In transit inventory reduction by improving rail and road infrastructure in India

Abstract

1. Why did I decide to examine the issue? The economy of India is at the forefront of a huge growth opportunity. However, as stated by the central bankers and some of the principal economists of the country, the rising inflation is to a great extent attributable to supply side issues prevalent in the logistical infrastructure of the country. In this context, it is therefore important to analyze the impact of faster freight movement services on the rail and road infrastructure. A small yet critical chunk of the savings will come from inventory reduction in transit and the accrual of notional interest income on the reduced inventory. 2. What were the objectives? The following steps in the analysis embody the objective of each computation. Choosing the commodities for analysis *Determining rail-based volumes *Determining road-based volumes *Determining the commodity prices *Determining the travel distance for each commodity *Determining the travel average travel speed for both modes *Determining the improvement in travel speed for both modes *Determining savings in Transit Inventory with potential increase in travel speeds *Determining savings through notional interest income on the reduced inventory 3. What did the study reveal?By improving the mean speeds of rail and road network by 60% and 100% respectively, the expected one time savings will be INR 900 Cr through reduction in the system inventory in transit. Additional INR 1150 Cr worth savings can be accrued over 10 years through notional interest income on the reduced in-transit inventory. 4. What are the recommendations? The internal rate of return of India’s foremost dedicated rail corridor project between Mumbai and Delhi is only 4.8%. Moreover, the savings in transit inventory too form a small proportion of the proposed investment by the GoI. Hence, it is advisable to adopt a cautionary outlook towards the pilot projects and improve the rate of return in the future ones by taking learning and cues from the execution of the Delhi Mumbai DFC, expected to operational in 2017.