India can slash logistics, raw material costs

India is suffering from high inflation and low growth, both of which are making life miserable for those at the bottom of the pyramid.

India needs to reduce its inflation, which remains at extremely stubborn levels despite the high interest rates. Equally, it needs to increase its manufacturing activity and be globally competitive.

The country can further use the huge headroom it has to expand exports, notwithstanding the shrinking global markets today. (India’s share in world exports is, after all, just 1.5 per cent, whereas it is 11 per cent for China).

Given its low labour costs, availability of a large number of educated youth, a reasonably rich raw material base, a long coastline and relatively better infrastructure than other low labour-cost countries, India can theoretically expand its share in global trade by pushing aside others who have higher unit costs. Sadly, we do not see this happening. And this perhaps has less to do with oft-cited problems, such as not opening up foreign direct investment in multi-brand retail, not increasing the cap in insurance, or not allowing our pension funds to be invested in equities.

THE BIG THREE

A nation-wide goods and services tax and greater clarity on the power sector will help us move forward. These reforms will most certainly improve our competitiveness. But beyond the ‘policy paralysis’-based issues, on which alone industry associations are focused, there are other real reasons for our growth slowing down and inflation remaining high.

Three important raw materials that are fundamental to any production activity — namely, cement, steel, plastics and polyesters — are all priced much higher than international prices, thanks to government policies giving domestic players artificial pricing power.

The cement industry today gets its limestone at less than international prices. Most cement units also generate their own power using coal available at international prices. Yet, the prices of cement in India are several times the international price, after including logistics cost.

The domestic industry’s pricing power comes from the requirement of Bureau of International Standards (BIS) certification of exporting factories.

BIS has not certified most large-sized exporters of cement in Thailand or Indonesia, and that has virtually prevented imports and indirectly created supply-side constraints.

Steel factories similarly get iron ore at far below international prices, thanks to the export tax on ore. Coal blocks have been given to major steel producers at practically zero cost. As a result, mined coal remains far below international prices, even if all environmental requirements are fully followed. In spite of important raw materials being made available at much lower than international prices, steel makers enjoy import duty protection. More recently, because of BIS protection against imports of domestic steel as well, prices here rule higher than international prices.

Polyester and plastics, too, rule at much higher than international prices, once again thanks to the export incentives based on the notional duty on raw materials (purified terephthalic acid and monoethylene glycol, which are not imported) and, more importantly, courtesy the anti-dumping duties from virtually all origins, ranging from 15 to 50 per cent or more.

Unless the artificial pricing power given to manufacturers of these three vital raw material producers (all of whom enjoy extraordinarily high ROI in spite of very high overheads) is removed, it would be impossible for India to become a globally competitive manufacturing base.

LOGISTICS REFORM

Logistics cost in India is over 13 per cent of GDP, whereas it is only around 5 per cent in the developed world.

This, too, is a consequence of wrong government policies, subsidising the least-efficient road sector with diesel subsidies and input VAT refunds by virtually all State governments, and neglecting coastal cargo movement and the rail sector.

If the Rs 1 lakh crore that is used to subsidise the road sector every year (State plus central government subsidies) is used to lay additional tracks and increase rolling stock for cargo movement, logistics costs can be reduced by at least 3 per cent of our GDP within a five-year period.

This cost reduction, which will impact all commodities and manufactured goods, will reduce inflation and make manufacturing that much more competitive.

With a long coastline and bulk of the industrial activity taking place along the coast, the cabotage rule should be suspended for a while to encourage coastal cargo movement.

The rule can be kept in abeyance till such time that coastal cargo movement picks up makes the creation of new ports an attractive proposition. This will further reduce the cost of logistics as a proportion of GDP and bring our costs too on a par with the developed world.

The need of the hour is to tackle problems that we as a country face, namely, high inflation and poor growth.

We need to remove the artificial pricing power enjoyed by the three main raw material-producing industries and refocus our subsidies and energy on efficient modes of transportation, namely, railways and coastal movement of cargo.

On the reforms front, we can continue to stay focused on GST and power.

(The author is CMD, Loyal Textiles.)

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