Developing an efficient logistics ecosystem

Exports allow developing countries to grow, create more jobs, become more sophisticated and competitive. However, growth in exports entails several pre-requisites such as an efficient logistics ecosystem and integration of domestic firms in global value chains. A supply chain system which ensures delivery of the right product, at the right place, at the right time in proper condition, all for a reasonable cost in turn fuels growth.

The World Bank publishes the Logistics Performance Index (LPI), a composite index and benchmarking tool to analyse how efficiently supply chains in an economy connect firms to international opportunities. India was ranked 44 out of 160 countries on the LPI in 2018. The Ministry of Commerce and Industry has also crafted the Logistics Ease Across Different States (LEADS) 2021 to analyse the business environment in all State/UTs pertaining to infrastructure, policy, and regulatory regime for improving logistics efficiency in India.

Under LPI, countries are ranked on a perception-based global survey of ground operators in the logistics sector such as freight forwarders and carriers. It allows countries to identify opportunities and challenges with respect to trade logistics and take steps for improving performance.

High costs

With logistics costs in India still high at around 14 per cent of GDP, the right policies and reforms can help boost LPI scores and make Indian exports more competitive. While LPI serves as one of the strongest tools to analyse country-level logistics, it has certain well-acknowledged limitations for diverse developing countries like India.

Firstly, the LPI is calculated by taking a weighted average of scores on core indicators with the weights for all indicators being almost identical. As per a paper published by Beysenbaev R and Dus Y in The Asian Journal of Shipping and Logistics , the index does not consider the relative criticality of factors like the quality of trade infrastructure and the border wait time over ability to trace consignments. Secondly, a perception-based survey has serious flaws in terms of subjectivity and recency bias. The industry perception may not represent the wider intra-country logistics setup. This is especially true for poor countries, which often rely on traditional operators whose service levels are often not as high and broad as operators functioning in multiple regions.

Thus, the efficiency of internal supply chains in India is largely ignored by the international LPI rankings. Also, the perception of both domestic and international logistics operators is greatly influenced by Government policy which operates differently for goods moved domestically vis-à-vis those meant for export.Third, the LPI scores might also reflect access issues outside the country under assessment, such as transit difficulties, which cannot be eliminated through domestic reforms.

Fourth, factors like geography, terrain, resource base and economic activity act as natural deterrents for the development and management of a robust logistics infrastructure. Therefore, any comparison between countries differing in these parameters requires a more nuanced narrative.

In this respect, insights from LEADS 2021 along with the LPI can perhaps better identify the necessary reforms for improving logistics across India. LEADS 2021 focusses on both domestic and international trade and uses a combination of objective parameters along with perception-based indicators, data on which has been sourced from 1,405 respondents.

While the objective indicators assess the enabling initiatives implemented by State/UT(s) in the logistics sector, the Index employs secondary datasets to capture logistics infrastructure, services, and facilities. The LEADS’s methodology can effectively complement LPI to not just capture perspective of logistics professionals but also account for local contextual variables such as capital outlays to build transport infrastructure, capacity of logistics services, regulatory environment, among others.

Factoring in India’s diversity, LEADS distinctly ranks North-East, Himalayan States/UT(s) from the rest of India. This is followed by clustering of States based on their geographic proximity to analyse policy and investment decisions on logistics infrastructure in a symbiotic manner. While ranking of States/UT(s), LEADS lays down recommendations to fare better in subsequent versions and reviews actions against suggestions in the previous report. The LEADS also enlists best practices for States/UT(s) to learn from. This is expected to improve their logistics efficiency.

The writer is Research Officer at Development Monitoring and Evaluation Office, NITI Aayog. Views are personal.