Disruptions in the global supply chain are becoming common place, for last two years one had to contend with Covid-19, this was followed by Ukraine-Russia conflict, sanctions against Russia and lockdown in China. Some of the traditional supply chain concepts like ‘just in time’ and ‘lean manufacturing’ are getting questioned. Throughout the nineties up to the 2008 meltdown, the global supply chain considered ‘efficiency’ as paramount. But in view of the disruptions of the later years the focus has shifted from efficiency to effective management of the risks associated with disruptions. Options of multiple sourcing base are seriously being explored. There is an increasing realisation that additional inventories, buffers and slack capacities are needed both at the manufacturing and distribution ends. This has led to the emergence of strategies like China plus one or China plus two. Above all, firms need flexible supply networks for minimising the frequency and amplitude of disruptions.
Can the Indian manufacturing industry use this opportunity to proactively link up with the global value chain is the key question. For the international firms, it is becoming increasingly apparent that in future ‘all eggs in the same basket’ for efficiency and scale will possibly get substituted by ‘eggs in different baskets’ for the continuity of supply chain and better risk management. However, to make the process attractive a host country, like India, will have to offer some competitive advantage along with political and economic stability. The ability to bounce back to the normal growth trajectory after disruptions is also critical. In order to attract investors well structured PLI schemes can play a major role. India has certain inherent disadvantages in the area of competitive power cost, logistics cost, compliance cost and high interest rates. Initiatives are being taken to correct these limitations. Notwithstanding the above mentioned problems islands of excellence do exist in the Indian manufacturing sector.
Covid has drawn our attention to the aspect of resilience in an economy or even the society as a whole. The concept of resilience has been succinctly described by the well known Princeton professor, Markus Brunnermeier as the ability to bounce back after a shock, this is similar to the mean reversion concept in financial literature, where you get back to the average performance level. In the macroeconomic front India’s ability to bounce back is clearly visible. In the Covid year 2020-21 India’s GDP declined by 6.6%; GVA went down by 4.8%; NSO’s (National Statistical Office) second advance estimate tends to indicate that in 2021-22 the growth rates can touch 8.9% for GDP and 8.3% for GVA. There are various projections of GDP for 2022-23, the range is 7-8%, according to RBI it could be 7.2%. During 2014-15 to 2018-19 the average growth rate was around 7%, so one is not hesitant to stress the point that rebound in the economy or mean reversion has already started. The resilience of the economy to rebound is very important for investors. The Indian economy which was deeply scarred in 2020-21 is getting back on the growth trajectory, exports have touched a record level of $418 billion, unemployment in March is down to 7.6%, growth in private consumption expenditure and gross fixed capital formation for the year 2021-22 have inched up by 1.16% and 2.6% respectively, over 2019-20 a pre-covid normal year. CPI Inflation at 6.07% is marginally above the prescribed limit of 6%. RBI’s current projection of inflation for the year 2022-23 is 5.7%. Imported inflation will continue to be an issue particularly if global energy prices remain elevated, so far as metal prices are concerned Ukraine war did have some initial impact but subdued demand from China helped in mitigating a part of it. India’s import bill will certainly go up, however given the acceleration in exports of goods and services, the current account deficit according to RBI will remain at a sustainable level which can be met through normal capital flows. Given the urgent need for growth in a scarred economy the Central Bank is continuing with its accommodative policy stance and has kept the repo rate unchanged. Given this scenario and the Government’s budgetary thrust on infrastructure investment, private sector investments are likely to pickup significantly. It appears that India among large economies will have one of the highest growth rates in 2022-23 along with a manageable inflation rate.
Resilience in the economy is helped by advancement in technology and innovations. India could quickly put in place a vaccination framework because that is an area which the country has been working on, for a few decades. Similarly, the concept of work from home could become a reality on account of the robust internet and telecom -structure available in the country. Given the fact that, this is a country of 1.38 billion people, economic and social disruptions are not unusual. However, the economy has always bounced back relatively quickly after such disruptions natural or man-made.
During Covid we had disruptions in the labour market, in the conduct of educational programmes where students have unequal facilities and resource endowments. Similarly MSMEs too suffered from lack of demand and debt overhang. Disruptions in a sense help the country to prioritise the next set of development issues. Health, medical services and education for the less privileged are emerging as the key focus areas of the future. These soft infrastructures apart, there is also an urgent need to improve hard infrastructure for better connectivity with the hinterland. Such connectivity can help in lowering logistic costs and make the hinterland industries cost competitive, enabling them to participate in exports and global value chains.
From nineties, concerted efforts have been made globally to circumvent trade barriers and build supply chains for firms based on efficiency. However, Covid-19 followed by Ukraine war and sanctions on Russia have clearly demonstrated that in the future supply chains cannot be too dependent on one country; the story goes when covid started the only major supplier of face mask was China. There is an immediate need to have multiple supply bases across product categories. The same firm for the same component or product can have multiple supply sources. Disruptions, particularly the larger ones, which we have experienced in recent years like Covid and the Ukraine-Russia war have raised the issue of re-shoring in developed countries like USA and EU. One needs to remember that the alternative to ‘off-shoring’ supply chains of USA and EU firms is not ‘on-shoring’ as that would eliminate cost advantages of a global supply chain. A better alternative would be to go for off-shoring in countries which have a talent base, good infrastructure, low risk and are friendly democracies. This is an area where India can score reasonably well.
Siddhartha Roy is the former Economic Advisor of the Tata Group. Currently he is the CEO of SR Associates an Economic Advisory and Strategic Consultancy enterprise.
Disclaimer: The opinions expressed in this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of Indiastat and Indiastat does not assume any responsibility or liability for the same.
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