Transport Freight Rates Outpace Diesel Price Hike

Transport Freight Rates Outpace Diesel Price Hike

An IFTRT Report

5th June 2008 onwards, truck rentals and general cargo freight rates have shot up far more than weighted impact of diesel price hike on goods transportation cost, as truckers, transport firms, goods booking agents, logistic companies and packers and movers make hay by exploiting the market and flaring up the runaway inflation - an IFTRT status report.

Price Hike: Ever since April 2008 when the international crude oil prices touched $135 per barrel, the writing on wall was clear that petroleum product prices shall be revised upward at any point of time in coming days. The Government of India got down to serious thinking to work out a package of measures to soften the likely impact of price hike on the common man. Consequently, against the call of domestic oil companies to jack up the petrol price by Rs.10/- per ltr and diesel by Rs. 5/- per Itr, on 4th June 2008, the Government permitted the oil companies to increase the fuel prices by Rs. 5/- per Itr for petrol and Rs. 3/- per Itr for diesel w.e.f. 5th June 2008.

Apex Transport Association: Within an hour of the Government announcement to increase the fuel price, the road transport operators and their apex organizations got into the act to convey to the media on 4th June 2008 that the cargo freight rates stood increased by 10% - 15% and that truck rental/truck hire charges would go up by 8% - 10% on the back of Rs. 3/- per Itr hike in diesel price. Next day, the print media carried the news items across the country quoting spokesperson(s) of All India Motor Transport Congress (AIMTC), national body of goods booking firms, which claims to be controlling over 40 lakh trucks in the country, that freight charges shall go up nearly by 15%. In a separate statement, AIMTC President, while speaking to TV news channels and print media, said that truck rentals would go up by 8% - 10%.

Truckers' Unions/ Transport Associations: Next couple of days, their affiliated truck unions in Punjab, Himachal Pradesh, Haryana, Western Uttar Pradesh, Rajasthan, Gujarat, Bihar, Orissa, Andhra Pradesh etc. followed the suit and jacked up truck rentals by 8% - 10% for different routes/destinations. Similarly, the Goods Transport Associations representing Goods Booking Agents in most of the States ensured that the retail parcel and general cargo rates were revised upward by 10% - 15% in the prominent trading centres in various States. These announcements have widely been reported in the State level language newspapers.

Transport/Logistic Companies: Not lagging behind, the individual logistic / transport companies came up with their announcement about increase in retail cargo booking rates by around 10%, citing the steep increase in diesel price announced by the oil companies w.e.f. 5th June 2008. Leading transport / logistic companies-Safexpress, Gati Ltd, DRS Ltd - have come out with individual plan to revise their freight rates to be applicable from retrospective effect and have virtually made identical statements saying "Our rates are customized according to the contracts that we had with our corporate clients” Safexpress Limited has gone ahead and stated that "These kinds of highs and lows are part and parcel of the business. The production of goods will have to match the consumption demand at the consumer end. Therefore, the movement of goods will have to continue”. This implies that the consumer has no choice but to accept the revised freight rates.

Diesel price hike and its weighted impact: In the background of truck rentals having been jacked up by 8%-10% in various parts of the country and the truck hiring firms i.e. good 3 booking companies / agents having raised retail parcel and general cargo freight rates by 10% - 15% since the diesel price hike, IFTRT has tried to examine the weighted impact of diesel price hike on truck owners cargo booking firms / agents, logistic companies, packers and movers and on large corporates & manufacturers as well as small & medium enterprises / wholesalers / traders in transportation cost. IFTRT has also attempted to analyze how, in the bargain, the common man is impacted.

Most of the State Governments having reduced the local sales tax on diesel in order to moderate the impact, the diesel price increase, In an average, for an inter-state trucker works out to Rs. 2/- per Itr as against the hike of Rs. 3/- per Itr announced on 4th June 2008.

Truck Rental: As a consequence of effective diesel price hike of Rs. 2 - per Itr, the truck rentals should have gone up by 3% - 3.5% on the Inter-State trunk routes. However, the truck rentals have been revised upward b) 8% - 10% in various transport centres by Truck Unions. The following table gives the truck rental movement between 3rd June 2008 and 11th June 2008.

Truck (16.2 Ton GVW) Rentals (Rs. per round trip): 3rd Jun'08 to 11th Jun'08

Trunk Route	Rental Movement (per Round Trip) Weighted 3.35% increase in relation to diesel price hike		Rental Movement (per Round Trip) Impacted by 8-10% increase under the cover of diesel price hike		Disproportion- ate increase contrary to Rs. 2/-per ltr avg diesel price hike
Trunk Route	Justified Rental		Prevailing Rental		Unjustified Increase (A minus B)
Round Trip/ 9-ton payload	X Rental 3rd Jun'08	B Rental 11th Jun'08	Y Rental 3rd Jun'08	A Rental 11th Jun'08	C (Rs.)
Delhi-Mumbai-Delhi	38700	40000	38700	41800	1800
Delhi-Nagpur-Delhi	38100	39400	38100	41200	1800
Delhi-Kolkata-Delhi	41000	42400	41000	44300	1900
Delhi-Guwahati-Delhi	81300	84000	81300	87800	3800
Delhi-Hyderabad-Delhi	52900	54700	52900	58100	3400
Delhi-Chennai-Delhi	69000	71300	69000	75800	4500
Delhi-Bangalore-Delhi	56600	58500	56600	62200	3700
Delhi-Ranchi-Delhi	40000	41400	40000	44000	2600
Delhi-Raipur-Delhi	36500	37700	36500	40100	2400
Delhi-Kandla-Delhi	25600	26500	25600	28200	1700
Delhi-Bilaspur-Delhi	36300	37500	36300	40000	2500

It is clear from the above table that there has been opportunistic and unjustified increase in the range of Rs. 1,700 - Rs. 4,500 on different trunk routes by the truckers.

