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Thursday, December 13, 2018
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Warehousing, a sunrise sector for the country

 

By N.C. Joshi

Warehousing plays a very vital role in the economic activities of any country. It ensures smooth flow of goods and commodities across the country, even in remote pockets far from manufacturing base. Specially, in India where industry is based in and around selected urban pockets while consumer market is spread over in large rural belts.  It is playing very crucial role also in ensuring Food Security in the country by maintaining uninterrupted supply of food-grains even to non-producing areas.

In spite of its significant role in economy, warehousing   in Indian context was existing till recent time in the form of traditional ‘go-downs’ in unorganized sector.  With the growing manufacturing activities, rising domestic consumption, emergence of organized retail, increasing international trade and foreign investments in infrastructure, the Indian warehousing is at the threshold of a major transformation. Credit also goes to the government for easing regulation to promote the sector.

Increasing emphasis on ‘cash less transaction’ is expected to give further fillip to online trading activities, coupled with implementation of GST and the “Make in India” campaign. It may bring sea change in Indian warehousing scene.

An Overview

According to ASSOCHAM current Warehousing Capacity in India is about 192.55 million MT which include following:

  • Food Corporation of India (FCI)- 35.7 million MT
  • Central Warehousing Corporation (CWC)- 10.09 million MT
  • State Warehousing Corporations (SWCs)- 21.29 million MT
  • State Civil Supplies 11.3 5 Cooperative Sector- 15.07 million MT
  • Private Sector- 110.40 million MT

 

Sector wise Industrial/Retail warehousing accounts for about 55% of the total market while CFS/ICD-14% share, Agri- warehousing: 15% share and Cold stores have abou16% share. The experts peg size of the Indian warehousing industry (across commodities and modes) in rupee term  at about Rs 600 billion (excluding inventory carrying costs, which amount to another Rs4,500 billion).

Though Indian warehousing is growing over 12-15 % annually, still it is lagging behind in quality, if compared with other countries. Lack of alignment of storage capacity with cargo flows, non-availability of latest technology, low capital and operating efficiencies, limited ability for handling multi-modal interfaces and inappropriate level of automation are some of the factors responsible for that. About 80% warehousing operations are non-mechanized, while warehouses across the world have fully automated operations. There is dire need of modern warehouses facilities that incorporate global standards such as tall designs, modular racking systems, computerized inventory and security etc for both agriculture and non-agriculture goods and commodities in view of wider product range, emphasis on shorter lead times and constant changes in customer demand have and to reduce operation costs.

.  Creating more space

 Like other sectors, recently Indian warehousing and logistics market also have witnessed new heights. Government policies to promote manufacturing sector has led to need of more housing space even in second tire cities.GST, if implemented will create demand for warehousing even in non-traditional pockets across the country. Realizing the importance of warehousing in the economy and in the absence of organized sector in this area, the Government agencies- FCI, CWC and MMTC are modernizing and creating more warehousing facilities. The Public-Private Partnership has taken up in big way for this purpose. Implementation of Food Security Act across the country and its provisions for timely delivery of food grains up to door step has led setting up of warehouses even in remote and inaccessible areas. Steel Silos of 20 lakh MTs with mechanized bulk handling facilities have been planned. These are considered most modernized storage for food grains world over.

In order to give fillip to warehousing infrastructure in rural areas for storage of Agricultural produce, NABARD has sanctioned Rs 1,112 crore for creation of 1,336 warehouses in State Governments and State Government Corporations in Haryana, Kerala, Punjab, Gujarat, Tamil Nadu, Tripura and West Bengal, which will create 7.5 lakh MT of additional storage space.

Growth Prospects

 Warehousing space in the country is in the range of 900 million sqft, much of it is in unorganized sector.  With annual growth of 100-125 million sqft, demand is expected to touch 1,500 million sq ft by 2020. At present it is primarily concentrated around country’s top seven warehousing markets- Mumbai, NCR, Bengaluru, Chennai, Pune, Hyderabad and Ahmedabad. The total space requirement in these seven markets is expected to grow from 621 mn sqft in 2016 to 839 mn sq ft by 2020.

