India - India's growing conflict between trade and transport : issues and options

Policy, Planning, and Research WORKING PAPERS VVPS 346 Trade and Transport Infrastructure and Urban Development Department The World Bank January 1990 WPS 346 India's Growing Conflict between Trade and Transport Issues and Options Hans Jurgen Peters India's trade performance will deteriorate if it does not adapt to the changing environment in international trade and distribution logistics. The Policy. Planning, and Resarch Complex distributes PPR Woring Papers to disseminate the findings of work in progress and to encourage the exchange of idcas armong Bank staff and a*1 others interested in developrnent issues These papers canry the names of the authors, refleac only their views, and should be used and cited accordingly. The findings, interpretations, and conclusions are the authors' own. Thcy should not be autributed o ihe World Bank, iLs Board of Directors, its management, or any of its member countries.  Policy, Planning, and Research Trade and Transport This paper - a product of the Transport Division, Infrastructure and Urban Development Departnent- is part of a larger effort in PPR to establish an effective framework for helping developing countries adjust to changing distribution logistics practices in intemational trade markets. Copies are available free from the World Bank, 1818 H Street NW, Washington DC 20433. Please contact Teresa Lim, room S 10-029, extension 34894 (49 pages with tables). Containerization and multimodal transport * Develop and manage efficient subsystems arrangements are key features of the radical re- for shipping, railway, road, and air transport structuring of transport logistics in international sectors as well as port and warehouse systems. trade in recent years. - Lift import duties on vital equipment and To increase trade, India must tie into this spares. highly organized intemational trade logistics network - but it has been totally unprepared to * Revise the regulatory and control net that cope with the demanding arrangements common now strangles transport. Above all, simplify among its major trade partners. Peters recom- customs procedures. mends the following agenda for reform: - Adapt trade-related banking and insurance * Prepare a strategy for tying into intema- arrangements. tional trade and transport logistics, particularly through containerization. This means organiz- * Promote the national freight forwarding in- ing India's fragmented systems planning, dustry by relaxing regulations that govem it. control, and management, and involving the pri- vate sector in organizing logistics networks. * Encourage the participation of the private sector, particularly through equipment leasing - Create a joint public-private sector task and privatization of such facility operations as force to establish an agenda for market surveys container terrninals. and system analyses to identify system short- comings and needs. The PPR Working Paper Series disseminates the findings of work under way in the Banks Policy, Planning, and Research Complex. An objective of the series is to get these findings out quickly, even if presentations are less than fully polished. The findings, interpretations, and conclusions in these papers do not necessarily represent official policy of the Bank. Produced at the PPR Dissemination Center  Table of Contents Page I. Summary ........... .................................. 1 II. National Trade Development .......................... 3 III. The Phenomenon of Containerization .... .............. 5 IV. Logistics Problems of India's Container Trades ...... 8 V. The Providers of Trade Logistics Services .... ....... 16 VI. The Public Administration and Trade Logistics Management ......................... 36 VII. The Financial Dimension ............................. 41 VIII. An Agenda for Reform ................................ 43 ANNEX: Sources of Information .............................. 46 Note: The term 'Logistics' is used in this report in a very general sense to denote all systematic actions aimed at bringing materials from primary sources through all intermediate steps to the end user. It includes transportation, packaging, handling, storage, inventory control, and related information processes, as well as banking and insurance services. In popular terms, logistics is often referred to as the art of 'bringing the right amount of the right material to the right place in the right time and at the right costs'. This analysis was greatly facilitated through contributions by a wide variety of Indian public and private sector institutions and individuals, which is gratefully acknowledged. The author wishes to thank Philip Blackshaw, Jeffrey Gutman, Kasturi Luthra, Jayant Shakdher, Stephen Talbot and Sir Alan Walters for helpful conments while this paper was drafted.  I. SUMMARY (I) India has been a rather marginal participant In world trade durIng the early years after independence. The need to consolidate a large and populous economy, to achieve self-sufficiency, and Import substitution policies account for much of the reasons for the country's inward-looking orientation of the past. Until recently, Indian economic policy has not treated exports as a prlority but in the last few years there has been a growing awareness of the importance of export performance, as the limits of efficient import substitution were reached. The oil shocks created severe adjustment pressures for the balance of payments, and the benefits of having foreign exchange to finance more rapid Importation of high technology capital goods In scarce supply have become more recognized. (ii) Since 1980, the structure and orientation of Indian export trades have undergone fundamental changes. Substantlal progress was made In diversifying