Why it is in News?

Nevertheless, the declaration made during the G20 Leaders' Summit about the India-Middle East-Europe Economic Corridor (IMEC) has the capability to position India as a key player in the Asian segment of global supply chains. This holds substantial importance as part of endeavors to reduce reliance on supply chains centered around China.

What Are Supply Chains?

• A supply chain encompasses all the stages involved in delivering a final product or service to the customer, starting from raw material producers.
• It involves strategically locating various production stages (like design, production, assembly, marketing, and service activities) in a cost-effective manner.
• Global supply chains have been the dominant model of industrial production since the 1980s, shaping the trajectory and character of globalization and regionalization.
• These global supply chains are prevalent in a wide spectrum of industries, from simpler ones like textiles, food processing, and consumer goods to more intricate sectors such as automobiles, aircraft, machinery, electronics, and pharmaceuticals.

Why Are Global Supply Chains Shifting Away from China?

• Presently, China plays a significant role in global value chains, contributing to nearly 20% of global manufacturing trade and a substantial share of key inputs required for production within global value chains.
• Nevertheless, even before the Covid-19 pandemic, Western companies were progressively reducing their dependence on China as a sourcing market, and its appeal among Western buyers was waning.
• This shift was driven, in part, by increasing labor costs and supply chain challenges within China, along with concerns among investors about tighter regulation of foreign businesses.
• Additionally, the trade disputes between China and the US prompted multinational companies to reconsider their global sourcing strategies.
• Certain segments of Chinese supply chains, especially those reliant on labor-intensive processes, were relocating to more cost-effective locations.
• However, complete relocation from China is challenging due to the substantial costs associated with shifting supply chains, including establishing new facilities and recruiting and training workers, among other factors.

Why are India and Southeast Asia Considered Favorable Supply Chain Destinations?

• Southeast Asia has been successful in luring foreign companies due to its combination of low labor costs, tax incentives, and enhanced logistical capabilities.
• Notably, countries like Vietnam and Thailand have emerged as prominent choices for supply chain relocation.
• India, however, is poised to become an accompanying manufacturing hub in Asia alongside China by leveraging foreign technology transfers and creating value-added employment opportunities. This is evident in various developments:
• Increased production of iPhones within India.
• Early-stage technology transfer for the technologically advanced Mercedes Benz EQS to India.
• Foxconn Technology Group's establishment of a chip-making fabrication plant in Gujarat.
• India's existing manufacturing sectors, including automobiles, pharmaceuticals, and electronics assembly, already possess sophistication and are likely to excel in this competition.
• Foreign investors are drawn to India due to both geopolitical and economic considerations.
• India's services sector, encompassing ICT, back-office functions, financial and professional services, as well as transport and logistics, is also positioned for success.

Initiatives Taken by India to Strengthen its Supply Chain Network:

• Since 2022, the Indian government has prioritized preferential trade through various bilateral agreements with trading partners.
• The UAE-India Comprehensive Economic Partnership Agreement became effective in May 2022.
• Ongoing discussions aim to finalize the Australia-India free trade agreement (FTA) by the close of 2023. Negotiations are also underway for UK-India and EU-India FTAs.
• The Indian Prime Minister's visit to Washington DC in June 2023 underscored the pivotal role of supply chains in India-United States relations.
• These new agreements with Western trading partners signify a commitment to extensive economic integration, surpassing India's previous FTAs, which primarily focused on goods trade and related measures.

Path Ahead for India - Drawing Lessons from China's Success:

• Encouraging foreign direct investment (FDI) with an export focus remains a key strategy for engaging in supply chains.
• Local businesses must devise strategic approaches to integrate into global supply networks.
• Large conglomerates can allocate resources and costs effectively among their business units.
• Small and medium-sized enterprises (SMEs) can play pivotal roles as industrial suppliers and subcontractors for major exporters.
• Strategic moves such as mergers, acquisitions, and collaborations with multinational corporations and prominent domestic enterprises are sensible steps.
• Investing in domestic technological capabilities to meet international benchmarks for price, quality, and timeliness is crucial.
• Identifying and targeting multinational corporations involved in industries where India holds a potential comparative advantage, coupled with improved coordination between central and state governments, is essential.
• Investing in higher education in fields like science, technology, engineering, and mathematics is a forward-looking approach.
• Caution should be exercised when contemplating the adoption of China's interventionist state model, as it carries significant risks of government failures.
• Engaging with think tanks to gain insights into effective strategies is a prudent course of action.
• India stands at a pivotal moment in history to foster industrialization in South Asia, which would enhance regional stability, create employment opportunities, and reduce susceptibility to Chinese influence.
• To promote regional supply chains, the Indian government should consider the following policy actions:
• Expanding the Make in India Programme into a broader Make in South Asia Programme.
• Establishing a comprehensive bilateral Free Trade Agreement (FTA) with Bangladesh.
• Enhancing the Indo-Sri Lanka FTA to bolster regional trade and investment based on established rules.
• Without forging connections within South Asia, India's appeal to the Global South remains limited. The emerging supply chain opportunities with the United States offer India a promising pathway to embark on its journey of global integration, while maintaining a 'Neighbourhood First' approach.