By Vrashabh Kapate
Executive Summary
India relies heavily on imports to meet some of its vital needs such as medical devices. During the COVID-19 crisis, there was a need for India to import critical goods like Personal Protective Equipment (PPE) and ventilators from China[i]. The supply shock caused by the pandemic in many sectors served as a timely reminder to trace how products reach Indian markets and insulate supply chains to ensure there is no threat to the economic security of the country. This memo looks at policy alternatives to achieve that and recommends two steps: building safety stock and boosting domestic production. These interventions will address gaps in both the short and long term by building on existing policies of the government.
The Strengths and Vulnerabilities of Global Supply Chains
A global supply chain exploits the concept of comparative advantage – a country produces goods that it is efficient at producing, and outsources cost-ineffective activities. The international community, including India, has taken advantage of and benefited from an increased reliance on global supply chains[ii].
India has a thriving global trade – in 2019 alone, India exported goods and services worth $323 billion while imports were worth $478 billion[iii]. India has a trade deficit of over $150 billion, a significant portion of which is India’s reliance on China for both raw materials and finished goods (totaling $68 billion). These products range from electrical machinery and appliances, electronic circuits, fertilizers, and active pharmaceutical ingredients for drugs[iv]. More importantly, India imports about 80 percent of its medical device requirement[v]. A trade deficit also puts negative pressure on the rupee, making imports more expensive and exports less valuable.
However, COVID-19 has exposed the vulnerability of such logistics networks, especially the reliance on imports of vital raw materials and finished goods from China[vi]. According to an Ernst & Young report, 72 percent of industries reported that the pandemic had a negative effect on them[vii]. All of the industrial sectors, namely automotive, chemical, textiles, manufacturing, cement and steel, were impacted. As we move past COVID-19 lockdowns and recovering from this shock alone, the conversation has shifted to making supply chains resilient to such disruptions[viii].
India’s Economic and Geopolitical Context
In the past, schemes like ‘Make In India’ focused on making products for the world and increasing the share of exports[ix].The campaign showed some potential. Under the scheme, 36,433 ventilators were produced in India, in 2020 alone (more than twice the number of ventilators that were present in the country before COVID-19)[x]. However, there has not been a lot of focus on import substitution. During the COVID crisis, the government had to remove import tariffs imposed on vital products and raw materials required to make PPE, ventilators, masks, and test kits[xi]. Apart from the revenue foregone, this has shed light on the dependence on imports for such essential goods and the threat to India’s well-being.
Dependence on China has put India in a weaker position as well. It has become particularly tricky when pushing back Chinese aggression in the Indian Ocean and the Himalayas. One such instance was year-long negotiations with the Corps Commander to de-escalate standoffs in Ladakh[xii]. Having robust domestic supply chains will help decouple the effect of trade on military actions.
Due to the economic and geopolitical uncertainties, COVID-19 has exposed the fragility of India’s supply chains, necessitating the need to reimagine the strategic architecture of India’s global supply chain with a focus on vital imports.
Proposed Interventions and Evaluation
The following interventions may mitigate the impact of global supply chain shocks on India’s economic security:
- Status Quo: By letting present trends continue, India would continue to have a trade deficit of ~$100 billion and will have to rely on other countries for importing vitals.
No changes to current policies are required and there are no anticipated cost implications or spillover effects
- Import Tariffs: Imposing import tariffs on select commodities will send a price signal to domestic manufacturers to prioritize the production of these goods.
Import tariffs are a way of signaling a country’s trade priorities. By imposing import tariffs on select commodities, the government could send a price signal to domestic manufacturers to produce these goods. This policy alternative will increase the ambition of domestic enterprises and create a competitive advantage by positioning them at a comparable price point to their foreign counterparts.
This policy will yield desired effects while also generating revenue that the government can further use to incentivize local companies. However, import tariffs are often perceived as a discriminatory and protectionist measure by other countries, creating potential for a trade war[xiii]. Such a move can also be challenged in international forums like the World Trade Organization (WTO).
- New Partnerships: India could reduce dependence on a few countries by promoting alternative trade ties and diversifying trade partners.
With about 40 percent of India’s imports coming from five countries, there is potential for India to diversify its import portfolio[xiv]. India can reduce dependence on a few select countries by promoting alternative trade ties with industrial hubs like South Korea and Japan. India can also take the lead on developing industrial corridors by working closely with countries like Vietnam, and Indonesia for low-tech manufacturing and with countries like Bangladesh, Myanmar, and Sri Lanka for labor-intensive manufacturing[xv]. Finally, India could also leverage existing platforms for engaging with consortiums like ASEAN. Ease of collaboration and proximity to other producer markets can increase productivity. Forging new partnerships would also lend India soft power in the region.
