Cannot understand basis for logistics cost assumption: Economist Rakesh Mohan

New Delhi:

Rakesh Mohan, member of the Prime Minister’s Economic Advisory Council (EAC-PM), said today that he cannot find any basis to assume that logistics costs account for 14 percent of India’s GDP and that the assumption is the basis for government initiatives such as production related incentive schemes (PLI).

Speaking at an event organized by the economic think tank ICRIER, Rakesh Mohan further said that he had not figured out how think tanks or researchers arrived at 14 percent of logistics costs.

“It seems generally accepted that India’s logistics costs are significantly higher than global benchmarks. I’ve tried to research this, but I can never find the basis of this data… this report (CRIER report) reiterates the India’s commonly used number of logistics costs are 14 percent of GDP,” said the former RBI deputy governor.

The government relies on certain estimates suggesting that logistics costs in India are about 13-14 percent of the country’s GDP. The government has rolled out a national logistics policy and initiative by Prime Minister Gati Shakti to boost industry competitiveness and reduce logistics costs.

“It is impossible that (it) can be true… what is the share of production in GDP… 17 percent. So you are telling me that the logistics value added or the logistics costs are the same total production value added in the country are?… these numbers, I just don’t understand,” said the eminent economist.

According to Rakesh Mohan, the acceptance of this argument that India’s logistics costs are 14 percent is leading to policies that the industry loves, such as the PLI scheme.

“(Industry people say) we are not competitive because of this (high logistics costs), so give me money. But (they also say) don’t give money to farmers, give money to us,” he said.

The government has announced PLI schemes for 14 sectors including white goods, textiles and auto parts.

The aim of the PLI scheme is to make domestic production globally competitive, create world champions in manufacturing, boost exports and create jobs.

“These things need to be done very seriously. Because it does indeed lead to fiscal spending,” he stressed.

Mohan pointed out that the economic think tank’s NCAER report, which was submitted to the Logistics Department of the Ministry of Trade and Industry in 2019, had calculated India’s logistics costs at 8.8 percent of GDP in 2017-2018, which is not high compared to the other countries.

“But one never sees the mention of this (NCAER) report. We keep repeating the Economic Survey data that came after the NCAER 2017-18 report.

The 2022-23 Economic Survey had pointed out that logistics costs in India were between 14 and 18 percent of GDP, against the global benchmark of 8 percent.

Rakesh Mohan noted that it is true that India is globally uncompetitive in terms of manufacturing, especially in terms of labour-intensive products.

Last month, the Ministry of Trade and Industry announced that a task force will be set up to formulate a framework to determine logistics costs in the country.

The members of the task force would include representatives from NITI Aayog, the Ministry of Statistics and Program Implementation (MOSPI), the National Council for Applied Economic Research (NCAER), academic experts and other stakeholders.

The government relies on certain estimates suggesting that logistics costs in India are about 13-14 percent of the country’s GDP. The government has rolled out a national logistics policy and initiative by Prime Minister Gati Shakti to boost industry competitiveness and reduce logistics costs.

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