Indian economy takes giant leap

After a new tax reform and comprehensive investment in India’s infrastructure, the established logistics industry stands to be a big winner – and DSV India is ready.

DSV India FTWZ warehouse

Companies that export goods to India can save time and money by means of India’s free trade warehouse zones (FTWZ). DSV’s FTWZs are state-of-the-art facilities that make it possible to store goods for up to five years with deferred customs payment. Customs duty does not fall due for payment until the goods leave the free trade zone.

From a mercantile perspective, India is not a unified nation: it is fragmented into 29 states and seven territories with borders, tariff barriers and individual VAT rates. Or rather that was the case until 1 July 2017, when a Goods and Service Tax (GST) replaced countless sales taxes and internal tariffs with a single taxation structure that will revolutionise both the economy and the various types of undertakings in the country.

The principal aim was to get rid of state borders, incentivise growth and stimulate investment through greater efficiency, while ensuring improved compliance with tax rules. At the same time, the tax reform will ease the free movement of goods, as the reform paves the way for efficient, multimodal transport solutions. Now that it is possible to cross previous borders and customs zones unhindered and without the familiar kilometres-long truck queues, the average transport time is expected to decline by more than 30%.

"The Goods & Services Tax (GST) reform is a potential game-changer. It’s ambitious and complex, but its impact could be enormous. So many industries in India are tax-optimised rather than supply-chain optimised or strategically structured and operated. GST will allow companies operating in different states to consolidate, expand and rationalise as dictated by demand and opportunity, rather than as part of a complex strategy to minimise taxes," says Sameer Khatri, Regional Director, Indian Subcontinent and Managing Director India for DSV Air & Sea.

Jumping 19 places

With the GST reform and India’s higher score on the World Bank’s Logistics Performance Index 2016, the logistics sector is expected to enter into a phase of rapid growth. India jumped 19 places upwards in the Logistics Performance Index, to 35th out of 160 countries, and its greatest improvements were in customs processing (one out of six subcategories) where India jumped from 65th in 2014 to 38th in 2016. In addition, India has increased its infrastructure investments which in recent years have amounted to around 10% of GDP. This is significantly higher than the other BRIC countries can achieve and also more than the investments in transport infrastructure made by both the US and Japan.

Bandra Worli Sea Link Mumbai India

Mumbai's Bandra-Worli Sea Link, officially the Rajiv Gandhi Sea Link

Trade Facilitation Agreement

In addition to this, members of the World Trade Organisation (WTO), which includes India, have recently ratified the Trade Facilitation Agreement (TFA), which ensures better and simpler terms for companies that are engaged in international trade. TFA will also reduce trade barriers by simplifying the customs rules with simpler, more modern and harmonised rules and administrative procedures relating to imports and customs clearance.

"The implementation of a ‘Single Window Interface for Trade’ (SWIFT) and other recent customs reforms emphasises the improved regulatory environment and the ‘ease of doing business’," Sameer Khatri says. And Ketan Shah, Managing Director for DSV Solutions in India is no less excited:

Golden years ahead

"I believe that this is the time to be in India to achieve accelerated growth, as most corporates are going to reinvent their supply chains. As an organisation, we must invest in the future of logistics in India as the next three years are going to be the golden years for the Contract Logistics Segment."

New VAT and tax rates as well as the implementation of TFA are expected to have a positive effect on global trade once the agreement has been fully implemented. Transaction costs for international trade are expected to decline by 20% and similar reforms such as "Make in India" and "Digital India" are also fuelling the optimism at DSV.

Tripled exports

These actions infuse India’s international trade with dynamic energy, which is directly measurable in the activities of the logistics industry, estimated at around USD 260 billion a year. Over the past five years, the industry has grown by 14% p.a. at the same time that it has developed from providers of transport services only (typically by truck) into fully integrated service partners.

And the authorities are helping expectations to skyrocket: The government expects exports to rise from USD 315 billion in 2015–2016 to USD 900 billion in 2019–2020. Pharmaceutical companies in particular are boosting exports by an expected growth rate of more than 60% in 2017.

"Western life-science companies are increasingly buying from India, and high-quality Indian generic makers continue to grow exports," Sameer Khatri says, stating that a panel of 800 international supply-chain executives has just named India as the area of the world in which they prefer to invest.

And there are plenty of things to invest in, according to his colleague at DSV: "In the pre-GST era, businesses would have smaller state-wise warehouses in order to avail taxation benefits. Post-GST will trigger consolidation of large distribution centres closer to their customer bases with parent DCs replenishing regional DCs. Although India is a low-cost country, some of the retailers having large automated warehouses are slowly moving towards effective operation with the shortest throughput time," Ketan Shah says, adding: "Growth in the logistics sector in India is imminent. Efficiencies that were not visible in the past are becoming evident."

Download the White Paper on the Indian GST Tax Reform