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Lighthouse - September, 2016.

Why GRI is More Important Than GST For The Logistics Industry

There is a unique relation between all organs in the human body. They always go through the central leadership of the brain who directs them to act in a certain way and react in a certain way to an external stimulus. This is the standard procedure and in existence since mankind itself.

But two organs have turned out to be breaching this protocol for the last few years. Some outsiders (Social media avenues like Facebook, Twitter, Whatsapp etc.) have motivated them. These controversial organs in cahoots with each other are:

Ears

Tongue

What they have done is, they have become hand in glove with each other and skipped the intermediate link of involving the brain. So ears listen and tongue reacts instantly. Read a tweet, react. Read a post, react. Read a message, react. And react FAST. This is the new chaos called social media.

I remember, earlier days, if some people were fighting outside the railway station, suddenly a crowd would appear and in 7-8 minutes, all were giving “solutions” and in 11-12 minutes all were fighting with each other.

Same thing is happening, but not necessarily outside the rail station.

Now the point i want to make is: This rhetoric, which is aggravated by the noise around it, is about GST legislation in India. Suddenly, everyone and his uncle think that this will be very good for the logistics sector.

I will speak for our sector only in context of GST. The buzz is:

• Due to a “One Nation, One Tax “theory, all indirect taxes will be subsumed and therefore there will be ease of operations and flow of goods and services.

Remember – one nation one tax is a good theory but look within and see the difference of opinion and chaos within your own house, office, society, club, village, town. Accounts department doesn’t agree with marketing teams so how will centre and state agree and work without chaos is to be seen to be believed.

• Since goods and services will flow freely, a unified National Logistics policy will come in leading to organisation of the industry.

All i have seen in my observation of industry is that whenever a “policy “or “ organised “sector is tried to be created, the small, middle, tertiary level players get exhausted and only the large fish remain. If this is good or bad, you decide but I think it is necessary to have industry at every level of operation, especially in a country like India, where entrepreneurs are at each level.

• Then due to this policy, 100% FDI in warehousing will be possible, 3PL and 4 PL will get a boost with the entry of multinationals etc. Look, the listed players who are ready for it will benefit. But the industry as a whole will be further cornered and narrowed.

Also, never forget that FDI is just a policy. It doesn’t guarantee FDI. Look at the real estate prices on which warehouses are built which are higher than London, New York, Tokyo and I doubt if anyone will want to pay a price for it, knowing very well that the final pricing power of warehouses to customers is nil.

That brings me to a larger point:

GST is only a tax situation. Tax alone is not the Business. If the Business is there, tax comes in the picture. There are four constant players in any business:

•     Shareholders – Real owner
•     Managements and Employees – executors
•     Tax – government
•     Customers – consumers

This doesn’t change. What changes is that according to the macro and micro dynamics of that industry, the share of revenue is distributed. Let me illustrate with an example:

Let’s say in Logistics: The denominant is INR 100. The year is 2016. The Base year is 2001.

Customers benefit the most because of no pricing power. So they have almost 45 bucks of this 100 – which in 2001 would be 15 since there was no competition and logistics companies had pricing power.

Management & Employee costs have escalated over the decade so as of today; they corner 35 bucks which was 5 bucks in 2001.

Tax: new taxes like service tax have come in and direct taxes have also gone up so this corners 15 of that 100 today which was 10 in 2001.

What remains is Shareholders or Owners who have the balance 5 out of the 100 today. I am not just saying. The Net Profit After tax component of the large listed players in India and around the world is in low single digits like 5%. This in 2001 was 70 if you do the reverse math.

These 70 out of 100 enabled them to buy offices, land, warehouses, equipment etc. and the asset prices appreciated over the years. Ask a promoter today to invest 150 crores for a warehouse and then hunt for business without pricing power on the back of discounts and he will rather do nothing than hit himself on his own toe.

So what is needed?

A business situation in logistics needs to change. Pricing power needs to come in which i don’t see coming anytime soon, maybe never. It looks like the best is behind us. On immediate basis, that business situation is GRI (General Rate Increase)

That happens when demand picks up and supply can’t catch up and the business situation changes for the better. Everyone makes better profits when prices are higher. You may argue that LCL rates never go up but see your own P&L statements over the years and realise that when the prices were higher, the going was the best.

So to my mind, a business situation needs to better, not a tax situation like GST.

GRI as of now is much anticipated than GST.

But you won’t listen to me because print, digital, broadcast and social media are all shouting: GST best for Logistics. All stocks have run up in anticipation. Companies in the business of Market Cap, congratulations. You can do one thing for me at least: You don’t breach the brain in this sinful partnership of the ears and tongue.

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