Dated 27th May 2013
OPPORTUNITIES IN INDIAN WAREHOUSING INDUSTRY
Evolution of Warehousing in India
Until decade ago, warehousing in India was a synonym for basic four-walled structures with sub-optimal sizes, inadequate ventilation & lighting, lack of racking systems, poor hygiene conditions and lack of inventory management or technology solutions such as Warehouse Management System (WMS). Although modern warehouses have begun to develop across India, there is still a significant growth story that remains to be played out in India.
Comparative Analysis of Key Variables in Warehousing Space
- Market Maturity (Fragmentation by contribution Unorganized, fragmented warehousing industry of key players to the total industry cost)
A. Size – Godowns with approx. size of <10,000 sq.ft
B. Centralization of warehouse – Multiple Warehouses, one in every state
C. Infrastructure – Poor Infrastructure
High Pilferage and Loss
- Value Added Services – Poor
- Level of Outsourcing – Poor
- Skilled Labour – Labour available but with poor training
- Technology Used – Poor
- Consolidation: Level of usage of Large scale
Logistics parks & free trade & warehousing zones – Poor
Source: KPMG in Hong Kong Report on Transport in China (2008), Industry discussion
Although large, Most of the warehousing space in India lies with the unorganized players- largely on the domestic side.
Structure of the Indian warehousing Industry (2008)
- Indian warehousing Industry: 433 million Sq.ft
- Domestic Sector: 85 % = 367 million Sq.ft
- EXIM Sector: 15% = 66 million Sq.ft
- Organized Sector (High Quality/Pvt Sector): 8% = 36 million Sq.ft
- Unorganized Sector (Medium to Low quality): 92% = 398 million Sq.ft
Source: KPMG Analysis
Emerging Opportunities in India
1. CREATING NEW SEGMENT: Bringing in Know-how from overseas markets, Showcasing Proof of concept to customers & building awareness on the back of a strong global brand, Example: 4PL, Logistics Park, FTWZs, Air Cargo Complex, Shipbuilding & Shipyards
- GROWING THE SEGMENT: Introducing processes to enable an efficient scale up, developing business plans for expansion, Sensible capital allocation, Providing HR & management bandwidth, Example: 3PL, Modern warehousing, Project Logistics, Cold Chains
CHANGE IN EXISTING & MATURE SEGMENTS: Improving automation & tech adoption, Migrating existing services to new industry segments, Access to new geographies or customers, Streamlining operations; Example: CFS, Courier Service, Offshore Logistics, Ports
TRANSFORMATION: Acquisitions of leading market players, Process improvement, Cost & profitability management, Divestment or asset lightening; Example: Freight Forwarding, FTL Trucking, Shipping, NVOCC
Impact of Regulatory changes on Warehousing in India:
Warehousing Development & Regulation Act 2007 (WDRA 2007)
Context of Discussions
Evolution of Warehousing / Storage
Current State of Warehousing in India
Future Trends in Warehousing business
What are the impacts of WDRA on Business?
Evolution of Warehousing / Storage
Warehousing – Historical Evolution (Regulatory History)
Public Warehousing in India for Supply Chain Management or Logistics??
Why Public Warehousing?
As warehousing needs huge capital investments with low returns, Public warehousing was inevitable
1928 Royal Commission on Agriculture recommended establishments of licensed warehouses.
1954 All India Rural Credit Survey Committee Reiterated the need for Warehousing in Public Sector
1956 Agriculture Produce (Development & Warehousing Corporation) Act, 1956 passed.
Warehousing – Historical Evolution (Regulatory History)
1962 Warehousing Corporation Act, 1962 for creation of Warehousing.
Central & State Warehousing Corporation (CWC & SWCs) were established under this Act
2005 WDRA Bill
2007 WDRA Act
Public Sector – More than 2000 Warehouses = 54 million tons
Total capacity in Private Sector is 300 million tons out of which 8% is in the organized sector.
Gaps that Unorganized Players are incapable of Filling
More than 80% of the warehouses in and around NCR and 50% in and around Mumbai area are less than 10,000 Sq. ft. in size (AC Nielsen Primary Survey)
Stock damage in storage is significant cost.
