Egypt recently expanded the Suez Canal. Panama Canal expansion is due to be completed in 2016. The 72 kms Suez Canal expansion entailed 37 kms of expansion as well as deepening of the existing canal as well as another 35 kms of creating a parallel waterway close to the present one. This will help double traffic from the present average of about 1426 ships per month (or 48 ships per day) by 2023 thereby increasing revenues for Egypt to US$13.2 billion from the present US$5.3 billion. The new route will reduce time taken to pass through it from 18 hours to 11 hours. More importantly, it allows the passage of much larger ships. Similarly, Panama has completed more than 90% of the work on expanding the Panama Canal. After completion the canal will permit 97% of the global merchant ships to pass through it. This is especially important in container shipping because once complete the type of ships that carry almost 45% of the container cargo to USA.

The introduction of new ships to carry commodities and containers is another important step that is bringing out major changes in the sea trade in the next few decades. Apart from Vale which can use ships to carry out dry commodities in bulk, this move is present even among container shipping companies. Maresk Line, the largest Danish container shipping line (which carries 15% of the world’s sea container freight recently ordered ships that are 400 meters long and 59 meters wide with a capacity of 19,678 containers that are 20 feet to replace their older ships which can carry 18,224 containers that are 20 feet. These larger ships are expected to reduce costs for the customers and increase margins for the company as provide the advantage of economies of scale. 

All the above changes have immense economic implications for India. Apart from the above scenario, Indian logistics scenario in the next decade or two may be at the cusp of phenomenal changes. India could benefit immensely if its plans to expand trade and cooperation with Iran fructify. This has the potential for reducing cost of transportation, increase margins of companies, reduce costs and give India access to gas thereby speeding up the economic and trade cycle in India. If India’s plans to develop ports in Iran and build a transit route that combine sea and road to Europe through Iran and Central Asia materialise, it is estimated that they can halve the travel time for goods from India to Europe and reduce costs by 70%. They can take this alternative route without going through the longer Suez Canal or without passing through hostile Pakistan. This could also facilitate access to oil and gas in Central Asian countries like Turkmenistan and other CIS countries for India. 

An immediate consequence of these new, much larger ships is that they can increase the volume of goods transported while reducing the factor cost of goods transported. The expansion of the Suez and Panama canals means that larger ships can easily move through the expanded canals (though Valemax cannot go through the canal as yet). Together these changes along with other technology investments will shorten the cycle across the world – even in countries like India. Once the India-Iran-Europe Transit is ready, a 10 day reduction in time taken will make a big difference in the cost of goods and services. An important unanswered question that only time answer is if there is sufficient demand to absorb such a huge capacity addition and the impact of a shortened economic cycle. It has been pointed out that the Suez expansion comes at time when traffic is declining (down from a daily average of 58.5 ships in 2008 to the present 48). These doubts arise largely because of the consequence of the global credit crisis, slowing of China and the problems in Europe. One thing that we can rest assured is that shipping companies in the future will prefer large ships in order to reduce costs and protect their margins in a world economy that is rapidly slowing down. 

If India has to take advantage of the changes that are underway in the global economy, India needs to rapidly upgrade its infrastructure. These include speeding up the building of inland waterways, coastal shipping, ports, airports that cater to freight, road network, etc. If India cannot do so, there is a risk that Indian manufacturers will not be competitive in the global market place. On the positive side, the government has announced its intention to invest in Inland Water Transportation (IWT). Any success with IWT can decisively alter the Indian economy from a structurally high cost one to a low cost economy since IWT can facilitate transfer at least 10 times the quantity of goods fraction of the cost. In the past, it was estimated that the cost of inland transportation costs Rs.0.40 per tonne per kilometre while the cost of transportation by Rail is Rs.0.50 and by road nearly Rs.0.90. However, the global logistics boom and IWT can be a double edged sword, especially in a country like India. Unless the governments are prepared and prepare the people, the coming changes can revolutionise and wreck havoc on the present transportation sector, especially in the lorry sector. An example best illustrates this: the vessels that are proposed to transport goods on the Krishna River from Vijayawada to Kakinada are expected to carry 100 tonnes initially and later upto 1000 tonnes. In contrast the maximum possible transportation by a lorry is about 30-40 tonnes. That in turn will have huge repercussions on employment and nature of transportation. In short, the Indian logistics sector has to completely rework its business model – something that it has to prepare from today rather than wait for the last minute. These changes will invariably have major change in the employment scenario. It is unlikely that IWT vessels will need so many people directly. Instead it will require a large part of the workforce to be redeployed (like for loading/unloading, etc). Hence, different parts of the transportation value chain require different kinds of skills - which cannot be learnt in one day. They have to be acquired gradually. Hence, the best time to start preparations for the future on the part of Government and businesses is today. 

This does not mean that India benefits automatically. We have to build larger ports which can dock and unload goods quickly. The average turnaround time for a standard container vessel in Hong Kong, Singapore and most of the ports in China is 10 hours or maximum of 12 hours. In contrast, in India it varies from 3-4 days. There is a need for India to build larger ports that can allow large vessels to dock in the country and to load/unload commodities and containers. Otherwise these large ships will simply avoid India and we will miss an opportunity to change the fundamental nature of our economy - from a structurally high cost one to a low cost one. More importantly, we need to link these port cities to our hinterland using IWT. Development of coastal shipping may actually help. Example: if a huge carrier can dock in Vizag then using coastal shipping can help transfer goods from Vizag to Kakinada then transfer them inland using IWT. Since tens of lakhs of tonnes of goods will move through large vessels the cost for these commodities can fall dramatically. 

Thus, if India cannot take advantage of the major structural change that is likely to come about in global logistics and transportation sector in the next decade, it will be yet another lost opportunity. Importantly, taking advantage of these changes will mean a complete structural transformation of India from a high cost economy to a low cost economy.

(A shorter version of this was Published in the Telugu Daily, Eenadu on 14 August 2015, p.4)