Keeping India’s global supply chains operational
Akhilesh Tilotia, principal at National Investment and Infrastructure Fund, explains how the Indian government is boosting domestic and international investment across asset classes
TODAY’S international trade is fuelled by a robust global supply chain that cuts across countries. There is a significant dependence on container movement via ships, port infrastructure, road and rail. Shipping is responsible for movement of around 90% of the $22tn world trade. Containers have become a mainstay of modern just-in-time supply chains which are growing at a multiple of gross domestic product for most large economies.
However, continued optimisation in sourcing has led to a trade-off in resilience and redundancy buffers. This was tested during the pandemic and multiple knock-on effects over the past few quarters have led to a protracted recovery period for global supply chains.
As countries lifted pandemic-induced restrictions on movement, an increase in demand for goods – especially from the US – caused a surge in volumes on key western US routes leading to re-routing of vessels from other trade routes. The consequent bottleneck was a shortage of ship and container availability on regular routes by as much as 11% between September 2020 to July 2021 and pushed cost to record levels.
Over the last two decades there has been an increased dependence on large fleets and ocean alliances with the share of top-five lines increasing to 65% from 27%. The order book for new container ships before the pandemic was below 10% of the existing fleet compared with 60% in early 2000s, further impacting availability.
‘The National Investment and Infrastructure Fund was set up and anchored by the government of India as a collaborative investment platform to invest across asset classes including infrastructure, private equity and other diversified sectors in India.’
Inland logistics was affected by staff availability and container imbalance. Job openings for transportation and logistics in the US are more than twice as high as 2020. Export-import container imbalance meant that import containers travelling inland could not find adequate export volumes for the return journey to ports and vice versa. This led to too many containers piling up at shipping terminals or at inland facilities.
However, since September 2021, several measures point to an easing of supply chain bottlenecks. Benchmark spot rates between China and the US’ west coast is at around $15,000 per 40ft equivalent unit, below the peak of $20,000. The ratio of newbuild order book has improved from 10% of the total fleet to 20% as of December 2021. There is also a decline in containers piled up at key western US ports.
Regulatory and policy intervention to correct supply chain imbalances has also increased. In December 2021, the US passed legislation that would allow the Federal Maritime Commission – the US’ international ocean transportation agency – to pressure shipping companies to prioritise empty containers for American manufacturers and farmers.
Impact on India
Since 2000, India’s share in global merchandise trade has more than doubled to 1.6% in 2020 from 0.7%. The repercussions of the current supply chain issues were felt in India as well. Lower shipping line calls have led to fewer empty containers being picked up and global container shortages have led to empty containers being re-routed outside the country. This has significantly impacted overall container availability, with a shortage on the export leg for shipments outside India. Moreover, there has been a four- to six-fold increase in freight charges as compared to pre-pandemic times.
Despite this stress, India’s merchandise trade activity remains robust with over $742bn worth of trade between April and December 2021. While value of exports and imports are at all-time highs, even in terms of volume trade has been higher with merchandise export volumes growing by 18% year-on-year and import volumes by 57% yoy in Q2 2022 financial year.
The increase in trade has been supported by strategic initiatives of the Indian government to incentivise manufacturing for exports through the production-linked incentives schemes and ‘Make in India’. Globally emerging structural themes such as the ‘China Plus One’ strategy have supplemented India’s efforts as companies look to diversify their business to other countries. India is taking steps to improve its infrastructure and logistics connectivity as it attempts to further integrate in the global ecosystem.
NIIF’s role in Indian logistics
Growth in trade volumes has also led to higher demand for logistics. Such strong growth provides immense investment opportunities in Indian logistics. The National Investment and Infrastructure Fund was set up and anchored by the government of India as a collaborative investment platform to invest across asset classes including infrastructure, private equity and other diversified sectors in India. The objective was to catalyse international and domestic institutional capital into important areas of the Indian economy and thereby generate attractive risk-adjusted returns for its investors.
NIIF’s master fund, which primarily invests in operating assets in core infrastructure sectors such as transportation and energy, has partnered with DP World to create Hindustan Infralog for investments in the ports and logistics sectors. The platform aims to invest $3bn of equity in development of high-quality logistics infrastructure. It owns and operates an integrated pan-India network of 12 inland logistics facilities, container train operations with 30-plus rakes, container freight stations, two free trade warehousing zones, cold chain and has a presence in 100-plus cities through its express logistics business. In the less than four years since inception, HIPL has grown to be among the top three inland container logistics companies in India.
Significant rail infrastructure in the form of dedicated freight corridors will be operationalised in India over the next few years along with a favourable low base effect of domestic rail-linked container movement. These provide strong tailwinds to position the platform as an important supply chain enabler in India with a highly integrated network, which provides a unique value proposition for end-customers.
At the country level, the Indian government is implementing reforms to help India integrate in the global value chain. There has been a concerted focus on infrastructure via the government’s flagship programmes Gati Shakti and the National Infrastructure Pipeline. Gati Shakti is the master plan for multi-modal connectivity that will facilitate cargo movement by improving capacity while NIP will facilitate investments into infrastructure.
Several other initiatives such as the development of multi-modal logistics parks and inter-modal stations are being undertaken to reduce cost of logistics in India to 8% of GDP from the current 13% to 14%. The logistics sector is expected to grow at a compounded annual growth rate of 10% to 12% to $380bn in 2025 from $250bn. The Indian government has also announced plans to monetise 31 port projects of a total value of $1.7bn until 2025 giving long-term investors significant opportunities for investment.
As countries and companies look for investment opportunities, India offers significant advantage for potential investors: macroeconomic stability, sector-wide opportunities and potential to scale.