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Airfreight in India: Tax reform, FDI progress offer hope

By Staff Reports on May 2, 2013

India remains irritatingly out of reach. There is a growing sense of frustration that what is destined to become the world’s largest consumer market remains resolutely disconnected from the global economy.

The stark contrast is made with China, which, with a population of 1.3 billion, has come from virtually nowhere to grab a 14 percent chunk of the world’s economic output. By comparison, India, with a burgeoning populace of 1.2 billion, contributes just 2.7 percent of global economic output. India is set to surpass China’s headcount, at least by population size.

What is holding India back? The answers are numerous, but failure to embrace the real world must rank high. This is best illustrated by the determined efforts of the Indian business community not to allow direct foreign investment. On much the same terms, the country has failed to sign a long-posted free trade agreement with Europe.

Within the country itself, individual states are responsible for their own tax regimes, which means in effect companies are liable for excise duty when simply “exporting” goods from one state to another. This makes it impossible for the major service providers to set up central distribution and warehousing hubs.

This should all change with the introduction of a national goods and services tax (GST) that will lead to the abolition of all other taxes such as central sales tax, state-level sales tax, excise duty, service tax and value-added tax. This single move alone is expected to boost exports by up to 6.3 percent, with imports likely to rise by nearly 5 percent.

When will this game changer occur? GST was due to be implemented April 2010 and a further deadline of April 2012 was missed, with efforts now focused on an April 2014 start for the new tax regime.

In the meantime, the Indian rupee continues to devalue, imports are down and manufacturing is weak.

But there is hope for India. In particular, the foreign direct investment door has finally been pushed ajar allowing major retailers into the Indian market for the first time. The likes of U.S. retail giant Walmart, France’s Carrefour and Britain’s Tesco have long been hammering at the door and have finally been let in, with permission to hold a 51 percent equity in any Indian investment venture.

But according to Prashant Shukla, area manager India for Panalpina, it will take time for foreign direct investment in the Indian retail sector to flow through.

“These major retailers are only just beginning to formulate their plans for the Indian market,” he says. “When they do start operating we can expect a surge in airfreight business until they have got their inventory controls in place.”

Panalpina is a relatively new player in the Indian market, but says it has been able to quickly establish a strong presence.

“Our strength has been the vertical integration of our product sectors, particularly auto, for example, which is directly connected to our global auto product network,” Shukla says. ”We are now looking to transfer the same dynamic to the pharma sector.”

But in other sectors, Panalpina is fighting for market share in a tightening market.

“The garment sector used to be an Indian airfreight staple,” Shukla says. “But a lot of this business is being transferred to Bangladesh and Vietnam, which are able to offer better quality control and cheaper labor.”

Quality issues appear to still be a persistant concern for Indian manufacturing.

“We have major companies like Nokia manufacturing mobile phones in India,” Shukla says. “But you will find that they produce the cheaper models here, whilst their high-end products are made in China.”

DHL Global Forwarding appears to be anticipating the introduction of a uniform goods and services tax across India, which will allow the logistics sector to develop more centralized warehousing and distribution networks.

It had announced a US$130 million investment program to develop eight multi-client sites across the country, which will add a further 5 million square feet to its warehousing footprint in India.

“The supply chain and logistics sector in India are highly fragmented, characterized by small market players, making the implementation of synchronized logistics sector difficult,” Shabana Khan, senior director of airfreight for DHL Logistics India, says.

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