India is the market with maximum growth potential in the logistics segment among emerging economies, says Agility Emerging Markets Logistics Survey. Last year, China had the top position in the same survey.

Agility is a $4.3 billion logistics company, with 22,000 employees, and is public traded in Kuwait and Dubai.

Based on inputs from 800 executives in the supply chain and logistics sector, the survey refers to goods and services tax as a “darling” in the Indian context. According to the survey, India was the leading pick as an investment destination, an indication of the enthusiasm generated by some of the reforms undertaken by the Modi government.

“Looking into 2017, however, there is uncertainty as a result of the government’s surprise decision in November to take ₹500 and ₹1,000 bank notes out of circulation. That move will undoubtedly be jarring in the immediate term for a society where use of mobile payments, credit cards and other cashless forms of payment is not widespread,” Agility said.

The decision is already causing pain and likely will cause more through 2017, the report said, adding that India is a cash-based consumer economy, and people are going to spend less until they understand what’s going on and gain some level of comfort.

“We’re seeing some of our logistics customers shutting down production for days at a time and calling it ‘annual maintenance.’ The reality is that they’re trying to reduce inventory. We’re seeing trucks stranded and drivers who can’t afford to buy tea or food while they’re idle,” it added.

In sector terms, the survey says “Pharma is one of the brightest spots in the Indian economy. Western life sciences companies are increasingly buying from India, and high-quality Indian generic makers continue to grow exports. India’s pharma exports are expected to grow more than 60 per cent in 2017.”

Companies will have to re-gear themselves to adjust to GST, it said, adding that those with flexible, strong systems have an inherent advantage. Today, if a logistics company is slow to invoice, customers don’t mind because it gives them more time to pay, it said, adding that after GST, quick billing will be essential to customers so that they can claim their GST input credit.

The sustainability of investments is under scrutiny, however, as the recent growth seen in India has been largely funded by the public sector, with private sector investment described as “listless” by the Asian Development Bank.

Outside of reforms, India’s ability to raise the spending power of its vast population and to develop the skills and productivity of its workforce will be a determinant of how successful the transition is.

On downside risks, Agility stated that skills are in short supply, and in 2015, a staggering 90 per cent of India’s workforce were employed in the informal sector. Perhaps most significantly, while economic growth of 8 per cent is the envy of many, India requires double-digit growth to create enough jobs to support the millions joining the workforce each year, it added.

Another country with huge potential is Iran, which has re-emerged in the global economy and looks set to provide significant opportunities to the logistics sector over the next few years.

The Agility Emerging Markets Logistics Index uses three metrics to assess and rank 45 emerging markets. The metrics measure the countries’ market size and growth attractiveness, market compatibility and market connectedness.