Expert Explains: With the announced India-Europe Economic Corridor, a look at India’s supply chain opportunity

Source: The post is based on the article “Expert Explains: With the announced India-Europe Economic Corridor, a look at India’s supply chain opportunity” published in “Indian express” on 14th September 2023.

Syllabus: GS2- International relation- Effect of policies and politics of developed and developing countries on India’s interests. & GS3- Economy- Effects of liberalisation on the economy, changes in industrial policy and their effects on industrial growth.

News: The article talks about global supply chains moving away from China and how India could become a significant hub. It mentions India’s strengths, like its growing manufacturing and service sectors, and offers ideas for India to seize this chance. The article also stresses India’s role in fostering growth in South Asia.

What are supply chains?

Supply chains represent the different stages of producing a product or service.

They dictate where each production stage, like design or assembly, happens.

The model has dominated industrial production since the 1980s.

Historically, the shift from local supply to global supply has taken about 100 years. Examples of industries with supply chains include:

Textiles: Like clothing production.

Food processing: Making packaged foods.

Complex industries: Such as cars, electronics, and pharmaceuticals.

In essence, supply chains describe the journey a product takes from its initial concept to reaching the consumer, determining where each part of that journey is most cost-effective.

Why are companies leaving China?

Economic Reasons:

Rising Wages: Costs in China are increasing, especially in labor-intensive stages of production.

Supply Chain Bottlenecks: Companies are experiencing operational issues, impacting their efficiency.

For economic: Exports from China and Hong Kong dropped by 15% and 27% respectively in the last quarter of 2022.

Regulatory Challenges:

Tighter Regulation: There’s growing apprehension about stricter oversight and rules for foreign companies in China.

Geopolitical Tensions:

Trade War: The ongoing conflict between the US and China is causing uncertainties for multinational firms.

Why is India seen as a new hub?

Manufacturing Advancements:

Tech Transfers & Manufacturing: iPhones are now being produced in India, and there was an early technology transfer for the advanced Mercedes Benz EQS.

Growing Industries: Foxconn is setting up a chip-making fabrication plant in Gujarat, and sectors like automotives and pharmaceuticals are flourishing.

Attractiveness to Foreign Investors:

WTO Rankings: By the end of 2022, the WTO listed India as the fifth largest importer of intermediate goods with a 5% share.

Trade Agreements: New trade deals, like the UAE-India partnership and ongoing negotiations with the UK and EU, indicate deep economic integration.

Service Sector Growth:

Diverse Services: India excels in IT, back-office work, financial services, and logistics.

Considering these factors, India is gaining attention as a key center in global supply chains.

What should India’s strategy be?

Promotion of FDI:

Export-Oriented Approach: India should promote export-oriented foreign direct investment to effectively join global supply chains.

Trade Liberalization: There’s a need for trade liberalization, especially with an emphasis on facilitating FDI in manufacturing.

Modern Special Economic Zones: As public-private partnerships, these zones would enhance the business environment.

Empower Local Companies:

Big Company Advantages: Large companies have the advantage in supply chains due to scale and technology access.

Support SMEs: Small and mid-sized enterprises should work as suppliers or subcontractors to these large firms.

Domestic Technological Investment: Invest in domestic technology to meet international standards in price, quality, and delivery.

Learning from China’s Experience:

Selective Adoption: While some aspects of China’s industrial policy may be relevant, India must avoid wholesale copying to sidestep risks of government failure and cronyism.

Education Focus: Upstream investment in tertiary-level education, especially in STEM fields, is crucial.

By adopting these strategies, India can position itself as a dominant force in global supply chains.