Poor Storage conditions at the C&F agents
A variable cost model in warehousing (pay per use) is yet to evolve
Large Infrastructure Gap
High Transit Times.
Low Penetration of IT in Logistic Sector
Complex Tax Laws and Regulations.
Lack of Skilled Manpower.
Warehousing in Future – Pointing Trends
Nascent Food Processing in India – 6.3% of GDP and 13% of Exports
The Indian food market is estimated at over US$ 182 billion, and accounts for about two thirds of the total Indian retail market.
The retail food sector in India is likely to grow from around US$ 70 billion in 2008 to US$ 150 billion by 2025 (McKinsey & Co)
Few visible Growth drivers of the Economy
Growths driven by demographics and population:
Large population of 1.1bn (UN 2005): India has a high consumption base.
45% under 20 years of age: Large numbers to participate in the creation of wealth.
Middle class of approx. 340m with increasing spending power.
Some of the many growing industries:
Telecommunication: 771m mobile phones (as on Jan’11) as per TRAI
Automotive: World’s largest motorcycle manufacturer; increased outsourcing of automotive ancillaries to India.
Drugs and Pharma: 4th largest in the world
Information Technology: World’s 3rd largest optical media manufacturer; 2nd largest software developers.
Gems and Jewellery: World’s largest exporter of diamond jewellery
Sourcing hub of Ready Made Garments
India is emerging as a potential and important outsourcing / manufacturing hub.
Warehousing – Issues and Challenges
No adequate warehousing infrastructure.
Warehousing does not exist as a concept in town planning
Warehousing adds to the cost, and also increases the touch points that might deteriorate the product.
Substantially losses to the economy every year due to inadequate Warehousing
WDRA 2007 (Warehousing Development Regulation Act 2007)
An Act enacted by Parliament in the Fifty-eighth Year of the Republic of India to:
Make provisions for the development and regulation of warehouses,
Negotiability of warehouse receipts
WDRA 2007 will lead to:
standardization of the warehousing activities in the country,
efficient price discovery for warehoused products,
use of negotiable warehousing receipts which are fundamental to the competitiveness of the industry.
Possible inclusion of warehousing in the town planning and thereby availability of land pockets for warehouse development.
No Distress sales by the farmers
Impact of WDRA – Significance to Farmers
Avoid Distress Sales by Farmers
Obtaining of finances against the stored produce
Higher returns to farmers
Higher level of protection though enhanced standards of warehousing infrastructure.
Reduction in losses by adoption of standardized storage practices.
Enhanced scope for trading through Spot/Future commodity exchanges
Effective dispute redressal mechanism and quick compensation of loss/damage
Efficient Supply Chain
Reduced dependency in Money Lenders.
Impacts of WDRA – Significance to Insurance Cos and Banks
Enhanced scope for lending due to increased confidence in the system.
With a legal framework available, Banks / Insurance companies would have an increased role in the warehousing business (especially farm sector) by way of funding individuals/groups.
Insurance companies would also have increased business opportunities as insurance will be an essential requirement before issuing NWRs due to the liabilities of the warehouseman in the WDR Act.
With a stable NWR system in place, owners of inventory can borrow foreign currencies for which real interest rates are lower, against inventories of export commodities, thereby hedging against the foreign exchange risk of foreign borrowing. This practice is followed in Kenya and Uganda where coffee stocks are often financed in Pound Sterling.
Reduction in cost of finance and Risk
Impacts of WDRA – Other Significance
Reduction in Logistics and Transportation Cost
Increase in warehousing business by enhanced utilization by the farmers.
Expansion of the warehousing in rural areas thereby making the facilities more accessible.
Expansion of cottage industry in rural areas
Enhancement of employment in the rural areas.
Stabilizes prices by balancing demand and supply
Faster delivery system
Provisions of Warehousing under Indian Customs
Circular No. 68/95 Dated: 15/06/1995
Subject: Public / Private bonded warehouses procedure liberalized
I am directed to state that a review of the existing policy with regard to appointment of public bonded warehouses and licensing of private bonded warehouses has been conducted by the Board. Consequently, it has been decided to liberalize the procedure on the lines indicated in the succeeding paragraphs.