the export base -manufactured goods have increased and the traditional bulk sector has shrunk. Key targets for the export of manufactured goods are the European, Japanese and North American markets. These markets are characterized by Increasingly efficient trade logistics arrangements -a trend that was spurred by the shippers' drive to reduce Inventory costs, and by the International carriers who initiated significant service restructuring In order to better meet the shippers' more and more sophisticated logistics requirements. Containerization and multi-modal transport arrangements were central to these developments. (iil) To enable further trade growth, India Is now confronted with a need to tie into the highly organized international trade logistics networks. But the country was totally unprepared to cope with the demanding logistics arrangements, common among Its major trade partners. National planners considered containerization as a state-of-the art development which would happen only very slowly in Indla, and lIttle action was taken to prepare the national economy for the events that finally have affected Indian trade In a major way. As a result, there is a real danger that India's trade performance will deteriorate, If no corrective measures are taken.  - 2 - (Iv) A highly fragmented service Industry, outdated regulations, heavy Government control, a constrained private sector, and largely Inadequate Infrastructure have curtailed efforts to Improve trade logistics arrangements in India. Major reforms are called for so that an effective framework for initiating urgently required system adjustments can be estabflshed. In particular the pubilc corporations, mandated to provide logistics services, have to be substantially reorganized, and the Government's protective umbrella has to be lifted so that these corporations can become more market responsive In competition wlth the private service Industries. The role and participation of the private sector should be substantially enhanced because the few successful service Innovations In India were brought about by private companies. (v) There are plans to Invest about US$ 3 billion each year over the next decade In trade logistics facilities. However, In the absence of a national strategy for efficient organization of trade logistics In India, proposed investments In the service sector often bear little relation to system Improvement needs. This fact Is compounded by common situations in which existing facilities are not utilized to their full capacity potential because of Ineffectual management and cumbersome control procedures. The country needs a harmonized national trade logistics management and development strategy, and its formulation should be given highest priority . Under such strategy, each segment of the logistics system should be assigned a proper role and function -based on consideratlons of cost-effectiveness and market response. (vI) Very importantly, the entire setup of the public administration for managing the national trade logistics system has to be reassessed. The present organizational arrangements are excessive which undermines efforts to improve the system's responsiveness to changing trade and transport market environments. It will be vital to Include the private sector In these deliberations. Possibly the most cumbersome task will be the absolute need to revise the regulatory framework that governs the conduct of trade logistics services. Going by the experience with similar efforts In other countries, It should be recognized that Instituting the required system adjustments will be a major task for which unequivocal Government commitment is a basic prerequisite. Invariably, the process will spread over several years -but it is Important to get it started!  - 3 - II. NATIONAL TRADE DEVELOPMENT 1. Since independence, India has been a rather marginal participant in world trade, as shown below. Growth of Indian Import and Export Trades 1950 1986 Compound Growth Rate US$ share US$ share 1950-1986 (bn) (Z) (bn) (Z) (Z) World Exports 60.7 100 2,113.6 100 11.5 India Exports 1.2 1.9 9.2 0.4 7.0 World Imports 63.6 100 2,213.1 100 11.5 India Imports 1.2 1.8 14.8 0.7 7.4 (Note: exports on f.o.b. and imports on c.i.f. basis) Source: UNCTAD Handbook on International Trade and Development Statistics, 1987. 2. The above figures demonstrate that India's foreign trade has grown at a much slower pace than world trade. Actually, both export and import trades as a proportion of global trade have been shrinking. The 1986 share of Indian exports in world trade was only one fifth of the corresponding figure in 1950. As an explanation: markets for commodities which have traditionally formed the backbone of Indian exports -essentially the bulk trades- have displayed very modest growth trends. But over the last few years, the structure of Indian exports has been changing. The share of manufactured goods in the total export structure is increasing, whereas the bulk trades show declining trends; see table below. Structure of India's Export Trade Commodity Group Percent Share 1970 1980 1986 Manufactured goods 45.1 57.5 64.6 All food items 29.7 28.2 22.5 Agricultural raw materials 5.6 4.0 3.8 Fuels and Combustibles 0.8 0.4 0.4 Ores and metals 18.5 8.6 7.9 Unallocated 0.3 1.3 0.8 (Note: Comparisons are in terms of value.) Source: Department of Statistics, Ministry of Planning, GOI.  3. In general and until recently, Indian economic policy has not treated exports as a priority. Instead, the aim was for broad self- sufficiency in most products through import substitution, with exports covering the costs of residual import requirements. In the last few years there has been a growing awareness of the importance of export performance as the limits of efficient import substitution were reached. The oil price increases of 1973/74 and 1979/80 created severe adjustmer.n pressures for the balance of payments, and the benefits of having foreign exchange to finance more rapid importation of high technology capital goods and consumer goods in scarce supply have become more widely recognized. 