The Government decision to allow oil firms to raise diesel prices has sparked fears that the Indian household will be further saddled with increase in food prices. Deeper fears that this may bruise the economic recovery and crimp domestic demand are also creeping out of the shadows of the debate on the move towards diesel price de-regulation.
One does not have to be an economist to predict that rise in fuel prices do lead to hike in food prices. Rise in fuel prices burden companies with higher transportation costs — which are either absorbed by them or passed on to consumers, who are already smarting under a high price regime.
But now, with oil companies permitted to raise diesel prices in small doses every month, the quantum of increase in wholesale prices may be difficult to gauge, though experts believe that the impact may not be immediately felt.
Result of a spike
Road transporters have a simple arithmetic. A Re 1 rise in diesel price translates into one per cent increase in freight charges. “A 50 paise increase in fuel costs will immediately mean a freight rate increase of about Rs 250 for a normal 16-tonne truck to carry a load from Hyderabad to Delhi, which is currently about Rs 49,000. The truck would need almost 450 litres of diesel to cover this distance,” says Pawan Kumar Gupta, President of Hyderabad Goods Transport Association.
Thus, an increase of 50 paise in diesel may not immediately manifest itself in the vegetable markets, what with oversupply of trucks and the sponge available with companies to soak up this hike. But, you cannot keep regular fuel price spikes out of the grocery shop for long.
This leads to one option that can insulate food prices from fuel price rise — and that is too bring down overall logistics costs. True, fuel constitutes the most essential cog in the entire logistics cycle, accounting for nearly 60 per cent of the total logistics costs. Not only that but it also has a cascading effect on operational costs, such as tyres and spares.
Examples from round the world have shown that there are other ways to water down logistics costs. It is well known that logistics costs in India are estimated at 13-14 per cent of the GDP, while in developed nations, especially in the US, it ranges between seven to eight per cent. Clearly, the Government, corporates and the logistics operators have a lot of headroom to bring down logistics costs.
Firstly, quality of roads can immediately boost fuel efficiency and partly offset rise in fuel prices. Currently, road freight volumes are estimated at 1,315 billion tonnes per km, growing at a CAGR of about nine per cent.
Bad roads can drag down an efficiency of a truck in terms of fuel consumption and speed. Today, the average mileage that trucks can manage on Indian roads is about four kms a litre, increasing their average trip expenses to over Rs 1 per tonne-km. A normal 16-tonne truck can clock no more 250-400 kms a day in India, compared to 700-800 kms in developed countries.
India’s total road network is about 4.3 million kms, but the share of paved roads is only 49 per cent, as compared to 67 per cent in the US and highways/expressways an abysmal 1.67 per cent.
Clearly, the Government should step up investments on the road sector, which can then digest the inevitable increases in fuel prices without much of a groan.
An added cost imposed by the road sector on transportation is in the form of delays, either for tax collections or inter-state clearances. Estimates suggest that the annual cost of delays encountered by goods carriers to the Indian economy is about $5.5 billion. Another estimate points out that additional fuel consumption on account of such delays is a numbing $12 billion per annum.
Trucks have to queue up for a minimum of five to 10 minutes before being waved through at the estimated 525 toll plazas across national and State highways.
A study undertaken last year by the Transport Corporation of India and IIM Kolkata had computed that a truck had to cough out an average Rs 122.79 per hour on the Delhi-Mumbai route on account of these delays. “Average trip expenses increase by 1.82 per cent to Rs 1.11 per tonne/km. If the shipper’s inventory carrying cost due to the delay is included, the additional cost becomes Rs 147.05 an hour,”it adds.
The next link is warehousing and cold chain infrastructure. A FICCI study had shown that about 30-35 per cent of India’s fruits and vegetables production gets wasted just because of inadequate storage facilities.
India is estimated to have about 1,800 million sq feet of warehousing space, but only eight per cent of this is owned and operated by organised players with some degree of efficiency and quality checks.
Trade body CII has estimated that India’s cold chain infrastructure would require at least Rs 18,000-20,000 crore investment over the next five years to meet the country’s need. Thus, more investments in this could be another way to counter the fuel price spikes.
Infusion of more information technology on logistics operation could also nudge up efficiency and bring down costs. IT expenses by Indian companies on logistics are today below five per cent of their total IT spends.
Setting up of logistics parks is yet another way to reduce logistics costs, highlighted by the examples of developed nations. Estimates indicate that a company using a logistics park could reduce its supply chain costs by as much as 50 per cent.
Imagine, just a Re 1/ km saving due to lowered logistics costs and, if the annual distance travelled by goods carriers is one lakh km, the annual saving for six million goods vehicles would work out to a whopping $12 billion.
Clearly, transport operators have little scope to decrease logistics costs because of their already tight margins. Even the private sector has been keen on investing in infrastructure sector, but the recent instances of GVK and GMR Groups pulling out of road contracts, apparently due to delay in clearances, show that Government policies are lacking.
Thus, the responsibility rests primarily with the Government to beef up infrastructure through effective private participation, which alone can pull down logistics costs.