2.0 Appointment of Public Bonded Warehouses:-
2.1 The existing policy of appointing only Central Warehousing Corporation and State Warehousing corporations as the customs of the public bonded warehouses, formulated in 1980, will undergo a change in the context of liberalization of the economy. Considering that fact that the management of CFSs and ICDs has been entrusted to private operators, in line with the existing policy of privatization and with a view to raising the efficiency of warehousing services, private operators would now be allowed to be appointed as custodians of the public bonded warehouses. This relaxation may pave the way for more number of public bonded warehouses coming up in interior locations where these are needed.
2.2 The concerned Commissioner should, however, ensure that while appointing any private operator as a custodian for public bonded warehouse, the application submitted by the latter is very carefully scrutinized and factors such as the feasibility and financial viability of the warehouse operator, his credibility, his financial status, his past record to comply with Customs & Excise Laws, his expertise in warehousing field, etc. should be given due consideration. Besides, operational requirements such as, suitability and security of the premises, availability of customs expertise, proximity to the users, etc. are also to be taken into account while appointing the custodians for the public bonded warehouses. The applicant should agree to take the services of the customs officers on cost-recovery basis, if the services of the officer are required on a continuous basis (i.e. 9 AM to 6 PM), or on payment of MOT / Supervision charges, as the case may be.
3. Private Bonded Warehouse:-
Furthermore, it has been decided that the requests for grant of licenses for private bonded warehouses will be considered and decided at the level of the Commissioners without making any reference to the Board. The private bonded warehouse licences may be allowed without any restrictions regarding the type of goods to be warehoused. Hitherto, private bonded warehouse licences were allowed only in respect of goods which required specialised storage/ handling facilities, e.g., liquid in bulk, hazardous goods, explosive goods, goods requiring controlled temperature conditions, etc. From now onwards, irrespective of whether the goods fall in the above categories or not, the private bonded warehouse licences may be granted. The existing practice of allowing only industrial raw-materials/ components to be warehoused in inland areas is also being relaxed. The Commissioners may carefully scrutinise the applications for grant of privet bonded warehouse licences and if the applicant is financially sound, has goods credibility, and has not been involved in custom or excise duty evasion in the preceding 5 years, in the normal course, a private bonded warehouse licence may be granted. This would, of course, be subject to the condition that the premises are suitable and adequately secured and the applicant agrees to take the services of the customs officers on cost-recovery basis, if the services of the officer are required on a continuous basis (i.e. 9 AM to 6 PM) or on payment of MOT/ Supervision charges, as the case may be.
4. All pending applications forwarded to the Board with recommendations from the Commissioners of Customs are being processed in the Board. Other pending applications will be sent to the respective Commissioner and the same may be disposed of in the light of the above instructions.
5. Any difficulties likely to be faced as a sequel to the above liberalisation may be brought to the notice of the Board. The contents of this letter may be circulated to the public by issue of a public notice.
This circular was published to liberalize the process of application for the Public/Private Bonded warehouse.
Checklist for Bonded Warehousing Application with Indian Customs:-
1. Details of Premises Ownership (Supported by relevant documents)
2. Self-assessed declaration about the maximum storage capacity of the warehouse in MT and CBM (Volumes)
- Security Bond equivalent to the applicable Import duty of all the stored goods
- Solvency Certificate from the bank for minimum amount of INR 50 Lakhs
- IEC Code (If available)
- Bank Verified signature
- 2.5% of the total value of the stored goods as a security deposit with Customs
- NOC from the States Fire Department
- Details of the Civil structure, security arrangements, IT Infrastructure available
Our Role as a Consultant on Warehousing
- To help clients in getting their warehouse registered as a Public bonded warehouse
- To provide consultancy to warehouse owners on operational aspects
- Assist warehouse owners in setting up of the warehouse by arranging a tie-up with the equipment providers, logistics providers, space designers, security services providers etc.
- To assist warehouse owner in integrating their space with the demand segment through analysis of the markets, products, area etc.
- Assistance in integrating the warehousing activity with the nearest Customs port or Railways sidings.
- Consultancy on Marketing & Operational strategy & development, Inter-State Taxation etc.
SOURCE: GOVT. OF INDIA, Ministry of Finance