Changing Global Logistics Scenario: Implications for India

A few important global events have received almost no attention in India. Seemingly unconnected, these events will have far reaching economic and trade ramifications for the Global and Indian economy. All these events are directly connected to the global logistics, transportation and commodity supply. As a natural corollary, these will have an impact on businesses, consumers and governments. This is because any impact on sea trade has major reverberations since 90% of the world trade is seaborne. This is more important considering that the global logistics industry (all segments) is worth US$4 trillion. Egypt has recently announced the opening of an expanded Suez Canal water. The second event was the announcement that the expanded Panama Canal will open to traffic in early 2016. The third event was Iran’s announcement that India will build a port and help build an alternate sea and land trade transit route passing through their country and some other Central Asian Countries overland to reach Europe. This new land and sea route will help trade from India to Europe without passing through Suez Canal. India will also receive gas from Central Asia without having to pass through hostile Pakistani or Chinese territory. A few months ago Brazil’s Iron ore company “Vale” reintroduced giant ships that can carry 4 lakh tonnes (deadweight tonnage or DWT in shipping terminology) of ore to China. These ships called Valemax were first introduced in 2011 to help reduce cost of carry iron ore from Brazil to China and to give Vale a competitive edge over rivals by carrying large quantity of dry commodities. To place the size of these ships in perspective: around 18 ships such large ships can carry all the Iron ore 70 lakh tonnes of Iron ore exported by India in 2014. The consequences of these events will play out over the next decade and were hard to imagine a few years ago.

Expansion of Panama Canal and Suez Canal

Egypt recently expanded the Suez Canal. Panama Canal expansion is due to be completed in 2016. The 72 kms Suez Canal expansion entailed 37 kms of expansion as well as deepening of the existing canal as well as another 35 kms of creating a parallel waterway close to the present one. This will help double traffic from the present average of about 1426 ships per month (or 48 ships per day) by 2023 thereby increasing revenues for Egypt to US$13.2 billion from the present US$5.3 billion. The new route will reduce time taken to pass through it from 18 hours to 11 hours. More importantly, it allows the passage of much larger ships. Similarly, Panama has completed more than 90% of the work on expanding the Panama Canal. After completion the canal will permit 97% of the global merchant ships to pass through it. This is especially important in container shipping because once complete the type of ships that carry almost 45% of the container cargo to USA.

The introduction of new ships to carry commodities and containers is another important step that is bringing out major changes in the sea trade in the next few decades. Apart from Vale which can use ships to carry out dry commodities in bulk, this move is present even among container shipping companies. Maresk Line, the largest Danish container shipping line (which carries 15% of the world’s sea container freight recently ordered ships that are 400 meters long and 59 meters wide with a capacity of 19,678 containers that are 20 feet to replace their older ships which can carry 18,224 containers that are 20 feet. These larger ships are expected to reduce costs for the customers and increase margins for the company as provide the advantage of economies of scale. 

All the above changes have immense economic implications for India. Apart from the above scenario, Indian logistics scenario in the next decade or two may be at the cusp of phenomenal changes. India could benefit immensely if its plans to expand trade and cooperation with Iran fructify. This has the potential for reducing cost of transportation, increase margins of companies, reduce costs and give India access to gas thereby speeding up the economic and trade cycle in India. If India’s plans to develop ports in Iran and build a transit route that combine sea and road to Europe through Iran and Central Asia materialise, it is estimated that they can halve the travel time for goods from India to Europe and reduce costs by 70%. They can take this alternative route without going through the longer Suez Canal or without passing through hostile Pakistan. This could also facilitate access to oil and gas in Central Asian countries like Turkmenistan and other CIS countries for India. 

An immediate consequence of these new, much larger ships is that they can increase the volume of goods transported while reducing the factor cost of goods transported. The expansion of the Suez and Panama canals means that larger ships can easily move through the expanded canals (though Valemax cannot go through the canal as yet). Together these changes along with other technology investments will shorten the cycle across the world – even in countries like India. Once the India-Iran-Europe Transit is ready, a 10 day reduction in time taken will make a big difference in the cost of goods and services. An important unanswered question that only time answer is if there is sufficient demand to absorb such a huge capacity addition and the impact of a shortened economic cycle. It has been pointed out that the Suez expansion comes at time when traffic is declining (down from a daily average of 58.5 ships in 2008 to the present 48). These doubts arise largely because of the consequence of the global credit crisis, slowing of China and the problems in Europe. One thing that we can rest assured is that shipping companies in the future will prefer large ships in order to reduce costs and protect their margins in a world economy that is rapidly slowing down. 

