Budget 2022: Higher allocation for logistics sector likely given its strong linkages with economy

The growth of the logistics sector is critically linked to the growth of trade and economic activities in the country. In India, road transportation dominates the logistics sector, with a dominant share of 60 percent, followed by Railways with 30 percent and the remaining by freeways.  The first wave of COVID-19 severely disrupted the road logistics sector as business activities came to a standstill and thereby road transportation of goods. Consequently, Q1 FY2021 revenues and earnings were severely impacted. The sector witnessed sequential recovery over Q2-Q4 FY2021 with the improved transportation through various modes such as rail, road, port, etc.; post relaxation on lockdown-related restrictions and as the needs for essential goods and economic activities recovered.

The road logistic sector revenues witnessed Q-o-Q growth of 53 percent in Q2, 19 percent in Q3, and 9 percent in Q4 with select few players reporting historical levels of quarterly revenues during Q4 FY2021. Industry revenues grew by 4 percent Y-o-Y, amidst expectation of subdued performance during FY2021.

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The logistics sector was once again affected in Q1 FY2022 upon the resurgence of COVID-19 cases. However, this time around the impact was moderate compared to the corresponding previous quarter (last fiscal) due to the continuation of industrial activities and less-stringent lockdowns. Nonetheless, moderation was witnessed in freight volumes sequentially across different segments - road, rail, and sea in Q1 FY2022.

The economic recovery that had been visible across most sectors during H2 FY2021 got stalled with the resurgence of COVID-19 cases by the end of Q4 FY2021. The freight movement was affected given the impact of the second wave on most end-user industries.

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In Q2 FY2022, industry revenues peaked to a multi-year high with a strong recovery in industrial activities and favourable outlook for several sectors. With declining COVID infections and the situation moving towards normalcy, monthly FASTag volumes ramped up to their highest level since the pandemic in October 2021. It now remains to be seen how the new Omicron variant impacts the logistics sector in Q4FY2022, given its overall vulnerability to economic activity.

The industry volumes are expected to remain stable in FY2023 on optimism of steady business activities and formalisation of the sector.

Another challenge faced by the sector is rising diesel price and related inflationary scenario, since H2 FY2021. Fleet operators hiked rates given the rising fuel cost environment (diesel prices increased by 30 percent Y-o-Y during FY2021) upon the gradual opening of the economy during H 2 FY2021. This along with an increase in volumes and fleet utilisation significantly eased the pressure on cash flows as the year progressed. Subsequently, crude oil and diesel prices witnessed some correction in November 2021. But with a further rise in crude in the current month, January 2022, it remains to be seen how this affects operators’ margins and how much further rate hikes they could implement, given some near-term cash flow pressures going forward, more so for the smaller fleet operators.

In view of the given backdrop, ICRA expects adequate budgetary allocation for the logistics sector, as it is directly linked to the economy in general. The Budget is expected to strengthen its focus on the faster implementation of projects like Bharatmala for improving connectivity for the road logistics sector, Dedicated Freight Corridor(DFC) for the Railways; and Sagarmala for the Waterways.

To provide relief from the rising diesel price inflation scenario, any possible reduction in duties on the same will be welcome.

The Budget should also push for higher digitisation and automation to lower compliance costs through policy support as this is a key area, wherein industry players have been demanding higher incentives/subsidies for higher absorption of EVs (Electric Vehicles) particularly for last-mile connectivity for the sector.

A push towards the creation of a skilled workforce for the sector as well as reforms towards the upliftment of livelihood of the workforce is also a need of the hour, given that the sector employs a large number of the unorganized workforce - primarily for the driver and helper segment for the vehicles. Finally, the Budget should spell out clarity on the finalisation and implementation of the National Logistics Policy which has so far remained a work-in-progress. This is from the perspective of continued reforms in the sector in order to reduce inefficiencies and improve global competitiveness for the sector.

The author is VP and  Sector Head – Corporate Ratings, ICRA Limited, Views are personal.

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