This policy option will reduce dependence on countries like China but still give India exposure to the global supply chain. However, the chances of China reacting strongly to such a move are high. They have already established themselves as the ‘big brother’ in the region through their ‘Belt and Road Initiative’ (BRI)[xvi]. Countries who are beneficiaries of the BRI may not participate fully in such partnerships, making it geopolitically less feasible.
- Safety Stock: India could build a buffer stock of key products in government-controlled inventories that can be leveraged in future crises.
One of the realizations of the breakdown of the global supply chain during COVID-19 was the importance of buffer inventory. On the back of its strong Public Distribution System (PDS), India was able to distribute essential grains and lentils stored as part of its buffer stock requirement to the needy[xvii]. However, these were limited to food essentials. By extending the list to other vital items (like strategic medical supplies) required in a long-term disaster like the pandemic, India could build a comprehensive inventory.
Though politically feasible, such a policy alternative would only be an effective intermediary measure. It would not eliminate undue dependence on external supply chains and insulate the country for economic insecurity. Instead, it would work as a tactical fix while other longer-term options are yet to show results.
By prioritizing resilience over efficiency, this policy would demand large amounts of capital – the government would have to pay for idle stock and storage, going against the notion of just-in-time inventory[xviii]. Materials may also become obsolete with time – either due to a reduction in effectiveness or due to changes in the manufacturing process where the stored commodity is no longer required.
- Domestic Production: This alternative would require India to boost domestic industries by providing incentives to locally produce critical goods.
One of the surest ways to remove economic insecurity is to become self-reliant. ‘Atma Nirbhar Bharat’ (Self Reliant India) launched by Prime Minister Modi is a great move in this direction and the Commerce and Industry Ministry should channel its efforts toward strengthening this initiative and making it a success[xix]. This can be done by expanding the scope of ‘Make in India’ and creating a focus on import substitution.
For India’s domestic industries to compete with the quality and cost of industrial powerhouses like China, the ‘Make In India’ program has to be augmented with a sharp focus on digital supply chain and automation. This can be achieved by linking it with the ‘Digital India’ campaign[xx]. The Ministry will also have to work in tandem with the Ministry of Micro, Small, and Medium Enterprises (MSME) to ensure last-mile delivery of policy interventions.
This policy would also have positive spillover effects through job-creation, which will lead to a healthier and more robust economy. It would also have long-term benefits as the outcome of a domestically reliant economy would shield the country from future risks such as acts of terrorism, trade wars, global tariff changes, etc. The Indian government would also have the flexibility to regulate the markets more closely, if required, to protect consumers.
While imposing import tariffs and creating new partnerships are effective solutions, they may not be politically feasible as both can have negative retaliatory repercussions. Domestic production is an effective solution and will get political support due to the positive co-benefits like job creation. However, industrial policies to promote industries will take many years to bear results. Therefore, it would be prudent to invest in building safety stock to avoid shocks in the short run.
Thinking about Long-Term Gains
In considering these alternatives, two important points need to be recognized. First, it will take a few years to move away from a globalized supply chain and the process will require intentional investments and aligning of policies like ‘Make In India’, ‘Digital India’, and ‘Atma Nirbhar Bharat’ to speed up the process. Second, the globalization of supply chains was a result of optimization (mostly from a cost and specialization perspective)[xxi]. Moving away from such an optimal logistical network will therefore be costly. It will require capital investment to start manufacturing units, and Research & Development to reach the level of expertise that India’s international peers have. Till the cost curve normalizes, end products will be costlier than their global counterparts and some subsidies may have to be given out to maintain the competitiveness.
Recommendation
Going forward, a two-pronged approach is recommended – building safety stock, and boosting domestic production capacity – with the objective of shielding India from future disruptions in global supply chains. Investing in building a safety stock as an intermediate measure can provide short-term resilience. Meanwhile, a robust focus to boost domestic production of vital goods through the ‘Atma Nirbhar Bharat’ scheme to create import substitution will create the desired long-term benefits along with providing economic security.
REFERENCES
[i] Rees, Victoria. 2020. “India To Import PPE From China In COVID-19 Fight, Says Report”. European Pharmaceutical Review, , 2020. https://www.europeanpharmaceuticalreview.com/news/116411/india-to-import-ppe-from-china-in-covid-19-fight-says-report/
[ii] Li, Elsa. 2015. “The Benefits Of Globalization On The Economy Of India”. Blog. Linkedin Pulse. https://www.linkedin.com/pulse/benefits-globalization-economy-india-elsa-li.
[iii] “India Trade”. 2019. Wits.Worldbank.Org. https://wits.worldbank.org/countrysnapshot/en/IND/textview.
[iv] Samsani, Sumanth. 2021. “India-China Economic Ties: Impact Of Galwan”. Blog. ORF Expert Speak. https://www.orfonline.org/expert-speak/india-china-economic-ties-impact-galwan/.
