India’s newly implemented goods and services tax (GST) is top of mind for many executives in Asia because it removes artificial barriers previously present across states. This is making the movement of goods easier and increasing consolidation in India’s warehousing sector. Unfortunately, a botched rollout of the tax has negatively affected short-term business sentiment and increased operating costs for companies.
To better understand how the GST is impacting companies’ channel strategies—particularly their indirect channel strategies—I spent considerable time in India, speaking with executives in Delhi and Mumbai.
Three major changes to India’s distribution landscape frequently emerged in my conversations:
1. Changes in logistics costs:
Prior to the implementation of the GST, a truck would spend approximately 20% of its run time at interstate check-posts verifying documents related to state tax payments, consignment value, vehicles, driver, etc. This idle time at state borders increased the time a truck spent on the road, reduced the distance it traveled, and increased overall logistics costs.
After the implementation of the GST, almost all states have removed their border check-posts and tax payments, which has lowered the cost of documentation and compliance. Based on my conversations, the travel time for goods to move between Delhi and Mumbai has decreased by 20-30% in the first three months of implementation.
2. Changes in warehousing:
Most companies’ warehousing and supply chain strategies were influenced by tax decisions before the GST because different states in India levied different taxes. There was also a tax—the central sales tax (CST)—levied on the sale of goods across states. To avoid paying the CST, many companies set up warehouses in individual states they served and transferred goods across state warehouses, which were exempt from the CST.
Following the GST, the removal of tax barriers is easing the movement of goods across states, allowing companies to adopt more commercially viable models. Many companies that currently have a state-specific warehousing approach are consolidating their smaller warehouses into larger, regional warehouses.
3. Changes in the level of sophistication:
Distributors in India, as in other emerging markets, are not large businesses, but small and often single-owner entities. Even the logistics sector is dominated by numerous small, owner-operated businesses. Fragmentation in both the distribution and logistics sectors has resulted in low levels of sophistication in the industry. Digitization in the sector is currently in a nascent stage, with most processes yet to be automated.
The increasing consolidation in warehousing and transport after the GST is allowing companies to achieve economies of scale in their supply chain operations. The shift from traditional “godowns” to regional warehousing hubs will enable companies to get higher returns on investments in modern warehouses and better enterprise resource planning (ERP) systems.
In light of these changes, you should re-evaluate your indirect channel strategy for India and use the shifts in market to make internal changes, drive efficiency, and improve your distributor management process. Companies that capitalize on this opportunity will outperform competitors and increase profitability in the country. Read my latest report on “India Distribution Management” for more details on how to enhance performance amid the transition.