India Freight Transport Report Q3 2008

An inadequate transport infrastructure was acting as a key constraint on Indian economic growth, finance minister P. Chidambaram said in December 2007. If investment in infrastructure continued to fall below expectations, India would not achieve its target of 10% annual economic growth by 2012, Chidambaram warned. The minister was speaking at a meeting of the National Development Council that was expected to approve the 11th five-year plan for 2008-2012. 'We need to go forward with a greater sense of urgency in building rods, ports, railway lines and above all, power plants' he said. Separately, Indian officials attending a seminar in Shanghai called on Chinese companies to fund infrastructure investments. They said that India's road, port, telecoms, power and property projects required US$500bn worth of investment over the next five years. The Chinese response was said to be one of cautious interest. India needs to increase its spending on infrastructure projects to 8% of the country's GDP from 4.6% at present.

Despite these obstacles, however, BMI's India Freight Transport Report Q2 2007 concludes that the country will reach average annual freight-traffic growth of 10.5% in the 2008-2012 period.

Strong economic and foreign-trade growth is underpinning the freight upturn. Demand in the road-freight sector is boosted by door-to-door logistics, the move to higher-value/lower-bulk shipments, the rising size of the vehicle fleet and the new impetus to improve and extend the network, using private-sector highway operators and build-operate-transfer (BOT) schemes. Rail will experience steady but less spectacular growth, given the predominance of the state-controlled Indian Railways; however, even here some promising signs of reform are beginning to emerge. All other transport modes should experience faster growth, with international air cargo turnover performing strongly as more private airlines join the market.

Sea transport through India's major ports will also perform well. A major factor over the next few years will be the rising competitive pressures from cargo operators among India's immediate neighbours and main trading partners.

The dynamic pace of development and competitive wages are delivering a significant boost to the industry, largely offsetting the traditional problems of poor infrastructure and bureaucracy. To this must be added a favourable operating environment. BMI has given India a composite score of 66 (out of a possible maximum of 100) in our ratings. It scores very highly in the freight growth category, but performs less well in the regulatory environment, long-term economic risk and infrastructure growth categories.

For the 2008-2012 forecast period we expect the transport and communications sector to outpace the economy as a whole. It will achieve average annual growth of 7.9%, versus 7.7% for overall GDP. The total value of transport and communications GDP will rise to US$107bn in nominal terms by 2012, representing 7.6% of India's GDP.

In our view, the growth potential in the transport sector is likely to be the greatest in those areas where the authorities are prepared to contemplate reforms and a reasonably brisk opening up of monopolies to greater competition. A case in point is road haulage, where once the 'infrastructure deficit' begins to be closed, numerous factors will underpin dynamic future performance. These range from the increased demand for door-to-door logistics, the move to higher value/lower bulk shipments, the rising size of the vehicle fleet and the new impetus to improve and extend the network, using private sector highway operators and BOT schemes. We are predicting that road freight turnover measured in billion tonnes-km will rise by an average of 13.1% every year in 2008-2012, significantly above the rate of GDP growth.

In contrast to the performance of road freight, we have been predicting a steady if rather unspectacular performance by rail freight. There are, however, some new and encouraging signs that reform may begin to take hold within the vast Indian Railways. We forecast freight carried by rail will rise by an annual average expansion of 5.8%, and will be monitoring developments with a view to possibly raising this figure in future reports.

All other transport modes should experience faster growth, with international air cargo turnover gaining an average 11.6% per annum and domestic air cargo further ahead with 13.1%. Sea transport through India's major ports, measured in tonnage handled, will rise an average 10.0% per annum. A major factor over the next few years driving change will be the rising competitive pressures from cargo operators among India's immediate neighbours and main trading partners.