“Special freight corridors favor railroads for freight traffic”

The forthcoming Dedicated Freight Corridors (DFCs) are expected to shift the modal mix of freight transport in favor of rail as higher operating costs limit the road sector’s growth prospects.

A report by Motilal Oswal Investment Services states that the proportion of freight transport is shifting from road to rail, with the phasing in of DTCs. The National Railway Plan (NRP) expects the share of rail freight transport to increase from around 18 percent in 2020 to 40 percent by 2031.

Higher cost

The brokerage firm attributes the high costs of road operations, including sharp increases in fuel prices, to the emergence of rail as a more efficient mode of transport.

For example, diesel prices in Mumbai have gone from £75 to ₹95 in the last four years. Along with an increase in insurance fees, the competitiveness of roads will decrease, the report says.

In addition, the introduction of BS-VI and an increase in the price of steel and other raw materials have pushed up truck prices. The average cost of a medium and heavy commercial vehicle (MHCV) has registered a CAGR of 6 percent to 23 lakh in December 2022, up from 17 lakh in FY18, she added.

The brokerage firm pointed out that volumes of key commodities are shifting to rail. For example, the average domestic container volume carried by Indian Railways has increased on a monthly basis from around 1t in FY20 to 1.5 million tonnes (MT) in FY2022.

In addition, Container Corporation of India (CONCOR) announced that it transported nearly 50,000 tons of cement in special tank containers by rail during nine months in FY23. With DFC fully operational, it is expected that several other goods will be shifted from road to rail.

Increasing demand for freight services

The brokerage firm said demand has been strong from manufacturing (led by the Make in India campaign), retail, automotive and pharmaceuticals. Favorable government measures such as the Production-Linked Incentive Scheme (PLI) and Atmanirbhar Bharat are expected to further fuel the growth of the sector.

“Industry preferences are shifting from siled offerings like transportation or warehousing to integrated supply chain services and other sophisticated solutions like inventory optimization and data analytics,” it added.

The high growth of e-commerce in India and the demand for special online delivery requirements (faster delivery, returns management and cash on delivery) are expected to continue in the future, it noted.

Street still king

Although road transport is losing its market share to the railways, it will continue to dominate the movement of goods across India with a share of around 60 percent by 2031 (currently around 70 percent of goods traffic is by road), the report says.

“While roads would lose shares in railroads at the overall level, the sector would see a sharp shift from the unorganized segment to the organized segment with the introduction of reforms such as GST, E-Way Bill and e-Invoicing,” it added.

“Even when operating costs increase (due to fuel/tolls/insurance/compliance etc.), disorganized players struggle to compete with organized players. We expect that the proportion of organized actors in road freight transport will increase to 20 to 25 percent in the medium to long term (currently around 10 percent),” the report says.

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