Possible Impact on India

If India has to take advantage of the changes that are underway in the global economy, India needs to rapidly upgrade its infrastructure. These include speeding up the building of inland waterways, coastal shipping, ports, airports that cater to freight, road network, etc. If India cannot do so, there is a risk that Indian manufacturers will not be competitive in the global market place. On the positive side, the government has announced its intention to invest in Inland Water Transportation (IWT). Any success with IWT can decisively alter the Indian economy from a structurally high cost one to a low cost economy since IWT can facilitate transfer at least 10 times the quantity of goods fraction of the cost. In the past, it was estimated that the cost of inland transportation costs Rs.0.40 per tonne per kilometre while the cost of transportation by Rail is Rs.0.50 and by road nearly Rs.0.90. However, the global logistics boom and IWT can be a double edged sword, especially in a country like India. Unless the governments are prepared and prepare the people, the coming changes can revolutionise and wreck havoc on the present transportation sector, especially in the lorry sector. An example best illustrates this: the vessels that are proposed to transport goods on the Krishna River from Vijayawada to Kakinada are expected to carry 100 tonnes initially and later upto 1000 tonnes. In contrast the maximum possible transportation by a lorry is about 30-40 tonnes. That in turn will have huge repercussions on employment and nature of transportation. In short, the Indian logistics sector has to completely rework its business model – something that it has to prepare from today rather than wait for the last minute. These changes will invariably have major change in the employment scenario. It is unlikely that IWT vessels will need so many people directly. Instead it will require a large part of the workforce to be redeployed (like for loading/unloading, etc). Hence, different parts of the transportation value chain require different kinds of skills - which cannot be learnt in one day. They have to be acquired gradually. Hence, the best time to start preparations for the future on the part of Government and businesses is today. 

This does not mean that India benefits automatically. We have to build larger ports which can dock and unload goods quickly. The average turnaround time for a standard container vessel in Hong Kong, Singapore and most of the ports in China is 10 hours or maximum of 12 hours. In contrast, in India it varies from 3-4 days. There is a need for India to build larger ports that can allow large vessels to dock in the country and to load/unload commodities and containers. Otherwise these large ships will simply avoid India and we will miss an opportunity to change the fundamental nature of our economy - from a structurally high cost one to a low cost one. More importantly, we need to link these port cities to our hinterland using IWT. Development of coastal shipping may actually help. Example: if a huge carrier can dock in Vizag then using coastal shipping can help transfer goods from Vizag to Kakinada then transfer them inland using IWT. Since tens of lakhs of tonnes of goods will move through large vessels the cost for these commodities can fall dramatically. 

Thus, if India cannot take advantage of the major structural change that is likely to come about in global logistics and transportation sector in the next decade, it will be yet another lost opportunity. Importantly, taking advantage of these changes will mean a complete structural transformation of India from a high cost economy to a low cost economy.

(A shorter version of this was Published in the Telugu Daily, Eenadu on 14 August 2015, p.4)

Dreaming about a Rosy Future: Another shade to the Daily life in a city

Dreaming about a Rosy future has different side - it offers a great business model for the more enterprising kids. 

A Scene from Vijayawada, Andhra Pradesh in February 2015

Delhi Election Results: Understanding the Washout

The Delhi Election results are truly momentous in the history of Indian Politics. Never in the history of India has a single party won 95% of the seats. Never before in the history of India have national parties been so badly humiliated. One of them could not open its account. The BJP barely eked out that three seats – just a little better than others. A lot will be written on these historic results for a long time. For a second time in less than one year, voters decided that it was better give one party an overwhelming majority. For a second time in a year, a Six-sigma event seems to have become the norm. In terms of statistical probabilities such result is considered to be an outlier with the probabilities being one in one crore probabilities. However, such huge majorities may actually become the norm – an indicator that there is a major underlying sociological change in India and among the voters.   If BJP draws the right lessons, this electoral wipe out could be the best thing that could have happened to it. Unless BJP draws the right lessons, things can get a lot worse for the party. There will be a temptation within the BJP to dismiss the election results as insignificant since the electorate of Delhi accounts for only 2% of the total electorate in India and Delhi sends only seven members to the Parliament. Delhi has never been important because of the numbers. At the end of the day, it is the seat of power – at points of time in history it was only symbolic but most of the time it was/is the real seat of power. It is not without a reason that everybody in Indian sub-continent looks to Delhi for direction. More importantly, Delhi is a microcosm of the country. It literally has people from all parts of India – and, in large numbers. In other words, Delhi is important because it is a barometer for the country. 

