Economics

Logistics means managing the flow of goods between the point of origin and the point of consumption.

It includes

1. Transportation 
2. Inventory management
3. Warehousing
4. Packaging 
5. Last-mile delivery 

• Sunrise Sector: The Indian logistics sector is valued at $215 billion and is expected to grow at a CAGR of 10.5% between 2019 and 2025.
• Employment: Logistics industry employs 4.5 crores and is growing at the rate of 15%.
• The growth of the manufacturing sector depends upon it. E.g., getting raw material, taking final goods to markets etc.
• Boosting Indian Exports: China is an export giant because of its highly efficient logistics.
• Service Sector: Amazon, Flipkart etc., have become giants due to their efficient logistics.
• Increasing Farmer’s Income: An efficient logistic supply chain network has the potential to increase farmers’ income manifold, which can lead to a domino effect on the overall economy. 

PM Gati Shakti

• The growth experience of advanced economies has highlighted the importance of having a multimodal transport network approach. To introduce holistic planning in the case of infrastructure projects, the government launched PM Gati Shakti. 

How will it work?

• PM Gati Shakti is a digital platform which connects 22 ministries, such as Road, Shipping, Aviation, Railways, Petroleum, Telecom etc., to ensure holistic planning and execution of projects.
• The platform has 200 layers of geospatial data, such as roads, railways, forests, rivers, state and district boundaries, etc., to aid in planning projects and obtaining rapid clearances.
• The Gati Shakti portal will also help government agencies to track the real-time development of various infrastructural projects from a centralized place.
• It has been developed by the Bhaskaracharya National Institute for Space Applications and Geo-informatics (BISAG-N) and hosted securely on the Meghraj cloud. 

Benefits

• Address the silos-based approach of infrastructure development by various ministries.
• Reduce the logistics cost in India. 

National Logistics Policy (NLP)

• The NLP policy aims to increase employment opportunities, boost economic growth, and promote the competitiveness of Indian goods in global markets. It aims to bring global standards to warehousing, multimodal digital integration, ease of logistics services, human resources, and skill enhancement. 
• The targets of NLP are
  • Reduce the cost of logistics: Target is to reduce the cost of logistics to global benchmarks by 2030.
  • Improve India’s Logistics Performance Index ranking: Target will be in the top 25 ranks by 2030.
  • Create a data-driven decision support mechanism for an efficient logistics ecosystem.
• It will be achieved via a Comprehensive Logistics Action Plan (CLAP) consisting of
  1. Unified Logistics Interface Platform: It will bring all digital services related to transportation to a single portal.
  2. Standardisation of physical assets and benchmarking of service quality standards
  1. Development of Logistics Human Resources 
  2. Facilitation of Logistics Parks
  3. Development of Export-Import (EXIM) Logistics

Infrastructure Lending Status: 

Logistics sector has been given Infrastructure Lending Status. Due to this, loans for logistics have become eligible for the following benefits.

• Logistics projects can get long tenure loans.
• Loans will be cheaper (at least 50 basis points) 
• Such projects will now be eligible to borrow from specialized lenders like IDFC, IIFCL etc., which fund only infrastructure projects.
• Attracting investments from debt, pension funds and international lenders (ECBs) into recognized projects. 

Other Steps

• GST Tax Reforms: The taxation system has become simple and has created a single market. 
• Dedicated Freight corridors will smoothen the transportation and logistics. 
• Sagarmala and Bharatmala projects have been started to upgrade port and road infrastructure.  
• India has signed the Trade Facilitation Agreement of WTO and taken steps to make customs procedures smooth and paperless. 
• Creation of Logistics Division: The Logistics division in the Department of Commerce has been created. Further, the Logistics division has planned to create an IT backbone and develop a National Logistics Information Portal. This online Logistics marketplace will bring together the various stakeholders on a single platform. 
• Logistics Ease Across Different States (LEADS) Index: LEADS Index is an attempt to establish the baseline of performance in the logistics sector based on the perception of users and stakeholders at the state level. 
• Logistic Enhance Efficiency Program: It was launched to manage and develop logistic parks and reduce the cost of logistics.  

