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CWA # 498, 20 June 2021
Global Politics
India and the geopolitics of supply chains 

  Gurpreet Singh

With a renewed focus on strengthening the manufacturing sector, a boost in digital transformation, a vibrant business environment is being aimed to attract global companies exiting out of China. 

Transnational companies are now adapting themselves by diversifying their supply chains for limiting their exposure to any one country. This does not bode well for countries such as China that has long been the manufacturing hub of the world with many companies now shifting at least a part of their operations to other viable locations such as Vietnam offering similar comparative advantages. 

Strategies such as reshoring and near-shoring and China+1 have been deployed to shield international operations from geopolitical disruptions such as COVID-19 and the US-China trade war. Japan, a key ally of USA, is also incentivizing its companies to gradually shift their operations out of China to Japan or the ASEAN. 

The US itself is aggressively coming up with a series of measures aimed at curtailing China’s industrial prowess while encouraging the growth of its domestic industries. It has also announced tighter restrictions against Chinese telecom companies such as Huawei and ZTE, who are believed to have ties with the Chinese government, in order to curb their access to US-made technologies and software. 

The US has also expanded its scope of sanctions against China to include issues such as Hong Kong autonomy, human rights violations in Xinjiang and Tibet and Chinese military activities in the South China Sea. Therefore, international companies had to adapt their businesses in order to limit their exposure to the sanctioned Chinese enterprises or risk invoking US-sanctions. 

Opportunities for India
Although India’s overall contribution to the global supply chain network is not significant, the country offers a large market and low-cost labour. For decades, China has been the preferred destination for companies to build their supply chains. China offers a comparative advantage in terms of not only a huge market and low-cost productive labour but also in terms of a strong middle class, a world-class infrastructure and policy stability. 

India, on the other hand, stands to lose out because of red-tapism, infrastructural bottlenecks, connectivity issues and an unpredictable policy environment that has severely hindered the inflow of foreign direct investment in the past. So, if India wants to attract investments moving out of China, it has to resolve these impediments in order to compete with the likes of Vietnam and other Southeast Asian nations who are emerging as the most preferred investment destinations after China for the relocation of supply chains.

To deal with these challenges, India launched various initiatives in order to establish a conducive business environment for the smooth functioning of international business operations. For instance, various Indian states such as UP, Gujarat and Madhya Pradesh have initiated significant reforms in their labour laws which were a major stumbling block in drawing foreign direct investments. Moreover, the government has also launched special incentives to pull mobile manufacturing operations into India. India also came together with Japan and Australia to launch the Supply Chain Resilience Initiative (RSCI) which seeks to jointly build resilient supply chains across the Indo-Pacific in order to significantly reshape the post-Covid-19 geo-economic order of transnational production and distribution networks in the region. This will help in addressing the inherent weaknesses of the traditional supply chains such as overdependence on a particular location for sourcing critical items which made them vulnerable to local disruptions such as pandemic induced lockdowns and halt in production which in turn affected the global distribution of inputs and final products. This initiative is particularly aimed at curtailing the excessive dependence of these countries on China which also became a political imperative as the pandemic progressed due to the worsening of relations of each of these countries with the Chinese. The RSCI wouldn’t even have matured into a multi-country initiative without these strong political and security compulsions.

India itself has been a victim of excessive reliance on China for the supply of critical items such as the Active Pharmaceutical Ingredients (APIs) essential for the production of several life-saving medicines when in the midst of the Covid-19 pandemic in May 2020, the price of imported APIs shot up steeply, exposing India’s vulnerabilities in this critical sector. To respond to this challenge, the government launched the Production Linked Incentive (PLI) scheme for boosting indigenous manufacturing of APIs at competitive prices with the strategic objective of gradually decoupling from China. The political hostilities between India and China in the midst of the pandemic as reflected in the Ladakh border clash and stand-off made diversifying from China a geopolitical imperative having security implications. 

The crisis also brings opportunity. With a renewed focus on strengthening the manufacturing sector through initiatives like the Production Linked Incentives scheme and by re-emphasizing on self-reliance through projects such as Atmanirbhar Bharat along with a boost in digital transformation, a vibrant business environment has been aimed at. This is expected attract global companies exiting out of China and transform India into a manufacturing powerhouse for the world. 

The contemporary geopolitical environment is mired with various uncertainties within which international businesses has to operate and function. A clear roadmap is therefore required from the policymakers to gradually decouple investments from an individual location and spread it across various locations in order to build resilience in the supply chains. The geopolitical imperative for India and the like-minded countries constituting the QUAD is to develop a coherence amongst them for the purpose of taking on an aggressive China in the Indo-Pacific. However, this process is lengthy and takes time. Given the pandemic, many companies are also operating with stressed balance sheets which significantly curtails their capacity to go for any large-scale restructuring of their supply chains. So, the governments should focus on attracting the strategic supply chains in the short-term from countries like China and reposition them instead in countries offering a relatively stable business environment. India has the potential to be an ideal destination for this global restructuring if it can address its inherent weaknesses plaguing the business environment. Otherwise, it risks missing the bus to be an active player in the global supply chain network dominated by China.

Gurpreet is a postgraduate scholar in the Department of Geopolitics and International Relations, MAHE, Manipal

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