History has a number of important lessons – for those who are willing to draw the right lessons. After the 2014 general elections, Political pundits loved to point out that for the first time in 30 years there is a stable government. Though it is very early, there is a need take another lesson from history: Congress party winning a majority on its own in 1984 was also the last time that they ever formed a one party government. The party went into a long-term decline after that stupendous win. 

At the onset, it is important to point out that the election results should worry all parties in equal measure. It is clear that the electorate has become smarter than what they were credited with. Andhra Pradesh and Delhi election results indicate that the voters have become very knowledgeable, discerning and are not willing to waste their vote by sticking with their traditional preference – especially, if they want to punish a party. In this case, it was clear that the voters wanted to punish the BJP and hence decided to vote en masse for AAP because they stood the best chance of winning. In other words, unlike in the past, when voters are angry, it is unlikely that they will waste their vote. The 2014 general elections indicated the same when Congress was punished and Delhi elections is a reinforcement of that trend. It is likely that this will be the central theme of future elections. 

There is a long list of takeaways from the Delhi Results. The key take away of the results is that the sun is about to set or has already set on the Congress Party. The party has not just fallen off a cliff; instead, the results make it clear that the party has fallen into an abyss where nobody knows where the bottom is. Importantly, the results seems to indicate the regionalisation of the Congress Party. Technically, it may be a national party but, in terms of spread it may be more like a regional party with some pockets of influence. In other words, it means that Congress will from now on (and in practical terms) be more of a regional party. The BJP is likely to take the Congress Party’s place as the principal party that will drive the agenda. Hence, in future, electoral battles are likely with BJP on one side and others on the other side. The results clearly show that the era of regional parties is not over. On the contrary, the decline of the Congress seems to have convinced people that a regional party has a better chance of successfully opposing the BJP. An important point that BJP strategists have to keep in mind is that they have done exceedingly well only when they were fighting the Congress party and not any regional party. In Haryana and Maharashtra, the BJP decimated the INC but, in Jharkhand where the opposition was a regional party, it just about managed to form the government. Hence, there is an urgent need for the BJP not to lose sight of the fact that the vote for them in regional elections was essentially a vote against the ruling Congress party.  

There will also be strong temptation within BJP to blame internal squabbles for the loss. Internal squabbles are not a cause for such a huge washout.  The winning party got about 52% of the vote share – or about 25% more than BJP. In contrast, the BJP’s vote share was more or less constant from 2013. Therefore, internal squabbles played only a minor role – if at all they played any role. A frank analysis indicates that the Modi government needs a course correction. First and foremost, it has to understand that despite the fact that it has a majority on its own, it should learn to treat its friends with more respect and should be magnanimous in victory. Any political party, especially a national party, cannot afford to be considered as a fair-weather friend. Elections are all about mobilising support and converting goodwill into votes. Votes are one part of it. Mobilising support from all quarters is very important. In such a scenario, the direct and indirect support of friends is also important. If one antagonises friends it is likely that they will not mobilise their supporters: even if they sit at home, it will damage the prospects of the ally. It seems like as if within nine months the NDA allies simply did not bother to canvass support for the BJP – an important factor when the contests are intense and tight.  

BJP also needs to understand that it cannot become like the Congress and forget about promises made during elections. Making tall promises is easy but implementing them is another matter altogether. It is likely that many people are likely to think that inability to bring black money back is a major reason. However, it is unlikely that it was a major cause. Bringing black money does not touch the lives of the poor on a daily basis. In contrast, the poor were definitely affected by things like Direct Benefits Transfers, issues related to price rise and the inability to create jobs. A major reason for the wipe of UPA in 2014 general elections was their inability to control food prices and to create jobs. The promise to control prices and to create jobs along with good governance endeared the voters to Modi during the election campaign. 