What more can be done?

• Formulation of National Integrated Logistics Policy to bring greater transparency and enhance efficiency
• Faster clearances for setting up of logistics infrastructure like Multimodal logistic parks (MMLPs), Container Freight Station (CFS), Air Freight Station (AFS) & Inland Container Depot (ICD)
• Promote the introduction of high-end technologies like high-tech scanning equipment, RFID, GPS, EDI, and online Track & Trace systems in the entire logistics network. 

Selling and buying goods using ICT is known as e-Commerce.

E-Commerce Sector is growing at an incredible pace

The e-Commerce sector has generated a multiplier effect

1. Huge creation of jobs 
2. Reduction of market prices for consumers 
3. Huge investment in logistics and infrastructure 
4. Help Artisans exploit new markets. E.g. Karigar ke Dwar (Flipkart)  
5. Help in promoting tribal art. E.g., Amazon and Trifed signed a contract to sell Indian Tribal Products globally under the brand ‘TRIBES INDIA

There are two models of e-Commerce

1. Market-Based Model

• Market-based Model is followed by Amazon & Flipkart, in which the company provides the IT platform to facilitate the transaction between buyer and seller and takes their fees for providing the platform.
• FDI Norms: FDI is allowed

2. Inventory-Based Model

• In this Model, the seller manufactures and sells its product online—for example, the online store of Samsung, where Samsung sells its phones and other accessories.  
• FDI Norms: FDI is not allowed

Other way to define

• Supply chain disruptions triggered by the pandemic led to a new sub-vertical of the online grocery segment is — Quick Commerce, or q-commerce — where the promise of deliveries within 10-30 minutes of ordering is the unique selling proposition. The focus of most of these ventures is on setting up micro-warehouses located closer to the point of delivery and restricting the stocks at these ‘dark stores’ to a focussed set of under 2,000 high-demand items, as against the traditional formula of well-stocked large-format warehouses located on the outskirts of towns and cities.
• Examples: Instamart, Zepto, Grofers etc.

• India has one of the longest navigable inland water networks. But out of the total 15,000 kilometres of a navigable river, India is currently using just 2000 km. 
• West Bengal has the longest navigable length of rivers, followed by Assam and Bihar.
• Inland waterways Transport constitutes just 0.5% of the total cargo transport. In China, 47% of goods and passenger traffic is transported through inland waterways. Whereas in India, domestic transport through water is 3.5%, out of which 0.5 % is inland & 3% is coastal.

• According to a government study, one litre of fuel moves 24 tons/km on the road, 95 tons/km on rail and 215 tons/km on inland waterways.

1. It is cheaper than Road and Railways and costs 1/5th compared to road transport. 
2. The Carbon footprint is also lower than road and rail systems.
3. Land acquisition requirements are almost negligible compared with roads and railways. 
4. The infrastructure that needs to be developed is minimal.
5. There is also little scope for transit losses.
6. It will open up considerable investment in the areas like water-based tourism, dredging of rivers, and operation of terminals generating millions of new jobs.

National Waterway Act, 2016

• Inland Waterways, Shipping and Navigation, are covered in Entry 24 of the Union list. Hence, Parliament is empowered to legislate on this.
• This act repealed all earlier Acts for individual waterways, and 111 National Waterways have been notified under the provisions of this act. 

• Working National Waterways
  1. National Waterway 1: Ganga-Bhagirathi-Hooghly River System
  2. National Waterway 2: Brahmaputra River
  3. National Waterway 3: Kollam-Kottappuram stretch on Champakara canal and Udyogmandal canal
  4. National Waterway 68: Mandovi
  5. National Waterway 97: Sundarbans Waterways
  6. National Waterway 111: Zuari

Jal Marg Vikas Project

• This project aims to develop infrastructure to enable National Waterway 1 for commercial navigation on the Varanasi-Haldia stretch of river Ganga.
• In 2018, the Varanasi freight terminal became operational when the cargo ship ‘MV Rabindranath Tagore’ arrived in Varanasi from Kolkata.

