Self-reliance and supply chains

Context: Rather than building domestic supply chains in their entirety, India’s focus should be on increasing its manufacturing competitive advantage through straightening regulatory issues and investor friendly climate.

Elusive goals of self-reliance: The immediate aim to evolve local supply chains, reduce import dependence while seeking export competitiveness may not get fulfilled because of the following reasons:

• Import Substitution is a long-drawn process: With the Information and Technology (ICT) Revolution the fragmentation of production became possible, but the process was late for India.

• While South Korea underwent a successful transition in the 1970’s, India could not accomplish it until the 1980s.
• ‘Factory Asia’, centered around China, was the key outcome of this process of fragmentation.
• It was further facilitated by unilateral tariff liberalization and enabling business environments in 1990s.

• Narrow minded Free Trade Agreements (FTA): India focused mainly on the tariff part of the FTA while other Asian economies looked beyond to include intellectual property and investors protection.

• This facilitated ‘technology lending’, which led to enhanced manufacturing competitiveness of other Asian economies vis a vis India.
• The deadlock in the World Trade Organization’s (WTO)’s Doha Development Agenda led to the increased proliferation of such FTAs. For E.g. 

• Comprehensive and Progressive Trans-Pacific Partnership (CPTPP)
• Regional Comprehensive Economic Partnership (RCEP)

• India recently withdrew from the RCEP negotiations facilitating the relocation of companies to countries having preferential access to large collective markets like China, Australia, and New Zealand.

• Low participation in Global Value Chain (GVC) manufacturing: 

• In its lead export sectors, India has experienced a decline in its backward linkages.
• In electronics and computing, India’s backward linkages in 2015 are almost half the levels of Vietnam.
• India took advantage of proximity to GVC hub of China, weakening its value chain linkages with the region.

• Indian has not been an attractive destination for supply chains: In the wake of global economic decline and the US-China trade war, companies relocating from China are ignoring India.

• • • The lower end value chains have relocated to other nearby Southeast Asian economies like Vietnam and Cambodia.

Way Forward:

• Re-work-FTAs strategy: to focus on regulatory issues and investment inducing provisions.
• Understanding the significance of RCEP: It is an ASEAN - centric process and not a China-led one. East Asia may see a quick recovery and relocating companies needs to be attracted sooner.
• Increasing manufacturing competitiveness: GVC participation requires increased attractiveness due to relaxed regulatory norms, sectoral competencies and investment climate reforms.