4. Among the domestic industries which target the export markets, the most important are the eng neering -particularly electronics ar.d car manufacturing- and the textile sectors. The engineering indusiry has become a large and varied component of Indian manufacturing. However, the industry is afflicted by power shortages, excessive regulations, limited supplies of raw materials and lack of access to new techr.ology. In the two sub-sectors electronics and motor vehicles major efforts are under way to boost productivity through liberalization of technology and component imports, simplified licensing, foreign investment and cuts in customs and excise duties. In the wake of these developments, it is interesting to observe how some segments of these industries have started to tie into international production networks. The case can be made about car manufacturing and consumer electronics.1 After significant value added in India, products out of these industries are then re-exported tc overseas markets, particularly in Asia, the Middle East and Africa. This move became possible after substantial production capacities had been established and domestic demand could be largely satisfied. 5. The drive to increase exports of manufactured goods is an imoortant phenomenon of far-reaching consequences for trade logistics management. The same can be said about the changing market orientation of India's export flows. Both observations will be further elaborated below. Orientation of India's Export Trades in key Markets Region Percent Share 1960 197C 1980 1988 Asia 12.2 24.5 2C.5 20.9 Australia 2.6 2.4 1.8 -1. Europe 34.1 26.0 28.8 29.1 Middle East 27.5 6.1 10.8 5.8 U.S.A. 5.1 18.1 23.8 24.3 U.S.S.R. 18.5 22.8 14.4 18.8 Source: Directorate General of Commercial Intelligence, Ministry of Commerce, GCI. 1/' Two examples are imports of glass for cars from Indonesia srd television tubes from South Korea, which represents about '25 Forty-foot containers that a-e moved to Northern Indis on a weekly basis.  - 5 - In percentage terms, the trades with Africa and Latin America are still negligible. However, indications are that much growth will occur in these international market segments over the next few years. 6. While import trades have shown a declining trend as a proportion of world import trades, their volume is still significant. The decline can partially be explained by the inward looking import substitution policies followed by the country. But there is also the gigantic domestic market whose demand needs to be met, which -to some extent- accounts for the low export rates, and possibly also explains the higher import growth rate. Overall, the growth of domestic consumption exceeded that of local production. Main Sources of India's Imports (1986) Percent Share EEC countries 26.5 Non-OPEC developing countries 18.0 OPEC countries 17.0 COMECON countries 11.1 USA 10.6 Japan 9.1 Others 7.7 Source: The Economist Intelligence Unit, Country Profile India 1987-88 7. Looking at the import sector, it becomes apparent that there is an increasing share of general cargo, which reached 57 percent of India's total imports (in terms of value) in 1986. By 1988, the shares of manufactured goods in the export trades, and of general cargo in the import trades were both approaching 70 percent of total trade volumes. As a final observation: after a prolonged period of relatively stable annual trade volumes, India's export and import trades made annual quantum jumps from 1986 onward. III. THE PHENOMENON OF CONTAINERIZATION 8. Why is it so important to single out exports of manufactured goods and general cargo imports? Because in each case cargo unitization, and especially containerization offer a significant potential for sizeable efficiency gains in logistics management and reductions in the costs of physical distribution management. During the period 1987-1988 the total tonnage of 'containerizable' Indian export and imoort cargoes had reached a level of about 16 million. Under the assum on that the volumes of these cargDes would show annual growth ra+-- close to that expected for the economy as a whole (i.e. about six ent), one could  count on an annual incidence of such cargo in the order of 18 millicn tons by 1990, 25 million tons by 1995 (the end of the 8th Five-year Plan), and 32 million tons by the turn of the century. 9. Containerization of India's trades has started with much delay and at a slow pace. The reasons are explained in the following secticrs. During 1987-1988, a total of 5.3 million tons of cargo was handled in containers. What was the previous growth record? Growth of Containerized Trades in India Period Million tons 1980-81 1.4 1981-82 2.0 1982-83 2.1 1983-84 2.2 1984-85 3.3 1985-86 4.0 1986-87 4.5 1987-88 5.3 (Note: The average annual growth rate was 21 percent). Source: Indian Ports Association. 10. Despite the high annual growth rates, the penetration of containers in the general cargo market is still relatively low. The 5.3 million tons of containerized cargo handled during 1987-1988 represents less than one third of the total incidence of containerizable cargo during that period. The target under the 7th Five-year Plan was 5C percent container penetration of national general cargo trades. Penetration of Containers in General Cargo Traffic through key Indian Ports (1987-88) Port Imports Exports Total ....... .(percentage share). Bombay 23 61 32 Madras 25 58 34 Calcutta 10 34 17 Kandla 11 29 18 Cochin 22 63 45 Haldia 38 100 63 Tuticorin 26 17 22 Total 20 49