[v] Economic Times. 2020. “Govt Exempts Custom Duty, Cess On Ventilators, Surgical Masks, PPE, Covid-19 Test Kits”, , 2020. https://economictimes.indiatimes.com/news/politics-and-nation/govt-exempts-customs-duty-cess-on-ventilators-surgical-masks-ppe-covid-19-test-kits/articleshow/75072273.cms?from=mdr.
[vi] Pandey, Kundan. 2020. “COVID-19 Exposes India’S Dependence On China For Active Pharma Ingredients”. Downtoearth, , 2020. https://www.downtoearth.org.in/news/economy/covid-19-exposes-india-s-dependence-on-china-for-active-pharma-ingredients-70272.
[vii] Harapko, Sean. 2021. “How COVID-19 Impacted Supply Chains And What Comes Next”. Blog. Ernst & Young. https://www.ey.com/en_us/supply-chain/how-covid-19-impacted-supply-chains-and-what-comes-next.
[viii] Keegan, Kevin. 2020. “COVID-19: Operations And Supply Chain Disruption”. Blog. PWC Insights. https://www.pwc.com/us/en/library/covid-19/supply-chain.html.
[ix] “Make In India”. 2022. Makeinindia.Com. https://www.makeinindia.com/.
[x] Ministry of Health and Family Welfare. 2020. “How The Domestic Medical Equipment Industry “Adapted, Evolved And Expanded” To Meet COVID19 Challenge In 2020”. https://pib.gov.in/PressReleasePage.aspx?PRID=1685028.
[xi] Economic Times. 2020. “Govt Exempts Custom Duty, Cess On Ventilators, Surgical Masks, PPE, Covid-19 Test Kits”, , 2020. https://economictimes.indiatimes.com/news/politics-and-nation/govt-exempts-customs-duty-cess-on-ventilators-surgical-masks-ppe-covid-19-test-kits/articleshow/75072273.cms?from=mdr.
[xii] Woody, Christopher. 2020. “India’s Deadly Mountain-Top Showdown With China Could Lead To More Military Activity At Sea”. Business Insider, , 2020. https://www.businessinsider.in/international/news/indias-deadly-mountain-top-showdown-with-china-could-lead-to-more-military-activity-at-sea/articleshow/76902536.cms.
[xiii] Boylan, Brandon M., Jerry McBeath, and Bo Wang. 2020. “US–China Relations: Nationalism, The Trade War, And COVID-19”. Fudan Journal Of The Humanities And Social Sciences 14 (1): 23-40. doi:10.1007/s40647-020-00302-6.
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[xv] Shih, Willy. 2020. “Bringing Manufacturing Back To The U.S. Is Easier Said Than Done”. Harvard Business Review. https://hbr.org/2020/04/bringing-manufacturing-back-to-the-u-s-is-easier-said-than-done.
[xvi] “Weaponizing The Belt And Road Initiative”. 2020. Blog. Asia Society Policy Institute. https://asiasociety.org/policy-institute/weaponizing-belt-and-road-initiative.
[xvii] Hussain, Siraj. 2020. “COVID-19 Lockdown: How India Can Provide Food Grains To Stranded Migrant Labourers”. The Wire, , 2020. https://thewire.in/rights/covid-19-lockdown-india-food-grains-stranded-migrants.
[xviii] Shih, Willy. 2020. “Bringing Manufacturing Back To The U.S. Is Easier Said Than Done”. Harvard Business Review. https://hbr.org/2020/04/bringing-manufacturing-back-to-the-u-s-is-easier-said-than-done.
[xix] “Atmanirbhar Bharat Abhiyaan”. 2022. Investindia.Gov.In. https://www.investindia.gov.in/atmanirbhar-bharat-abhiyaan.
[xx] Harapko, Sean. 2021. “How COVID-19 Impacted Supply Chains And What Comes Next”. Blog. Ernst & Young. https://www.ey.com/en_us/supply-chain/how-covid-19-impacted-supply-chains-and-what-comes-next.
[xxi] Shih, Willy. 2020. “Bringing Manufacturing Back To The U.S. Is Easier Said Than Done”. Harvard Business Review. https://hbr.org/2020/04/bringing-manufacturing-back-to-the-u-s-is-easier-said-than-done.
Vrashabh Kapate is a student of the Masters in Public Affairs program at GSPP. Born and raised in India, he has experience in various sectors like Finance, Agriculture, Government Consulting and Nonprofit management. At UC Berkeley, he is building expertise in the area of Climate Change with a focus on Agriculture, Energy, and Urban Infrastructure.
The views expressed in this article do not necessarily represent those of the Berkeley Public Policy Journal, the Goldman School of Public Policy, or UC Berkeley.
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