Ways to Finance

• The government is using the corpus of the National Clean Energy Fund (NCEF) and Central Roads Fund  (CRF) for upgrading the Inland Waterways.
• Apart from that, the market borrowing route is also used. 

The bill will replace the Inland Vessel Act 1917.

Provisions of the bill include

• To operate in inland waters, vessels must have a certificate of survey and registration.
• The bill will bring all inland vessels & waterways in India under union government regulation.    
• Mechanical vessels must have certain equipment and signals to ensure safe navigation.
• In case of an SOS signal is sent by the vessel, the nearest vessel must respond to the call and failure to respond can result in a fine of up to Rs. 10,000.
• In case of an accident, the nearest police station will hold the jurisdiction for the inquiry.
• The Centre will prescribe the rules for the minimum qualification of the crew.

• Shipping is the world’s most efficient means of transportation.  
• In India, the sector works under the Ministry of Shipping.  
• In Schedule 6 of the Indian Constitution, Port development in India is a concurrent subject. Hence
  • Major ports are regulated by the central government  
  • Non-major ports are regulated by state governments 

Indian International Trade by volume and value carried by ships

According to India Yearbook & Sagarmala Concept Paper, India has 12 Major Ports.

Major ports on the West Coast

1. Mumbai (Maharashtra)

• It is situated in Maharashtra and is one of India’s most important major ports.

2. Jawahar Nehru Port, Nhava Shewa (Maharashtra)

• It was commissioned in 1989 to ease pressure on Mumbai port.

3. Kandla (Gujarat)

• Kandla is a tidal port which was developed in the 1950s because Karachi port was lost due to partition.
• It was the first Exclusive Economic Zone (EEZ) in India and Asia.

4. Mormugao (Goa)

• Mormugao is a tidal port situated at Zuvari estuary
• It is important for iron-ore export.

5. New Mangalore (Karnataka)

• It is a deep water all-weather port. 
• It was operationalized in 1975.

6. Cochin/Kochi (Kerala)

• It is situated on Willingdon Island.

Major ports on the East Coast

7. Haldia | Kolkata (West Bengal)

• It is the only major RIVERINE port in India.
• Haldia port is the oldest major port of India.  
• It has twin dock systems viz., Kolkata Dock System (KDS) on the eastern bank and Haldia Dock Complex (HDC) on the western bank of river Hooghly. 
• Port needs constant dredging to keep depth.

8. Vishakhapatnam (Andhra Pradesh)

• Vishakhapatnam port is situated in Andhra Pradesh.

9. Paradeep (Odisha)

• It is situated on a manmade lagoon. 
• JL Nehru laid its foundation in 1962 at a point where Mahanadi meet the Bay of Bengal 

10. Tuticorin (Tamil Nadu)

• It is a major port situated in Tamil Nadu.

11. Chennai (Tamil Nadu)

• Port of Chennai is an all-weather port situated in Chennai.

12. Ennore (Tamil Nadu)

• It is a private major port made under the companies Act

(Newly proposed) Enayam Port (Tamil Nadu)

• The proposal to establish Enayam port was accepted in 2016.
• Currently, around 78% of the marine traffic from ports of India is trans-shipped to Colombo, Singapore and Klang (Malaysia), as most of the Indian ports don’t have a draught (depth of water needed for a ship to float) to match global cargo handling. Enayam will solve this problem. The Enayam port has a natural deep draught of about 20 meters which makes it feasible for the largest vessels in the world. 
• But this port is very close to Vizhinjam (Transhipment) Port of Adani’s in Kerala. 

