India’s Supply Chain Opportunity

Context: 

The recent announcement of India-Middle East-Europe Economic Corridor (IMEC) has the potential to make India an Asian hub in global supply chains.

About Supply Chains:

• It is described as global production networks, production fragmentation, or global value chains — refers to the geographical location of stages of production (such as design, production, assembly, marketing, and service activities) in a cost-effective manner.
• Evolution of Supply Chains: Global supply chains emerged as the dominant model in industrial production around the 1980s.
  • This shift from local and regional to global supply chains occurred gradually over the last century.
• Scope: Supply chains are prevalent in both simple (e.g., textiles, food processing) and complex industries (e.g., automobiles, electronics, pharmaceuticals).

Factors Driving the Shift in Global Supply Chains Away from China:

• Rising Wages: China’s labor costs have been steadily increasing over the years, reducing its cost advantage as a manufacturing hub. 
• Supply Chain Bottlenecks: China’s rapid economic growth led to supply chain bottlenecks, particularly in transportation and logistics. 
• Regulatory Concerns: Foreign firms operating in China have faced increasing regulatory scrutiny. 
  • Recently, the Beijing office of Deloitte Touche Tohmatsu was fined 211.9 million yuan ($30.8 million) on charges that it failed to adequately audit state-owned China Huarong Asset Management Co.
• Trade War with the US: The trade tensions and tariffs resulting from the trade war between China and the United States have created uncertainties and risks for companies with supply chains heavily reliant on China.
  • In 2018, the Trump administration initiated a trade dispute with Beijing. This led to a series of actions, including the imposition of tariffs by the United States on over $300 billion worth of Chinese goods. In retaliation, China imposed import levies on approximately $100 billion worth of American goods.
• Significant Export Declines: Mainland China and Hong Kong represent 20% of world exports of intermediate goods.
  • In the last quarter of 2022:
    • Exports from mainland China decreased by 15% year-on-year.
    • Hong Kong experienced a more substantial decline, with a 27% year-on-year drop in exports.
    • The United States, comprising 8.1% of world exports of intermediate goods, saw a 3% decline in shipments.
    • Japan, with a 4% share, faced a 13% decrease in exports.

India’s Emergence as an Attractive Supply Chain Hub:

• Competitive Factors:
  • Lower Costs in Southeast Asia: India, like Southeast Asian countries, offers cost advantages to foreign companies, including cheap labor and fiscal incentives.
  • Potential Complement to China: India can complement China as a manufacturing hub, benefiting from technology transfers and creating value-added jobs.
  • Sophisticated Manufacturing Sectors: India’s automotive, pharmaceutical, and electronics assembly sectors are already advanced, positioning them as potential winners in the global supply chain landscape.
    • This is seen in the ramped-up manufacturing of iPhones in the country, early technology transfer in the product cycle of the technologically advanced Mercedes Benz EQS to India, and Foxconn Technology Group developing a chip-making fabrication plant in Gujarat. 

• Global Perspective:
  • Shifting Perception: India’s ranking as the fifth-largest importer of intermediate goods in 2022 Q4 suggests a changing perception of its supply chain potential.
  • Export Growth Potential: India has the potential to double its 1.5% share of world exports of intermediate goods, indicating its growing role in global supply chains.
    • The countries ahead of India are China (23.4%), the US (16.2%), Germany (9.1%), and Hong Kong (6.0%).
  • Service Sector Opportunities: India’s service sector, including IT, back-office operations, financial services, and logistics, holds growth potential.
• Trade Policy Initiatives:
  • Bilateral Trade Deals: The Indian government’s emphasis on preferential trade through bilateral agreements with partners like the UAE and Australia.
    • The UAE-India Comprehensive Economic Partnership Agreement entered into force in May 2022.
    • Australia-India free trade agreement (FTA), and talks are ongoing to conclude the full FTA by the end of 2023.
    • Negotiations for a UK-India and EU-India FTA are in process.

Benefits for South Asia:

• Regional Stability and Economic Growth: As the focus on China+1 increases, India has a historic opportunity to promote industrialisation in South Asia, which would stabilise the region, increase jobs, and make it less vulnerable to Chinese enticements.
• Spillover Effects: Market-led spillovers from India’s supply chains can naturally benefit neighboring countries like Bangladesh and Sri Lanka, leading to job creation and economic growth.
• Entrepreneurship and Innovation: Leveraging India’s dynamic start-up culture and fintech capacity can attract young entrepreneurs from other South Asian nations, fostering innovation and entrepreneurship.

Challenges in Integrating India into Global Value Chains:

• Domestic Policy Challenges: Enterprises in India grapple with complex tax policies and procedures. The substandard quality of infrastructure poses significant obstacles.
  • Uncertainty in trade policy adds to the challenges of scaling up production in the country.
• Quality and Institutional Support: Indian firms struggle to meet international quality standards. They often lack the necessary institutional support.
  • Inadequate access to essential information further hinders their integration into Global Value Chains (GVCs).
• High Logistics Costs: High logistics costs in India, accounting for around 13-14% of GDP, are impacting its competitiveness adversely compared to developed nations where logistics costs are lower (8-10% of GDP).

Strategies for India’s Future in Supply Chains: Learn from China’s experience

• Promotion of Export-Oriented FDI:
  • Maintain an open-door policy for foreign direct investment (FDI) in manufacturing.
  • Offer competitive fiscal incentives and create modern special economic zones through public-private partnerships.
  • Simplify business processes through digitalization of tax, customs, and administration.
  • Pursue high-quality free trade agreements to facilitate global trade.
• Smart Business Strategies for Local Companies:
  • Small and mid-sized enterprises should act as industrial suppliers and subcontractors to larger exporters.
  • Consider business strategies such as mergers, acquisitions, and alliances with multinationals and large local companies.
  • Invest in domestic technological capabilities to meet international standards in terms of price, quality, and delivery.
• Caution in State Intervention:
  • Exercise caution when replicating China’s state interventionist model, as it carries the risk of government failure and cronyism.
  • Engage with think tanks to gain insights into effective policies and practices.
  • Focus on targeted interventions in new industrial activities with comparative advantages.
  • Improve coordination between central and state governments.
• Investment in Education:
  • Invest in tertiary-level education, particularly in science, technology, engineering, and mathematics (STEM) fields to enhance the skill base.
• Policy Initiatives for South Asia: The Indian government should consider two policy initiatives to promote regional supply chains.
  • Make in South Asia Programme: Expand the “Make in India” initiative to a “Make in South Asia” program. 
    • Offer fiscal incentives to Indian manufacturers to expand into Bangladesh and Sri Lanka, focusing on industries like food processing, textiles, apparel, and automotive.
  • Comprehensive FTAs: Establish comprehensive bilateral Free Trade Agreements (FTAs) with Bangladesh and upgrade the Indo-Sri Lanka FTA.
  • Strengthen regional rules-based trade and investment to integrate these countries into supply chain activities centered on India.

Conclusion:

• Unless India creates channels for South Asia, it has no offer for the Global South. The fresh supply chains opening up with the US are a good place for India to start its global integration journey, Neighborhood First.

News Source: The Indian Express

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