‘Need to adopt supply chain lens instead of geographical lens to boost domestic manufacturing’

Published: June 3, 2020 4:01 PM

A national supply chain network can boost domestic manufacturing, generate employment, embrace export promotion, and transform India from being consumption-driven to being investment-driven.

A 5.6% depreciation of the rupee against the greenback since January has hardly come as a solace to exportersAn inclusive national supply chain network encompassing the national investment and manufacturing zones can provide the necessary complementarities to enterprises.
  • By Rahul Garg

India’s lockdown to maintain social distancing to minimize the transmission of the Covid19 pandemic has brought the challenges caused by global supply chain disruptions into sharp focus. As we look to re-start businesses and begin the recovery, we have to adopt a “supply chain” lens rather than a geographical lens. We can explore a national supply chain network to boost domestic manufacturing across industry verticals and assess export promotion by enterprises as a strategy for employment generation and investment. India ranks 74th on the DHL Global Connectedness Index, indicating both access to excellent windows of opportunities as well as a higher susceptibility to global supply chain disruptions.

Impact

Different parts of the economy will be impacted differently by the new normal brought around by Covid19. Cultural distancing factors are most likely to affect industries that have a strong association with national identity such as media, food & beverages, automobiles, consumer durables, and heavy engineering equipment. Administrative distance factors are likely to affect industries with a high dependence on the business regulatory framework and global supplier collaboration such as utilities, pharmaceuticals, transportation, defence and telecommunications. Similarly, geographic distancing factors are likely to affect industries with a low value to weight or a bulk ratio like cement, fragile items, and perishable goods, and with requirements for high local supervision like outsourcing in ITES. Finally, economic distancing factors are likely to affect the supply chains of industries where enterprises need to be responsive, and economies of scale are limited such as consumer electronics, apparel and healthcare.

Answer to Impact

Due to the disruptions caused by Covid19, capacity utilization has declined from 69 per cent to 57 per cent, as substantiated by empirical evidence from a study carried out by McKinsey. Further, the Indian Economic Survey 2019 posited a weak environment for global manufacturing, trade, and demand to have adversely affected the real GDP growth rate in FY 2019-20. Due to the supply and demand shock, most economies have faced, a trend towards self-reliance and localization will gain strength. Even before Covid, a nationalistic strain was noticeable in many countries and the realities of Covid may accelerate those tendencies, causing globalization to weaken. The focus will shift to building domestic capabilities especially for essential goods and services such as healthcare. A national supply chain network can boost domestic manufacturing, generate employment, embrace export promotion, and transform the economy from being consumption-driven to being investment-driven. It calls for an integration of policy initiatives for asset creation to improve logistics connectivity and technology enablement of supply chains through digital connectivity.

Also read: MSME loans sanctioned by PSBs jump 223%; this much amount disbursed under Rs 3 lakh crore credit scheme

Improving Logistics Connectivity

The national infrastructure Pipeline that has been envisaged at the cost of Rs 100 lakh crore over the next five years can be leveraged to improve logistics connectivity. The creation of the planned economic corridors and highways, more than 10,000 KMs,  can provide greater connectivity beyond terminal gates, ports and airports to the hinterland in rural areas.  It will bring new opportunities for investment in core industry verticals to provide quality-rated goods to the rest of the world and transform India into a global manufacturing hub. The creation of an inclusive national supply chain network encompassing the national investment and manufacturing zones can provide the necessary complementarities to enterprises from industries across different tiers in the supply chain to create a strong investment-driven domestic economy.

Technology Enablement

One of the major takeaways for Indian enterprises from the Covid19 pandemic has been the trust erosion in supplier relationships and collaborations. Major OEMs based out of the epicentre of the supply shock, invoking force majeure seek effective insulation from the loss offsets mandated for dishonouring supplier contracts. A focused approach to improving transparency into the mapping of multi-tiered supplier networks is essential to the vision for a national supply chain network. Advance information on possible digression from supplier contracts, supply chain automation to explore repetitive patterns in supplier behaviour through tracking of key performance indicators of cost, quality, and on-time delivery can enable Indian enterprises to work with a better sense of anticipation and likelihood into the next steps in the supply chain journey and thus adjust their positions in the market to hedge against supply chain disruptions.

Interdependence of Make in India and National Supply Chain Network

Of the 25 industry verticals in the manufacturing sector that the Make in India campaign aims to boost, 17 have been affected by the global supply chain disruptions caused by the Covid19 pandemic. Manufacturing currently contributes 16-17 per cent of the GDP and 12 per cent of employment generation in India. With a strategic integration of the national supply chain network with Make in India, the share of manufacturing in the real GDP can rise to 25 per cent while taking direct employment generation to 33 per cent. One manufacturing job can create up to three jobs in the service sector. For a labour surplus economy like India, the scope for creating 100 million jobs as targeted under the aegis of Make in India will provide sufficient impetus to embrace the national supply chain to create inclusive economic growth.

Rahul Garg is the Founder of online industrial tools and equipment store Moglix. Views expressed are the author’s own.

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