Private Ports by Adani Group & others

• In recent years, there has been an attempt to increase the country’s port capacity, but the real successes have been in the private sector, mainly by the Adani Group.
  • Sikka & Mundra port of Adani Group in Gujarat has overtaken Kandla to become the country’s largest. 
  • Dhamra (in Odisha) of Adani Group has become as big as Haldia. 
  • Adani will become the champ of the country’s port business once he builds the deep-water port at Vizhinjam in Kerala, designed to take some of the transhipment traffic away from Colombo.
• Meanwhile, Krishnapatnam port on the southern Andhra coast is being developed by local entrepreneurs, and claims to handle as much traffic as the long-established Chennai.

Colombo can handle more container traffic than all of India’s ports put together — with  75% of that being transshipment of containers from India because India’s ports are too shallow to accommodate big container vessels.

Problems related to Ports

• India doesn’t have world-class ports. Third-generation ships can’t enter Indian harbours & as a result, goods are offloaded in Sri Lanka & sent to India via smaller ships. 
• Port charges are high as compared to other developing nations.
• Port congestion
• Poor mechanization and manual handling of critical processes. E.g. in Paradip port.

Governance Issues

• A dual institutional structure has led to the development of Major and Minor ports as individual projects.
• Ports in India are operating on the “Trust Model”, where the government is the owner and operator of the port. 
• Procedural bottlenecks as there is a lot of paperwork to load -unload cargo.
• Poor performance of Government ports: It takes up to four times as long to fill or unload a cargo ship at Jawaharlal Nehru Port than at a private rival due to lower mechanization and unskilled labour.

Lack of Evacuation from Ports

• There is inadequate road & rail connectivity to ports.

Fleet = Ageing + Low number

• Ageing fleet: There is an urgent need to replace our ageing ships with new ones.
• Indian ships account for a tiny part of the country’s trade, i.e. about 15%, compared to the international norm of 40%.  

No Shipyards

• India has no civilian shipyards to compare with the world’s best. The two or three private ones that look to build commercial vessels are deep in debt and short of orders; most Indian ship-owners prefer to look to foreign yards because of better quality and assurance on delivery schedules. 

Low Penetration of Inland and Coastal Shipping

• Coastal and inland shipping hasn’t developed in India due to limited facilities, higher costs and policy constraints.

In short, India’s maritime business needs a booster shot.

Sagarmala is an initiative for port-led development whereby India’s coastline will become the gateway to India’s prosperity.

Key Components

• Port Modernisation: It aims to transform existing ports into world-class ports by modernization of port infrastructure and existing systems & developing 6 to 8 new world-class ports 

• Efficient Evacuation Systems / Port Connectivity: Develop efficient rail, road and inland waterway networks connecting ports to the hinterland.  

• Coastal Economic Development: Encourage coastal economic activity in coastal regions by:
  • Development of Coastal Economic Zones (CEZ), port-based SEZs etc. 14 CEZs are to be made under Sagarmala.
  • Promotion of coastal tourism.

• Coastal Community Development: This will be achieved via
  • Skill Development 
  • Uplifting fishermen and other local communities
  • Island development

Sagarmala could boost India’s merchandise exports to $110 billion by 2025 and create an estimated 1 crore new jobs. 

• It has replaced the Major Port Trust Act of 1963.  
• The composition of the Board of Authority has been simplified, and it will now comprise 11-13 members instead of the earlier 17-19 members. 
• Each port will have a separate Board of Major Port Authority members from the State Government, Railways Ministry, Defence Ministry, Customs Department etc.
• Model of Ports
  • Under the earlier Act: Ports used to operate on the “Trust Model”, where the government is the owner and operator of the port.
  • Under MPA Act: Ports operate on the ‘Landlord-Tenant Model’ where Major Port Authority will be the owner and regulator. 
• Earlier, Ports’ user fees were decided by National Tariff Authority for Major Ports. In the MPA, the Board of Major Port Authority will set up Committees to determine their user fees. 
• The Board of Port Authority has been given full powers to enter into contracts, plan and develop except in national interest, security and emergency arising from inaction.

