Global Supply chain and India- Explained Pointwise

There are arguments in favour as well as against greater integration of the domestic economy with Global Supply Chains. Some believe that higher global integration exposes a country to global volatility, which will negatively impact the economic growth of the country. Others believe that the positive impacts of being more integrated with the world outweighs & is longer lasting than the negative impacts of being exposed to global shocks.
India is generally considered as an inward-looking economy, however, India has shown a varying trend over the years when it comes to integration with the world.
2000-2010→ Period of rising global integration→ Resulting in higher share of global exports & higher GDP growth rate.
2010-2020→ Period of rising protectionism→ Fall in India’s global export share & GDP growth rate.

What are Global Supply Chains? What has been the history of its Evolution?

Global Supply Chains: Global supply chains represent the different stages of production of a product or service, which takes place in different regions of the globe. These supply chains dictate the regions for undertaking design, assembly, or production. The supply chain model has dominated industrial production since the 1980s.

Evolution of Design of Global Supply Chains:
1. From the 1980s to the 2010s, during the height of globalization, supply chains were designed for maximum efficiency (just in time). The products were assembled globally based on cost.
2. With the onset of Pandemic and the national security concerns, the priorities have changed from efficiency (just in time) to resilience (just in case) and security (just to be secure).

New Approach towards design of new Global Supply Chains:
1. Just to be Secure Approach: The “just to be secure” approach should be applied to high-risk sectors like communications and critical infrastructure. It can be done through measures such as audits, inspections, and adherence to security standards.
2. Zero Trust Approach: A “zero trust” approach which assumes that all products are compromised should be used for the most sensitive technologies like military and advanced research. This should be done through strict verification during procurement and continuous monitoring.
3. Just in Case Approach: A “just in case” approach should be applied for less critical technologies. The focus should be on diversifying suppliers and friendshoring to address vulnerabilities.

What are the reasons for the Shift in the Global Supply chains from China?

1. Rising Labour Costs: The significant increase in China’s labour costs has made it less attractive for labor-intensive industries like textiles. Countries such as Vietnam, India, and Bangladesh offer the advantage of lower wage rates to companies. This has prompted companies to relocate production away from China in these regions.

2. Supply Chain Resilience: The COVID-19 pandemic exposed vulnerabilities in global supply chain’s heavy dependence on China. Many firms are adopting strategies like nearshoring and reshoring to enhance resilience against these supply chain disruptions.

3. Geopolitical Tensions: The U.S.-China trade war, tariff hikes imposed on Chinese goods have led to the increased flight of firms from China. For ex- Countries like Mexico have surpassed China as the top trading partner for the U.S. in recent years.

4. Strategic Realignments: The formation of new trade alliances and partnerships such as SCRI (Supply Chain Resilience Initiative) and IPEF (Indo-Pacific Economic Framework) serve as alternatives to Chinese dominance of Global Supply Chains.

5. Regulatory Challenges: The growing apprehension about stricter oversight and rules for foreign companies in China, has also led to the shift of firms of global value chains from China.

Why is India being seen as an alternative to China?

1. Large Domestic Market: India’s vast consumer base (approximately 1.3 billion people) presents significant opportunities in sectors like electronics and textiles.

2. Government Initiatives: The launch of Production-Linked Incentive (PLI) scheme, which offers tax breaks and subsidies to foreign firms, has also helped in shifting production base from China to India.

3. Improved Infrastructure: Investments in infrastructure, such as the development of new ports and logistics facilities, have enhanced India’s competitiveness in GVC. For ex- Development of $900 million container port in Kerala which is expected to significantly improve product delivery times.

4. Trade Agreements: India’s fresh push towards more comprehensive FTA 2.0 like the India-UAE CEPA, India-Australia CEPA and India-EFTA FTA has helped in attracting greater FDI in India as part of the Global Value Chain investment.

5. Service Sector Growth: India’s excellent growth in IT, back-office work, financial services, and logistics, has been propelling investor’s to look at India as part of their China+1 strategy.

What are the examples of rise of India in the GVC?

What should be the way forward for India?

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

2. Trade Liberalization: Trade liberalisation measures, such as increase in the FDI limits for different sectors, will help in enhancing India’s profile in Global Value Chains (GVCs).

3. Modern Special Economic Zones: Modern SEZs in PPP mode should be set up to enhance the business environment.

4. Domestic Technological Investment: India should invest in domestic technology to meet international standards in price, quality, and delivery.

5. Skill development: India must invest in tertiary-level education, like STEM fields, for a skilled workforce.

Conclusion:
The potential US tariffs (‘Trump Tariffs’) are creating ground for external reforms such as lowering of import tariffs levied by India on others, fast-tracking of trade deals etc, if some domestic reforms are also pursued, side by side, such as, deregulation by government, then it can lead to improve in the ease of doing business. Such reforms will not only lead to greater integration of Indian economy into Global Supply Chains, but also become its important node.