Rising industrial production and growth in purchasing power are creating an increasing demand for warehouses, pushing the Rs 750 billion warehousing industry in India.
Over the past couple of decades, the warehousing industry in India has evolved from the traditional concept of a ´godown´ - a small structure with four walls and shed - to a modern-day automated set-up which offers efficient inventory management and value-added services. The modern set-ups, with automated warehouse management systems, have significantly improved storage and handling points across the country.
Currently valued at approximately Rs 750 billion, the warehousing industry in India is mainly driven by the retail boom, growth in the infrastructure sector and the flourishing e-commerce industry. Rising industrial production and growth in purchasing power are creating an increasing demand for warehouses. ValueNotes Research estimates that the industry will grow at a CAGR of ~17 per cent over the next five years. Warehouses are mainly required in sectors like food, pharmaceuticals, automobile, agriculture, textile, retail, FMCG, etc. Growth in these end-user industries has contributed to higher demand for warehousing space.
Industrial warehousing is growing at a faster pace than agricultural warehousing. I believe that the implementation of the Goods and Services Tax (GST) would lead to uniform development across the nation, and enable higher growth and consolidation in the warehousing industry.
So far, the organised warehousing segment in India has been dominated by public sector players like Food Corporation of India, Central Warehousing Corporation and State Warehousing Corporation due to large space requirements and a high infusion of capital. But over the years, the share of private players-such as Blue Dart, Transport Corporation of India, Gati and Adani Agri Logistics - has been steadily increasing and is expected to double in the next five years.
Dominance of the unorganised sector
The warehousing industry is largely dominated by unorganised players which account for ~80 per cent of the market. The unorganised sector is quite significant as smaller warehouses are situated in the interiors near the point of produce. They tend to charge lower prices as they are not as technologically advanced as the organised sector. Unorganised warehouses mainly flourish due to the low paying capability of end-users and the presence of a large number of middlemen in agricultural centres. This has led to an unorganised and scattered industry.
The picture is gradually changing with the growing opportunities and government initiatives. ValueNotes estimates that the organised sector is growing at a rate of 20-25 per cent on the back of improved service offerings and growth in various end-user segments. While private players are focusing mainly on ports and surrounding areas, internal regions with little infrastructure are still not covered due to the lack of economies of scale.
The government has played a significant role in promoting the growth of warehousing in India. It has been successful in attracting many private players by investing in SEZs and improving port facilities.
Development of FTWZs: Free trade and ware¡housing zones (FTWZs) were introduced by the Indian government, under the Foreign Trade Policy 2004-09, to facilitate import and export of goods and services. According to the policy, 100 per cent FDI is permitted in the development and establishment of FTWZs. This has led to an increased interest of private players in the logistics sector. Around 861 acres of land has already been identified for FTWZs in India.
Goods and Services Tax (GST): The government plans to eliminate CST (Central Sales Tax) and introduce GST. The latter has missed several deadlines due to the lack of consensus by Indian States on the new tax. The Centre is working on its formulation and it is expected to take effect in April 2016. GST implementation would lead to lower cost differentiation between regions and bring down the overall cost of logistics. It would lead to more uniform development across the country. To avoid inter-State taxes, most manufacturers have constructed regional warehouses. The implementation of GST would lead to centralised warehouses at key locations and outsourcing of operations leading to significant cost savings. It will reduce price discrimination and thus reduce competitive pressure from the unorganised sector in terms of cost.
Changing face of warehousing
The face of warehousing is changing in India. Warehouses are going beyond their basic function of storage, and are expanding into providing value-added services. Logistics is fast emerging as a service that involves end-to-end solutions and value-added services such as labelling, packaging, bar coding, custom clearance, distribution services, reverse logistics, etc. More and more warehousing players are beginning to focus on these value-added services as they offer better returns. The trend is changing to outsourcing services to 3PL in the industry, which offer services in the basic warehousing function. The next thing to look forward to is 4PLù this consists of knowledge partners offering process management, technology and operational competence. The use of automation in warehouses and MIS implementation are also resulting in increased efficiency. Recognising the need for efficient logistics and better services has encouraged a lot of new private players in the market to come up with more efficient technical systems. Warehousing in India is no longer four walls and a shed! With increasing demand for professionally managed warehousing, growing industry, improving infrastructure and government support, the modern warehousing industry in India is set for a quantum jump and it is the right time for private players to take the plunge.
Though warehousing is an independent economic activity, it is closely linked with production, consumption and trade. Warehousing is the most important auxiliary service for development of trade and commerce...
- Report on warehouse development & regulation by the Planning Commission of India
The author Priyali Shah is a research analyst at ValueNotes, which specializes in the management of competitive and market intelligence, information and research. She has worked on a variety of research projects such as market sizing studies, partner selection and database management in industries including telecom, IT, chemicals and cosmetics.