Biggest Shareholders of Asian Development Bank

Principles of ADB

• To make loans & equity investments for its developing members’ economic & social development.
• Provide technical assistance for the preparation & execution of development projects & programs & provide advisory services.

• India’s subscription to Bank’s capital stock is 7.2% & a voting share of 6%.
• India started borrowing from ADB’s ordinary capital resources in 1986. The Banks lending has been mainly in Energy, Transport & Communications, Finance, Industry & Social Infrastructure sectors.
• India holds the position of executive director on the Board of Directors of the Banks => its constituency comprises India, Bangladesh, Bhutan, Lao & Tajikistan.
• India is represented by 

• 2001: The term ‘BRIC’ was coined by Jim O’Neil of Goldman Sachs to describe the growing prominence of Brazil, Russia, India and China 
• 2009: BRIC country leaders started meeting as a bloc (immediately after Sub Prime Crisis). South Africa joined them later.  
• BRICS account for 

• Developed countries such as the US, Japan, Germany, U.K. and France hold 40 % voting power.

BRICS countries decided to form a development bank, whose purpose will be to “mobilise resources to set up infrastructure and ensure sustainable development” in BRICS countries and in other emerging economies.

• BRICS block emerging as a new economic powerhouse with 20% global GDP & 40% population. Hence, to solidify and demonstrate their strength BRICS Bank has been formed by these nations. 
• Disenchantment with Bretton-Woods institutions viz World Bank & IMF: Since its inception in 1944, the IMF and World Bank have not reformed their governance structure. The USA dominates both are out of sync with new world dynamics.  
• Exchange Rate Volatility: It will help defend these five economies from volatility in the dollar exchange rate.
• Making an alternative to the US Dollar: BRICS Bank will make the Chinese Yuan an alternative to US Dollar in the long run. 
• In the BRICS bank, the First chairman of the board of governors will be a Russian. The first President of the bank will be an Indian (KV Kamath). It is difficult in the World Bank and IMF, given the lobbying and uneven voting power.

It has to be noted that BRICS Bank is not an isolated initiative. Similar initiatives have been started in the past to blunt the might of Bretton-Woods institutions. These include the Development Bank of Latin America ( by Andean nations) in the 1960s, the Chiang Mai Initiative in the early 2000s (of 10 ASEAN nations plus China, South Korea and Japan) and Bank of South by Latin American countries in 2009.

• It will allow Beijing to invest overseas in developing nations through a neutral mechanism and avoid criticism of Chinese neocolonialism. 
• It will become difficult for India to balance a scenario in which China will provide funds for its OBOR through BRICS, especially because India is not part of the project. 

• IMF was established in 1945 as a direct result of the Bretton Woods Conference.
• The primary function of IMF was to assist the member countries to tide over the short term Balance of Payments crisis. 
• It has 189 members, with Nauru as the latest member (joined in 2016).

• To solve the problem of international liquidity.
• To stabilize exchange rate  
• To facilitate international trade.
• To enable international payment system  

• Correcting short-term Balance of Payment disequilibrium either by selling or lending foreign currencies to the member nation 
• Bringing stability in the exchange rate
• Balancing demand and supply of currencies by increasing the supply of scarce currency and purchasing excess currency
• Reducing trade restrictions, i.e. tariffs and other trade barriers imposed by the member countries
• Providing credit facilities like basic credit facility, extended fund facility for three years, compensatory financing facility and structural adjustment facility

• World Economic Outlook
• Global Financial Stability Report

• When a country faces a Balance of Payment (BoP crisis), it approaches the IMF for help through Extended Fund Facility.
• At the time of formation, the IMF fixed quota in which countries contributed according to their (economic) size. With the backing of all the money the IMF accumulated, a new currency called SDR (Special Drawing Rights) was created. At the time of its formation , 1SDR = 1$ =.88 grams gold. It was also called paper gold because of this reason.
• IMF works in the same way as banks. They take money from ‘Depositor nations’ & give interest to them. The same money is then given to ‘Borrower nations’ who pay interest to IMF.

