Prabhu's freight corridors dream hinges on GST

FMCG, automobile industries say if GST regime kicks in, rail hubs can take Make in India to a new high.

 

As Railway Budget 2016 promised focus on freight corridors and Railway Board Chairman A K Mittal revealed the strategy to tap sectors like fast-moving consumer goods (FMCG) and automobiles to increase traffic, the success of the ambitious plan hinges on the goods and services (GST) tax regime.

If freight corridors become reality as promised, FMCG sector could cut down expenses and streamline operations.

The inventory-heavy industry, in which logistical efficiency and warehousing play a significant role, will be able to shift towards centralised production at cheaper rates.

Currently, Indian Railways transport only 1,000 million tonnes of FMCG products every year.

While a few majors such as Nestle and milk co-operatives use the railways for supply of raw materials and dispatching finished goods from the factories, a majority of the players depend heavily on road transport.

"We are open to considering railways as the preferred mode of transporting goods, provided that is economically viable," said Lalit Malik, chief financial officer, Dabur India. 

According to top executive of a milk co-operative, while the industry uses railways to ferry milk, for items such as ice creams and foods, it is not viable. "We have a set infrastructure for that. Also, railway freights are higher than the road," he said.

While most FMCG companies have welcomed the initiative, various state-level taxes are a major hindrance in transporting goods from one part of the country to another by train.

To avoid multiple state-level taxes, most FMCG entities are forced to set up manufacturing units and warehouses near every major market. For example, Coca-Cola India has 57 production units while PepsiCo has 41 units.

According to a Coca-Cola India official, transporting glass bottles through railways could be a game changer since it will help beverage makers reduce the number of bottling units in the long term.

"If GST is implemented, the companies may not need to set up sales depots in every state as is the requirement now," said Harsh Mariwala, chairman, Marico.

"Typically, primary freight is used by most companies including us to transport raw materials such as palm oil from ports to factories. For secondary freight (using railways) is a challenge since delivery of finished goods in FMCG tends to be door-to-door," said Sunil Kataria, business head, India & SAARC, Godrej Consumer Products.

"Rail transport can become viable if manufacturing and distribution centres are fewer, so goods can travel large distances resulting in economies of scale."