GST: Logistics gains could have cascade effects on the economy

Logistics cost in India is high because a truck can hardly do 4 km per liter, such are the perils of stops and delays on the way. Some of this is designed by a system that we are now attempting to scrap, thanks to GST.

If you are moving a truck from Delhi to Bangalore, you are likely to have 31 stops on the way out of which 19 are toll stops. The stoppage expenses for this movement comes to a whopping 0.35 Rs./ton-km. Even if we could save 50% of this it would help to improve margins for the overall transportation system across the entire value chain. Delay could also mean delivery failures, wastes that could lead to loss of business. The cost of all this comes on top.

If the transportation margins come down due to delays, it is only natural that the freight rates will go up to compensate.

The average cost of delay comes to Rs.150/hour. So for a vehicle it comes to a whopping Rs.45000 per year (done on the calculation of 100000 km of annual movement per vehicle).

The recent study conducted by IIM Calcutta-TCI says that the total stoppage expenses on-road comes to a staggering $6.6 Billion for the economy for the year 14-15. If I take even a modest 50% of this due to the following: RTO, Toll, State Tax, Entry Tax, Octroi or its equivalent, Paper checks, etc, then the loss on account of these delays will be $3.3 Billion. With rising freight on the road, this number can only increase.

With GST, can we expect that we move to a regime where the collection of taxes can be moved through a system where a trucker does not have to stop multiple times? Could we also see that the verification process and paper checks are eliminated for a smooth ride all through to the destination?

May be this would need further scrutiny and a lot more coordination among the law makers from both center and state to see that we device a system that need not put the trucker to the receiving end of things.

The service tax on freight at 25% is one very astonishing number, which increases the cost of goods shipped; it is no small wonder that apples from Himachal to Chennai will be costlier than those from New Zealand to Chennai.

But the devil is in the details. We must find a way to get around all checks on the road and move them as far into the electronic and web based systems as possible. If the first hurdle of multiplicity of state taxes could be crossed, it is only expected that we could get over this hurdle as well.

The cascade effects on the economy, for ease of movement of goods is not so apparent until we start to dissect what percentage of the cost of goods is borne by logistics alone. Logistics appears like the tip of the iceberg till we start to break all its constituent elements.

Take any final manufactured good reaching the final customer; the good itself had multiple inputs that had to be moved at different time periods and each one of them constituted costs, including costs of wastes and delays due to transportation alone.

If you talking of a commodity, the bulk of the costs will be logistics surely and where you want to locate your center of production will determine the eventual cost structure from sourcing of inputs to production and finally to market.

If we start with ease of flow, that itself will bring in additional supply which is currently constrained. This marginal supply will be at a cost that is fraction of the current cost.

Every added tonnage moved on the road, if we could get around delays and stops, will be at far less incremental costs for the system. As the cost of transportation improves, it hits most of the commodities directly and it benefits one and all.

If transportation cost of food reduces, it impacts the poor positively. If transportation cost of coal reduces it benefits the entire nation.

Thus the cascade effects are enormous for the economy.

Lawmakers must move a step further to ensure that collection of taxes and checks could be done in a manner that eases flow of trucks on the road.