How value of SDR is calculated?

• Till 1970s, the conversion of 1SDR = $ 1 = 0.88 grams of gold was maintained.
• Present system:  It is a weighted average of 5 currencies with the following weights.  

• Presently, the conversion ratio is 1 SDR = 1.418 $. 

Triffin’s Dilemma

• Since the EU/US financial crisis, voices have been raised worldwide against the US dollar as an international currency. Zhou Xiaochuan, Governor of Peoples Bank of China, has proposed the adaptation of IMF’s SDR as an international currency. He argued that a national currency was unsuitable as a global reserve currency because of Triffin’s Dilemma, i.e. difficulty faced by reserve currency issuers in simultaneously achieving their domestic monetary goals & meeting other country’s demand for a reserve currency. 
• Keynes and Schumacher also conceptualised such a currency for International Settlement in 1940-42, called Bancor. It was to be introduced by the United Kingdom after the Second World War. However, the US keeping its own interest in mind, made the US dollar the world key currency at Bretton Woods Conference. 

India has been major beneficiaries of IMF’s Fund assistance. India has borrowed twice .

• World Bank Group is a family of 5 international organizations that give loans to developing countries. 
• It is a ‘Specialized Agency of UN’.
• Bank came into existence in 1945 following the Bretton woods conference.
• It is headquartered in Washington DC.
• Each institution of the World Bank is owned by its member governments & its membership gives certain voting rights to all countries. But additional votes depend on the financial contribution to World Bank. 
• The President of the World Bank is usually an American & the present President is  David R. Malpass (US economist).

• IBRD is the oldest of all World Bank institutions that started working in 1945.
• It commenced lending to India in 1949.

Main functions

• Initially, the primary function of IBRD was the reconstruction of war-ravaged regions (after World War II).
• Later, it evolved to the development of middle income & creditworthy developing economies of the world.
• Arranging the loans or providing guarantees on loans by various other channels to execute essential projects.
• IBRD facilitates different kinds of technical services to the member countries through Staff College and experts.
• Human development was the main focus of development lending with a very low-interest rate (1.55% per annum) – the area of focus being agriculture, healthcare, family welfare etc.

Note: The name “International Bank for Reconstruction and Development” was first suggested by India to the drafting committee.

• It was set up in 1960.
• IDA is known as the soft window of the World Bank.
• It gives long term credit with the basic aim of developing infrastructure & extended to economies having per capita income lesser than $895. Credit is for 35-40 years, interest-free except for a small charge to cover the administrative fee. Every developing nation make enough diplomatic attempts to get money from here because of additional benefits.
• India has been one of the biggest beneficiaries. But, since 2014, India stopped receiving soft loans from IDA as it breached the $895 per capita income mark.

• It was set up in 1988.
• It offers insurance to foreign investments in the member countries due to non-commercial ( i.e. political) activities such as currency transfer, expropriation, war & civil disturbance, thus encouraging foreign investment in developing countries.

• BIPA is an Indian version of ICSID since India is not a member.
• It promotes & protects the investment of investors on a reciprocal basis. 
• Till now, India has signed BIPA with 72 nations. 
• Objective: To promote & protect the interest of either country in the territory of other. 

• India has been a member of 4 institutions of the World Bank Group except for ICSID.
• World Bank has given sizeable financial assistance to India for economic development. Until China became a member of the World Bank in 1980, India was the largest beneficiary of the World Bank assistance.
• World Bank assistance to India started in 1948 when funding for Agricultural Machinery Project was approved. The World Bank has also assisted in developing infrastructures such as electric power, transport, communication, irrigation projects and steel industry.
• The first investment of IFC in India took place in 1959 with US$ 1.5 million. Presently, IFC has been helping India to raise foreign capital via ₹ denominated Masala and Maharaja Bond.

• Ease of Doing Business Report
• Remittances and Migration Report
• World Development Report
• Global Economic Prospects Report