How to make in India–and protect economy from supply shocks

Source: The post is based on an article “How to make in India and protect economy from supply shocks” published in the Live Mint on 29^th August 2022.

Syllabus: GS 3 Issues and Challenges pertaining to growth and development of the Indian Economy.

Relevance: Global Supply Chain Disruption; Extern Sector; Atma Nirbhar Bharat

News: In the last few weeks, there has been a global decline in commodity prices. Such a trend of decline in India’s domestic inflation rates was also seen. In India, the Wholesale Price Index has fallen from a peak of 16.6% in May to 13.9% in July 2022.

Background

Globally, inflation had reached levels not seen in decades. Initially, it was due to a boom in demand during the Covid-19 pandemic as well as global supply chain disruption due to lockdowns. Later, it was due to the Ukraine war, and the consequent rise in prices of oil and food grains.

What are the challenges?

The global supply chain disruption remains an important challenge in the future ahead. For example, according to IHS Markit, the global semiconductor industry is facing acute supply shortages. The shortage in semiconductors is at six times high. This shortage can have multiplier effects on other sectors like automobile companies.

What are the causes of supply chain disruption during the Covid and the Ukraine War?

Backward, forward linkages: Now, the global production of goods works in ‘fragment due to falling transport costs, information technology improvements and falling barriers to global trade. This fragmentation is part of the global value chains (GVCs). For example, the developed west has done ‘off-shoring’ of production to countries such as China, Vietnam and India, having lower labour costs.

This changed the dynamics of how the trade worked. Therefore, a shutdown in one country will disrupt production in another country and supply in another country.

Case of India’s participation in the global value chain and vulnerability

Export Pattern: Since the 1990s, India’s trading pattern shows a pattern common to emerging markets. In its export basket, the share of finished consumer goods has risen by about five percentage points, while the share of intermediate goods and raw materials has fallen.

Import Pattern: India is importing more intermediate goods than before. This shows that the bulk of its processing happens somewhere along the middle of the value chain, rather than at the beginning, or towards the tail end where assembly happens.

This means India is affected by shocks to the global value chain for a product, and this can affect production in countries further up the value chain. Therefore, India is prone to global supply chain shocks.

What should be done?

Make India less vulnerable to ‘global supply shocks: India should carry out reforms to immune itself from the problems present in the underlying structure of the global economy.

The government must focus on the idea of ‘reshoring’ key inputs like the Production Linked Incentive (PLI) scheme aimed at developing a domestic manufacturing base in a range of key sectors.

Prioritize sectors: These should be those sectors that are the most affected by the non-availability of critical imports and would impact the rest of the economy significantly. For example, basic metals, fabricated metals, chemicals and non-metallic minerals

Therefore, the focus must be on the inputs or critical inputs used in these sectors. Further, diversify existing imports of inputs among a number of countries to reduce vulnerability to external shocks.