From UPSC perspective, the following things are important :
Prelims level : Atmanirbhar Bharat
Mains level : Paper 3- Importance of resilient supply chains
What does supply chain resilience mean?
- When assembly lines are heavily dependent on supplies from one country, the impact on importing nations could be crippling if that source stops production intentionally (economic sanction) or unintentionally (natural disaster)
- Example: Japan imported $169 billion worth from China, accounting for 24% of its total imports. Japan’s imports from China fell by half in February 2020 that impacted Japan’s economic activity.
- In the context of international trade, supply chain resilience is an approach that helps a country to ensure that it has diversified its supply risk across a clutch of supplying nations instead of being dependent on just one or a few
Recent incidents that led to supply chain disruption
- Disruptions in supply chains can be natural or man-made.
- When the novel coronavirus pandemic broke out, it had an immediate and telling effect on supply chains emanating from China.
- In Japan’s case, a nuclear disaster (Fukushima Daiichi) caused a sharp drop in Japanese automobile exports to the United States.
- Terrorist drone attacks on oil refineries in Saudi Arabia in September 2019 resulted in a drop of 5.7 million barrels of oil per day.
- That attack triggered a steep plunge in Saudi Arabia’s stock market and a sharp spike in global oil prices.
- Tensions with China led the United States government to impose restrictions on the export of microchips to China’s biggest semiconductor manufacturer SMIC.
Supply Chain Resilience Initiative (SCRI)
- Geo-politics and geo-economics can never be truly separated.
- Also, there is a growing trend of weaponization of trade and technology.
- China had imposed sanctions on its key exports of grain, beef, wine, coal, etc to Australia for demanding an inquiry into the origins of the coronavirus and advocating a robust Indo-Pacific vision.
- It is against this backdrop that India, Japan, and Australia initiated the Supply Chain Resilience Initiative (SCRI).
- It focuses on automobiles and parts, petroleum, steel, textiles, financial services, and IT sectors.
- The SCRI may be strengthened by the future involvement of France.
- Kingdom has also shown interest in the SCRI.
“China plus one” strategy
- For many Japanese companies, global performance and profits are linked to manufacturing facilities and supply chains in China.
- Yet, they have shown an early capacity for risk mitigation through the “China Plus One” business strategy.
- The “China plus one” strategy aims at diversification of investments to the Association of Southeast Asian Nations (ASEAN), India, and Bangladesh.
- Japan announced a 2.2 billion Relocation Package.
- Of the companies that availed this package, 57 relocated to Japan, 30 to Southeast Asia, and two to India.
India’s vulnerability to supply chain disruptions
- India can ill-afford the shocks of disruption in supply chains.
- For instance, the pandemic caused a breakdown in global supply chains in the automotive sector.
- For India, which imports 27% of its requirement of automotive parts from China, this quandary was a wake-up call.
- It is t is noteworthy is that despite being the fourth largest market in Asia for medical devices, India has an import dependency of 80%.
- Given the renewed thrust in the health-care sector, this is the right time to fill gaps through local manufacturing.
India increasing its presence in global supply chains
1) Electronic industry
- India’s electronics industry was worth $120 billion in 2018-2019 and is forecast to grow to $400 billion by 2025.
- India is enhancing its presence in the global supply chains by attracting investments in the semiconductor components and packaging industry.
- The Indian electronics sector is gradually shifting away from completely knocked down (CKD) assembly to high-value addition.
2) Defence sector
- Defence is among the key pillars of the ‘Atmanirbhar Bharat’ policy.
- The government is providing a big boost to defence manufacturing under the ‘Make in India’ program.
- It has identified a negative import list of 101 items.
- There is a tremendous opportunity for foreign companies to enter into tie-ups with reputed Indian defence manufacturers to tap into the growing defence market in India.
Consider the question “Pandemic has demonstrated the damage vulnerable supply chains can cause. It also underscored the importance of resilient supply chains. In light of this, examine the importance of diversification of supply chains.”
India has the capacity and the potential to become one of the world’s largest destinations for investments, and one of the world’s largest manufacturing hubs, in the aftermath of the pandemic.