The upcoming dedicated freight corridors (DFCs) are expected to change the modal mix of freight in favour of Railways as higher cost of operations limits the growth prospects of the road sector.
A report by Motilal Oswal Investment Services said the share of freight movement is shifting from roads to railways, with the phase-wise commissioning of DFCs. The National Rail Plan (NRP) expects the share of railway freight traffic to increase to 40 per cent by 2031 from around 18 per cent in 2020.
Higher costs
The brokerage cites the high cost of road operations, including sharp increases in fuel prices, for the emergence of rail as a more efficient mode of freight transportation.
For instance, diesel prices in Mumbai have increased to ₹95 from ₹75 over the last four years. Together with an increase in insurance charges the competitiveness of roads is set to reduce, the report said.
Moreover, the implementation of BS-VI and an increase in the price of steel and other commodities have driven up the prices of trucks. The average cost of a medium and heavy commercial vehicle (MHCV) has registered a CAGR of 6 per cent to ₹23 lakh as of December 2022, from ₹17 lakh in FY18, it added.
The brokerage pointed out that volumes of key commodities are shifting to railways. For instance, on a monthly basis, the average domestic container volumes carried by Indian Railways have increased to 1.5 million tonnes (MT) in FY22 from around 1 MT in FY20.
Further, Container Corporation of India (CONCOR) said it had moved nearly 50,000 tonnes of bulk cement in specialised tank containers through rail during nine months in FY23. As DFC becomes fully commissioned, several other commodities are expected to shift from road to rail.
Rising demand for freight services
The brokerage said demand from the manufacturing (led by the ‘Make in India” campaign), retail, automotive, and pharmaceutical sectors has been strong. Favourable government policies such as the production-linked incentive (PLI) scheme and Atmanirbhar Bharat are expected to further propel growth in the sector.
“Industry preferences are shifting toward integrated supply-chain services and other sophisticated solutions such as inventory optimisation and data analytics, from isolated offerings such as transportation or warehousing,” it added.
High growth in e-commerce in India and demands for specialised needs of online delivery (faster delivery, return management, and cash on delivery) are expected to sustain in the future, it noted.
Road still king
Although road transportation is losing its market share to railways, it will continue to dominate goods movement across India, with around 60 per cent share by 2031 (currently about 70 per cent of goods movement is via road), the report said.
“While roads would lose share to railways on an overall level, the sector would experience a strong shift to the organised segment from the unorganised segment, with the introduction of reforms such as GST, E-way bill, and e- invoicing,” it added.
“Also, as cost of operations increases (because of fuel/ toll/ insurance/ compliance, etc.), the unorganised players are struggling to compete with the organised players. We expect the share of organised players in the road freight movement to increase to 20-25 per cent in the medium to long term (about 10 per cent currently),” the report said.