Growth prospects are very encouraging for the sector as the E-retail segment demand for warehousing is expected to double from 14 mn sqft in 2016 to 29 mn sqft in 2020. Auto & Ancillary and Chemical & Pharmaceutical sectors are also emerging as largest demand drivers of Warehousing space. According to Warehousing Report 2016 brought out by Knight Frank India 17 mn sqft of space transacted annually in the top warehousing markets of the country as of today.  Close to 5 million sq feet is absorbed in Delhi, Mumbai and Bangalore which have become hubs for fast moving goods. Pune, Chennai growing as centers for industrial warehousing in south Asia.

With the implementation of GST, certain locations which were considered non lucrative for industry may witness a spillover in demand due to the sheer cost advantage. Instead of state wise warehouses, companies will consolidate into zone wise larger warehouses. This will lead to a surge in demand of Grade ‘A’ and large sized warehouses. The proposed Delhi – Mumbai Industrial Corridor (DMIC), and the Western and Eastern Dedicated Freight Corridors planned by Railways, will give further fillip to the industrial warehousing. GST will also result in emergence of new warehousing hubs like Belgaum, Bhubaneswar, Coimbatore, Goa, Guwahati, Indore, Jaipur, Kolhapur, Lucknow/ Kanpur, Ludhiana, Nagpur, Patna, Raipur, Ranchi, Vapi and Vijayawada.

The Government’s decision to create buffer stock of 20 lakh MT pulses and 42 Mega Food Parks have added new demand for agriculture warehousing.

 

A mismatch in the supply and demand provides significant growth opportunities in the warehousing. There is dearth of quality warehousing with all amenities that most Third-party logistics or Fourth-party logistics look forward to leasing. There is large market for developers to capitalise on and as the experts suggest, a golden opportunity for private equity investors.

 

Upgrading Warehouses

Though the Tax exemptions and other policy initiatives have created favorable environment for the development of warehousing sector in India, still a lot have to be done to ensure to upgrade existing infrastructure and modernization of Warehousing in India. Creating basic quality infrastructure like power, roads and linked rail tracks is main issue which cannot be left to private players. It has to be addressed by the concern government agencies. Online trading companies are focusing on capacity building and operational efficiency of warehouse in view of increasing competition.

High land costs and strict bye laws of local civil authorities have also not allowed capital investment in warehousing as expected.  The government’s focus has been on encouraging farmers to use warehouses in order to access post-harvest credit.  But in absence of scientific storage there is significant wastage or deterioration of quality of agriculture produce. There is need to introduce third party audit, technology and network optimization and multimodal transportation, thus improving warehousing in the government sector.

Now, automation technologies have substantially improved data gathering, processing, analysis and transmission, with high level of accuracy and reliability.  Many new technologies are used in developed countries while in India adoption process is very slow. Though the entry of multiple global brands may help in raising the existing technology to global standards, expectations are also from the government to facilitate technology flow or integration of the sector with IT.

New Horizons

Policy of allowing 100 per cent FDI in warehouses under the automatic route and tax exemptions for setting up free trade warehousing zones besides renewed focus on infrastructure development has made the sector attractive for global investors and developers. Institutional players now consider it a lucrative sector and expect an internal rate of return (IRR) of about 16-20 per cent from a warehouse development project. The large, organised corporate entities have entered this market in the past decade, and this number is increasing. Developers have already started exploring, with backing from various funds, to develop logistic parks.

Financing of warehousing is being taken up by Banking Intuitions also as part of their important landing activities. Private equity players are also keen on tapping the opportunity and expect investments up to Rs 15,000 crore per annumn in the sector. Already some well-known private equity funds and developers like Embassy Industrial Parks, Indo-Space, Everstone Capital, Realterm Global, Mahindra logistics and Milestone Capitals etc. have made high-value investments into warehousing related development. According to real estate consultancy firm JLL India, in 2015 the sector received Rs 1,438 crore’s investment only through two major deals.

Technology up-gradation is also having a breakthrough. Foreign investors have also been importing latest technology for warehousing taking the advantage of liberalized policy measures. In view of incentives of “Make in India Programme”, a number of foreign firms have recently indicated to establish their manufacturing base in India and create a hub for supply to Middle East and South Africa. Hence, warehousing is likely to be a sunrise sector for India.

 

(The author is the Former Joint Director -Media & Communication, PIB. Views expressed are personal.)