India: the challenges and opportunities

Ben Jacob George, Executive Director and CFO at Mohebi Logistics, offers an insight into the potential for improving FMCG logistics services in his home country.

An overview

India has always been a fascinating and interesting country with its rich years of history, the culture, unity in diversity, religions, joint family system and Taj Mahal. Once it attained independence, India started with socialism as the base for the economy and established public sector undertakings to create the infrastructure, mass production and self-sufficiency in critical areas.

Although the private sector was encouraged, many factors interacted to prevent the entrepreneurial spirit from blossoming and the creation of wealth within the legal framework: the bureaucracy, labyrinthine laws and tax structure

India is moving rapidly to a modern supermarket shopping environment

On the path to changes

In the 90s, the federal government embarked on a series of economic reforms. There were greater opportunities to capture, store and analyze data – which served to accelerate the reform process. These reforms and the increased use of information technology increased the level playing field.

‘Information’ that had hitherto been available only to the few was now available to many others. Today youngsters dare to dream about entrepreneurship and entrepreneurs have the courage of their convictions to commit to commercial enterprises.

These reforms have not just been confined to economic policies alone. There are now three new fundamental laws in place – the right to education, the right to information and the right to services.

A promising consumer market emerges

As India progresses into the second decade of the second millennium, there are clear signs that this could be the exciting new consumer market that FMCG manufacturers are looking for. Various economic indicators point the way.

Optimism about the future is a key factor in driving consumption behavior. India ranked first in a global consumer confidence survey in 2011. At 62% consumption of the GDP, India is in league of western countries. So consumption has played a greater role than investment in the Indian growth story. Another ‘switch’ is that people are now comfortable using credit rather than savings to finance major purchases.

India at 13% is still too high compared to the West (under 10%). But it is performing better than China (18%) and Vietnam (25%). Source: KPMG

India at 13% is still too high compared to the West (under 10%). But it is performing better than China (18%) and Vietnam (25%). Source: KPMG

On the upward escalator

(NCAER) National Council of Applied Economic Research in New Delhi (NCAER) states in its April 2012 report that annual GDP is projected to grow 7.3%, up from 4.9% in 2008. Imports are growing by 19.3% and exports by 13.2%.

By 2025, 70% of Indians will be of working age. Their drive for a better life, combined with greater media penetration and improving transportation, will lead to a retail and FMCG boom. So predicts Thomas Varghese, the Chairman of the Confederation of Indian Industry National Committee on Retail.

In their recent joint report ‘The Tiger Roars – How a billion plus people consume and shop’ the Boston Consulting Group (BCG) and the Confederation of Indian Industry (CII) state that consumer spending in India will quadruple in eight years from US$ 900 billion in 2012 to US$ 3.6 trillion in 2020.

Significant upgrading work required

Encouraging though all these statistics appear, they need to be considered in context. India has a population second only to China (2nd most populous nation with 1210 million compared to China as No.1 with 1339 million) – yet its per capita GDP is US$ 3586, less than half that of China (US$ 7536). One of the main engines for increasing GDP is to make the logistics sector much more efficient and productive.

For this to happen, significant steps must be taken in three key areas:

Transport – upgrade the infrastructure

Roads are inadequate and container ports are congested. Currently ship turnaround time is three and a half days. The Indian government has launched a program to build 10,000 kms of new roads, develop inland waterways and stimulate railways through privatization.

Taxation – simplify the process

Currently each Indian regional state (there are 6) has its own tax system with different regulatory frameworks – leading to extra cost and complexity. By April 2013 a uniform Goods and Service Tax is due to be implemented, which will reduce compliance costs, promote employment and spur growth.

Logistics professionals – use more of them

FMCG is India’s 4th largest industrial sector, yet the numbers of logistics professionals in the country is still small. Stock filing and warehouse management is often done manually. There is a low level of 3PL usage in the most important logistics functions such as warehousing and transportation. RNCOS Industry Research Solutions states in its recent report ‘3rd Party Logistics Market in India’ that only 55% of Indian companies subscribe to 3PL services compared to 75% globally.

The need for specialist 3PL experts

If FMCG companies are to increase their efficiency in countrywide or regional supply chains, they’ll need to outsource their logistics operations to experts. Such 3PL specialists will have the capability to provide complete solutions, dealing with all stages from Inbound Logistics to Storage, Packaging, Inventory Management and Delivery.

Establishing the complete chain is still a great challenge here. However for the ‘daring’ it offers a unique opportunity – to establish and fulfill consumer supply solutions that the New India urgently needs.