The claim that the Modi Government controlled inflation did not cut much ice with the voters for two reasons: food prices have not come down and despite fall in international oil price the prices did not fall commensurately for the consumers. BJPs biggest and core strength is the support among traders and middle classes. The problem with the middle class is that it strongly believes in the concept of “Charity begins at home while justice next door”. Traders and the Middle classes did not benefit from the near 50% fall in oil price. Unlike a decade ago, 24-hours live television means that people are quite aware of global and national events. Hence, when oil prices did not fall in tandem with the global prices it hurt the BJPs core support base. Food and petrol are something that middle classes buy at least once a week. Consequently, each time they opened their purse to purchase food or petrol it opened a can of discontent. The undecided, independent minded voters who punished the congress for this reason and swung the 2014 elections now moved to AAP. In retrospect, it would have been less damaging for the BJP if it had passed on at least half of the benefits that accrued from the international fall in oil prices. 

Another important reason is the promise to create jobs. Creating jobs is not easy. However, when expectations are extremely high, as in the case of the aftermath of the General Elections of 2014, things can go awfully wrong when expectations are met at immediately. ‘Feel good factor’ may be good for the stock market but not for a poor person looking for a job. As long as the economy does not get better on the employment front, it is unlikely that there will be political benefits for the ruling party. 

A major issue that may not have gone down well with the people is the importance that the Modi government has given to Aadhaar and Direct Benefits Transfer. Considering the fact that the BJP had opposed it while it was in the opposition embracing it while in power does not seem to have gone down well with the voters. The BJP government would not have suffered such a fate if the roll out had slower and had given more time to the people especially in the case of LPG. Even to this day, the gas agencies are teeming with crowds who are facing a problem of LPG. It is a mistake to think that LPG is not used by the lower classes. Successive government have given LPG connections to the lower classes as part of one scheme or the other. A number of these consumers are facing a lot of trouble navigating the new set of rules. Each trip to the gas agency leaves the consumer fuming because it requires people to forego their work for at least that day – if the problem is solved in one day. 

The lesson for BJP is that it should keep all its promises – not just those that have an All-India relevance (like food prices or petrol prices). This is because unlike the 1980s or 1990s, migrants who settle down far from their native place are an important component of our voting populace in all our major cities. The larger the city, the more they number. In the case of Delhi, people from South India, especially those from AP, Kerala and Tamil Nadu make up an important component of the voters. BJP going back on its promise of special status has clearly not gone down well with people from AP settled in Delhi. The paltry and insulting package of Rs.850 crores was like adding salt to a festering wound. It was like as if the Modi government had thrown crumbs to its pet dog. While Congress bifurcated AP, BJP went back on its promise. So for a settler from AP in Delhi, it was no brainer that the best way to punish both the national parties was to vote for AAP. The Sooner BJP keeps its promise of Special Status of abundant funds to AP, the better for the party. This is because there are a number of constituencies in Karnataka and Tamil Nadu, which have a large concentration of people from Andhra Pradesh. Hence, it is better not to antagonise people of AP – their curse can be a problem far beyond the boundaries of AP. To this must be added the fact that there are very few South Indian ministers in Modi’s cabinet has surely not gone down well with the South Indian population. In the General Elections of 2014, such issues receded into the background as the anger was primarily directed at the ruling UPA . 

An almost unnoticed aspect of the Delhi elections but one that has ominous implications for BJP in Andhra Pradesh is that Arvind Kejriwal has clearly shown the Power of an Apology – especially when it is made innumerable times. At the time when elections were announced, the abrupt resignation of AAP government after 49 days was an issue. Though he had apologised in the past, in the early days of the campaign Kejriwal apologised so many times that on the voting day, abrupt resignation was a dead issue though the BJP tried to revive the issue. This has major implications in AP: if the Congress were to similarly keep apologising it is likely that instead of Congress Bifurcating AP by 2019, BJP going back on its promise of Special status and help to AP may become a major issue – thereby offering a major chance for the INC to revive itself from the present almost moribund state.  

