urban rail sector may join the mix. It will be interesting to see how this pans out.
Harman Mangat