Goods Booking Agencies/Logistic Firms/Packers and Movers: These service providers are transport intermediaries / common carriers having direct nexus with the consignors / manufacturers / traders for booking and delivery of cargo. These Goods Booking Agencies / Logistic Firms / Packers and Movers outsource 90% of their requirement of truck fleet from small truck operators, who do not have any nexus with consignor. These service providers (transport intermediaries / common carriers) are engaged in goods booking services, cargo handling services, storage and warehousing services to the service receivers (consignors / manufacturers / traders). Hence, transport intermediaries not only control the national truck fleet but also enjoy very strong pricing power for general class of consignors i.e. small and medium enterprises, wholesalers, distributors and unorganized small retailers. On the other hand, the big corporate consignors enter into contractual arrangement for cargo movement with the common carriers by incorporating 'escalation clause' in their annual freight rate agreement to accommodate pro-rata impact of increase in fuel expense in the total transport cost. The corporate consignors normally provide 25% - 30% of the cargo to the common carriers. Remaining 70% - 75% cargo booked and delivered originate from other categories of consignors, who are dependent upon the powerful group of transport intermediaries and their associations for the freight rates, which, at times, may not reflect the actual costing.

It cannot be ignored that these categories of transport intermediaries are not direct consume of diesel fuel but in turn hire / out source their truck fleet requirement from the market, mostly, on daily basis. Hen ;e, entire truck rental is part of transportation cost as one of their inputs for the gross freight charges which include goods booking charges, cargo handling charges, storage & warehousing charges. Transportation cost ranges 40% to 60% of their gross revenue, as indicated in the consignment note issued to the consignor / consignee for delivery of cargo.

Therefore, the weighted impact of increased truck rental on the goods / cargo booked by goods booking agencies, logistics firms and packers & movers varies between 1% 1.5% to 2% if the truck rentals shall be paid as per the justified increase corresponding to the diesel price hike. However, in the present case, since the truck rentals have gone up by 8-10%, the impact could be 1.75%, 2.5% to 2.75%. Unfortunately, 10 - 15% increase in freight charges effected by transport intermediaries is almost 5 times the actual increase in truck rentals. Hence, the diesel price hike has come handy for some of the people in road transport sector to make disproportionate gains, moderation in price hike by way of reduction in sales tax on diesel by most of the State Governments notwithstanding.

Manufacturers/Wholesalers/Traders: In last two months (April, May 2008), the manufacturers, by and large, had jacked up the prices of their items citing the steep increase in prices of various inputs and raw materials used by them. In addition to this, in April 2008 itself, the international crude oil price shot up to an all-time high of $135 per barrel, which made the increase in petroleum product prices including diesel price inevitable. The big transport contractors and their corporate clients had been wise enough to factor in the anticipated increase in transportation cost due to imminent increase in diesel price, which was generally expected to be Rs. 2/- per Itr. Hence, there may not be a quantum jump in the prices of manufactured products.

As mentioned earlier, 70% - 75% cargo is generated by the small and medium scale manufacturers, wholesalers and general class of traders in the country and they have very little bargaining power vis-à-vis the powerful transport intermediaries. Therefore, such class of manufacturers and traders are hit hardest by 10% - 15% increase in transport cost, which will go into their costing and pricing. Manufacturers/traders of FMCG, hosiery items, stationery items, cereals, fruits & vegetables etc. will have to bear extra transport cost burden of at least 4% - 5%. The manufacturers / dealers of white goods, electronic goods, two wheelers, car makers, etc. too may end up incorporating 4% - 5% more as a result of hike in transportation cost effected by common carriers.

On the other hand, the consignors of high density cargo (cement, fertilizer, timber, paper, petrochemical, steel etc.) will bear 1 % - 1.5% increase in their transportation cost, as these business majors operate on contractual transportation agreements with the transport contractors.

Conclusion:

The fears of diesel price hike fueling inflation have come true with transporters deciding to increase freight rates by 10-15%. On top of it, these transport operators have threatened to go on a nationwide agitation blaming fuel price hike on the Government. The intention seems to be to sell the freight rate increase to the tune of 10-15% to large majority of small and medium enterprise and traders, who provide 70% of the cargo, as justified and fair. It is to be seen how Government of India and State Governments combine their energies to tackle the situation unfolding in the coming days.

It may be recalled that the national body of transport operators in August, 2006, was warned with a 'Cease and Desist Order' by Monopolies and Restrictive Trade Practices Commission (MRTPC), in response to a complaint filed by a consignor in October 1999. The transport operators, association had then issued a fiat to its constituents to increase the freight rates by minimum 18% in the aftermath of Rs. 2.50 per Itr hike in diesel price. Now, once again the history is repeating itself.

The Indian Foundation of Transport Research and Training (IFTRT), is an autonomous body engaged in research and analysis in the field of transportation and automotive sector. IFTRT has been monitoring the truck rentals trends, growth of road freight & rail freight and impact of these developments on the sales of commercial vehicles in India.