This is not to claim that this is the end of the road for BJP though the implications of this will be felt for a long time in a number of states. An immediate consequence will be felt in Bihar where it may give hope for those against BJP to draw lessons and put up a united fight. Until date, straight fight has damaged the BJP more than the other parties. Second, more importantly, there is an urgent need for the BJP to revisit its hurry to introduce Direct Benefits Transfer. While the administrative benefits of DBT cannot be faulted, the manner in which they are implemented tend to inconvenience the people when introduced in a hurry. There is now an attempt to push movement of even food and related measures through the DBT route. If all the welfare measures are moved through DBT, the impact of this on prices is not known. Hence, there is a need for the BJP or its allies to study the implications of DBT in more detail before going full throttle on these measures. The haste in which Congress introduced DBT was a factor in its defeat – though the Congress will not accept it. The political implications cannot be missed: almost all the large states except UP and Bihar (parliament seat wise) are now ruled by BJP or its allies. Hence, any inconvenience to the consumers will invariably have a political consequence. Similarly, any measure that has long-term and large implications on the consumers there is a need for the government to take the people into confidence rather than use its majority in the Lok Sabha to push measures. Pushing measures in haste will send the wrong signal to the people. AAP was able to spring back only because it went directly to the people and took them into confidence. There is now a need for the BJP to do the same. Unless the BJP uses this crisis to introspect, it will be a crisis wasted and lessons not learnt.  

Oil Price: Interesting Chart Patterns

The recent fall in Oil prices from about US$107 to its low of  US$45 or thereabout has led to a cacophony of claims that it is headed much lower. The estimates vary from US$20 to US$30. Nobody really knows which will be the lowest point. A quick look at the chart patterns seem to indicate that the oil may be way too oversold to hit those lows in the in the next few weeks. On the contrary, it seems to be ripe for a sharp rally that could take it by 10 or possibly 20% or more higher. There is never any point in speculating about the exact price since most of the time we will be wrong. 

The chart below (from www.stockcharts.com) is a Kagi chart from 2012. The problem with the chart is that there are too few data points. I would have been more comfortable if the data started with the 1980s or at least 1990s. But, the chart pattern is one of the most successful on a long-term basis (1-3 year perspective). 

It seems to indicate that Oil may be way too oversold. This combined with data that the net short by Hedge funds for West Texas Intermediate Crude is at a record high may offer some reasons for the prices to go higher. Finacialisation of Commodities and near zero interest rates offer some great opportunities for large trading companies to speculate in a win-win manner. If they make profits they keep it, if they lose money then they can palm off the losses to the central banks.

Season of Migration is about to Start

The onset of this summer will probably offer a number of insights that will be indicative of the directions of India's public policy in the next few years. 

The debate about importance of NREGA, the largest provider of jobs to the rural poor is about to tested. Already, a number of economists, ministers and social activists along with innumerable others have pleaded that the NREGA should not be diluted. While the debate about NREGA is unlikely to end in foreseeable future, on the ground the conditions of migrant workers is unlikely to change. 

The photo below show the accommodation that is provided to migratory workers in a brick klin in Andhra Pradesh that is dependent on migratory labour. On the day of their arrival, the workers "repair" these structures that are used for resting after the end of their work day. The work day varies and is based on the number of bricks that they can make rather than one based on the number of hours. 

Hustle Bustle of a Ferry in a Remote Region

The establishment of a ferry service across the River Krishna in 2014 seems to have had interesting economic impact in Gudimetla. The remote village, located in Krishna District, is interesting because it exists in the revenue records but, about 50 years ago people from the village moved out and settled in the neighbouring villages. Not many know the reasons for this. 

The Ferry (picture below) connects Guntur and Krishna districts. The Guntur side of the landing point for Ferry is about 15 kilometers from the village where the new Capital of Andhra Pradesh will be built.

In the first year, the contract to operate the Ferry service was auctioned by the government for Rs.1.8 million. In the second year (current year), competitive bidding push it to Rs.5.4 million - indicative of its popularity and utility. 

The picture below of the Ferry as it reaches the river bank on the Vijayawada side. Trucks carrying upto 5-6 tonnes frequently use it. It usually takes about 20 minutes to reach the other side. However, when it is overloaded it takes upto 30 minutes: most of the time it is overloaded. It consumes about 35 liters of Diesel for each trip. 

They charge Rs.10 for an individual, Rs.30 for a bike, Rs.150 for a car and Rs.1200 for a truck. A road trip between the two points means covering about 160 kilometers - which could take at least four hours. 

One immediate consequence is that land prices in the villages have gone up - much before the explosion in real estate prices in Andhra Pradesh.

Probably, it is one of those rare cases where a government investment turns out to be a win-win for all the stakeholders from the first day. The government gets the auction proceeds, people pay and actually benefit in a clearly quantifiable manner in economic terms. Time for more such investments by the government?