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Reimagining India’s Supply Chain Industry

India’s supply chain industry is set to see major changes as it begins fixing the anomalies in the system that were exposed by the pandemic

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By Sanjay Bhatia

The Covid-19 pandemic will leave a lasting imprint on the global economy, so much so that the world will never be the same again. According to experts, the economic and social disruption caused is expected to be far worse than the 2008 global financial crisis. Interestingly, however, the pandemic has also proved to be a catalyst ushering in a new world order, which has rendered the world reconsider its socio-economic choices for the long term.

Now witnessing significant disruption, the supply chain and logistics industry was one of the worst hit by the pandemic. The supply shock that commenced in China in February 2020, followed by a global economic shutdown, ensued a massive turmoil across supply chains worldwide. Besides trade restrictions and the US-China trade war, factors such as equipment shortage and an exponential rise in the freight rates by almost 300 per cent had a bearing impact in the wake of the crisis. All these chains of events paved the way for an economic crisis.

According to the Indian Chamber of Commerce (ICC), the sector lost approximately Rs 50,000 crore due to the pandemic-induced lockdown. More than 9 per cent of the shipments were stuck, 21 per cent of the orders were delayed and the delivery percentage witnessed a clear decline of 19 per cent. Now while the industry spent years building complex supply chains designed for operational efficiency and cost optimisation, the pandemic brought to the fore the various inequities and complexities ingrained in the system. The Indian supply chain industry is set to witness substantial transformation with the potential to catapult the Indian economy back on the growth trajectory.

Rise of emerging markets 

With the disruption across China’s supply chain and logistics industry, many countries have started shifting to other emerging Asian economies for their manufacturing needs. The change in the economic-political environment has led to further strengthening of many Asian markets such as India, Vietnam, and the Philippines, as they are rapidly attracting FDI. A case in point is Japan. In early April 2020, the island nation announced that it has earmarked $2.2 billion of its record economic stimulus to help its manufacturers shift out of China. This announcement presents an excellent opportunity for India to attract these global manufacturing giants and their investments in the wake of global supply chain shifts.

Asia Growth Engine 
According to reports, Asia can generate more than half of the world’s GDP by 2040 owing to cross-border  flows shifting toward the region. With rapid integration on the cards, Asia will account for 60 per cent of goods traded and 56 per cent of greenfield foreign direct investment (FDI). In 2019, while Asia was the world’s largest FDI recipient of global inflows, India was the largest FDI recipient in South Asia (excluding China).

With conducive government policies to attract FDI, India has become an attractive destination for companies looking for expansion, especially in the Asian market. Business friendly economic policies have also helped India jump 67 places and rank 63rd in the ease of doing business global index. This drastic shift in global trade dynamics is also set to influence significant disruption across the country’s supply chain industry.

The rise of localisation
One of the biggest takeaways of the global pandemic has been to reduce the heavy or concentrated dependence on a single medium (single supplier or region) through adequate diversification of the supply base. The global economy has primarily depended on China, popularly known as the world’s factory. However, with global supply chains dismantling, economies are now looking to eliminate single source dependencies whilst establishing a more flexible and adaptable supply chain. These events will also encourage a significant shift from globalisation to localisation as economies will rework their capabilities to ensure they can draw supplies locally, giving rise to logistics hubs at the regional level.

MSMEs take a hit
The MSME sector contributes more than 25 per cent of India’s GDP across services and over 33 per cent in manufacturing output. Production shutdowns and continuing payments toward fixed costs in the wake of the nationwide lockdown have severely strained working capital, making the Indian economy vulnerable to an acute liquidity crunch. Due to supply chain disruptions and inventory stockpiles, cash flow constraints will continue even after lockdown. With MSMEs working on shorter working capital cycles, the trend is expected to render MSMEs as the worst hit.

Fixing conventional supply chains
The Covid-19 pandemic has not only accentuated the weak links across the industry but has reiterated the impending need for conventional supply chains to get a digital makeover. The crisis has presented an opportunity to fix the inherent anomalies, thereby transitioning from the current state of fragility to resilience.

According to a KPMG Outlook Survey 2020, 64 per cent of CEOs in India cited the need to reinvent their existing supply chains due to the pandemic. Organisations will implement the structured adoption of new-age technologies to aid this change, empowering organisations with real-time decision-making besides adapting to supply chain variabilities.

Even as the world is recovering from the aftershock of the pandemic, businesses are exploring alternative strategies of digitisation and localisation to mitigate potential risks by diversifying their supply chains. With seminal trends such as reconfiguring global supply chains, geopolitical rifts, and conducive trade policies and support schemes, India is by far emerging as the preferred destination for multinational companies. In the new normal post-Covid-19, India has the potential to build itself as an ‘exclusive opportunity market’, competing with the rest of the world whilst building a more inclusive, resilient and sustainable supply chain eco-system.