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The Supply chain disruptions: Its effect on India Economy?

T S Chandrashekar

T S ChandrashekarSep 15, 2021, 11:23 AM IST

The Supply chain disruptions: Its effect on India Economy?

India needs to build a long-term strategy and alternative be kept, as it is said in the future, that supply chain disruptions are only expected to increase in magnitude and frequency.

 

India depends on oil, Cooking Oil, hardware, raw materials for Industrial and electronics, medical raw materials, defence products, Solar Panels from other parts of the World. Our dependence varies from 1% to 90%. This is really shocking. Because of this, India needs a peaceful world where there is no conflict nor any disruption in the movement of goods and services. A small disturbance in the Middle East can affect a common man of India with a rise in the price of essential items due to cascading effects. Border Tensions with neighbours can affect Stock Market to Supply Chain. Piracy to data breaches ransomware affects India too in general. With this, we have hostile ideologies and nations who want to bleed and terrorize India. They, too, can affect our FDI cutting Supply Chains.

According to market and consumer data firm Statista, the top 10 commodities imported by India in 2020-21 were: Crude petroleum (21.6%) nearly US$104.4 billion, Gold (5.9%) nearly $41 billion, Petroleum products (5.8%), Coal, coke and briquettes (4.7%), Pearl, precious and semi-precious stones (4.7%), Electronic components (3.4%), Telecom instruments (3%), Organic chemicals (2.5%) nearly $18.2 billion, Industrial machinery (2.5%), Electric machinery and equipment (2.3%) nearly $42.9 billion.

India's top 10 trade partners from where it imported the above commodities in 2020-21, according to Statista, were: China (13.7%), the United States of America (7.5%), the United Arab Emirates (6.3%), Saudi Arabia (5.6%), Iraq (5%), Hong Kong (3.5%), Switzerland (3.5%), South Korea (3.3%), Indonesia (3.1%) and Singapore (3.1%).

India imports 82% of its oil needs and aims to bring that down to 67% by 2022 as successive governments before 2014 did not think of import substitution. Gold imports, which have a bearing on the country's current account deficit (CAD), rose by 22.58 per cent to USD 34.6 billion (about Rs 2.54 lakh crore) during 2020-21 due to increased domestic demand, according to the Commerce Ministry data. India is over-dependent on the World for Electronic Items, Hardware, Chips, and Solar Panels.

In an interconnected and interlinked world, much of the manufacturing production worldwide has been organized in what has become known as global value chains (GVCs). Raw materials and intermediate goods are shipped around the globe multiple times and then assembled in yet another location. The final output is re-exported to final consumers located in both developed and developing markets. In India, certain industries have become more and more dependent on imports. These industries are at significant risk.
For instance, pharmaceuticals (China supplies almost 70 per cent of active pharmaceutical ingredients (API) requirement for the industry); automobiles (10-30 per cent of the raw materials and base components are imported from China); chemicals and textiles. The renewable energy sector relies on China for 80 per cent of the sector's requirement of solar panels. Finally, and potentially most problematically, several micro, small and medium enterprises (MSMEs) are dependent on Chinese imports.

It has been analyzed that Lean supply chain strategies contribute to supply chain vulnerability while increasing short-term profits. So Companies should seek to diversify supply chains from a geographic perspective to reduce supply-side risk from one country. Multiple sources of key commodities or strategic components would be identified, and protocols will be in place to activate alternative sources of supply on short notice. The corporate strategy would likely look to build a robust inventory as a buffer against supply chain disruptions. There is an urgent wake-up call for the Indian industry to realize the need to develop its own local sourcing units and adopt alternative strategies to reduce China's dependency.

Supply chain disruptions are costly, e.g. Suez Crisis recently and COVID-19 Pandemic. In America, a Gartner survey conducted in 2021 revealed, 87 per cent of 1,300 supply chain professionals reported plans to invest in supply chain resiliency in the next two years. In America, more and more companies are at the very least considering a China+1 strategy. This involves maintaining a manufacturing base in China, which continues to be a critical market while developing smaller-scale operations elsewhere to prevent over-reliance on a single market. Another strategy includes near shoring or regionalization, which involves manufacturing in multiple locations globally to supply goods to consumers in nearby markets. Finally, companies are looking to alternative sites as they look to expand production. 

Finally, one can say that India is a price-sensitive market. Small disturbances in essential items can have a big bearing on public opinion and elections. As India goes to elections now and then, it is high time that the Supply Chain of all Items is under the radar and a long-term strategy and alternative be kept. It is said in the future that supply chain disruptions are only expected to increase in magnitude and frequency. McKinsey said companies are expected to experience disruptions lasting at least a month long approximately every 3.7 years.

Due to Geopolitical changes and unexpected Pandemics like Natural Calamity, e.g. Taiwan drought made Global Chip supply shortage or Japan floods and earthquake also disturbed supply chains of Chips, so Companies and governments who can anticipate and adapt to change stand to benefit. Particularly companies that restructure their supply chains. So any Governments that leverage this shift to their benefit by introducing attractive financial incentives while simultaneously strengthening infrastructure, upskilling workers and improving the business climate, and getting raw materials and goods for a long time without fluctuations will be able to move up the value chain in a wide variety of sectors by boosting economic growth and creating new jobs.

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