Prof Dheeraj Sharma, Director, IIM Rohtak,

Distinguished Panellists,

It is an honour for me to speak at the 7th IIM Rohtak INDAM Conference. I will endeavour to focus more on the geo-strategic aspects of trade and economic resilience in a world jolted by the pandemic.

Since it struck last year, the COVID-19 pandemic has swept aside all known vectors in healthcare. The pandemic has treated the rich and the poor alike; it has impacted adversely on economies worldwide.

We have all experienced, in one way or another, the disruption in the way of life over the past nearly two years. The virtual models of interaction have set new standards of ‘no contact’ behaviour. The deleterious impact on mental health, less explored, will be felt long after the virus has abated.

When the novel coronavirus pandemic broke out, it had an immediate and telling effect on supply chains emanating from China. In India, we discovered to our horror that even simple PPE kits and medical devices had to be sourced from China. Across the board too, several companies felt the disruption in the automotive, electronics and white goods sectors. India excels in the pharmaceuticals sector but the over-reliance on Active Pharmaceutical Ingredients (APIs) from China still creates vulnerabilities in the value chain.

What is Resilience in Supply Chains?

One of the key objectives for a mature economy like the Indian economy should be to achieve resilience in supply chain management in the shortest possible time. This is not to be mistaken for atavism or autarkic policies in a globalised economy, but as a means of survival. India’s ‘Make in India’ policy or ‘Atmanirbhar Bharat’ should be viewed in this context.

Supply chain resilience is also not a new concept. In the 1950s, an emerging People’s Republic of China practiced the policy of ‘Self Reliance’ or Zili Gengsheng in order to inure itself to the economic uncertainty imposed by the Cold War and poor relations with the Western economies. Today, there is a seeming redux of such policies in China with regard to the indigenous manufacture of semi-conductors as the US seeks to cut out China and secure supply chains.

The logic of a globalised economy is predicated on a free exchange of goods and services based on the market principles of demand and supply, which itself is based on capacities, purchasing power as well as the ability to produce higher volumes at the lowest possible competitive cost. This structure is for the ideal world.

In a world such as ours in which geopolitical contestation is overwhelming the geo-economic aspects, over dependence on others for critical supply chains comes at a steep cost. This applies to the digital space too, as I will elaborate shortly.

Look at rare earths for instance in which China has emerged as a very major player. In 2010, when a Japanese Coast Guard vessel was bumped by a Chinese fishing militia boat, the arrest of the Chinese captain and his crew led to China cutting off supplies of rare earths to Japan. This made the Japanese realise how critically dependant it was on China in the production of electronics, hybrid cars, wind turbines and guided missiles.

On its part, the arm-twisting in the matter of supply chains forced not only Japan to take a fresh look at alternative supply chains but also compelled the US to reopen mothballed rare earth mines.        

Disruptions caused by natural calamities are commonly experienced around the world. Japan has seen the unfortunate effects of the Great Tohoku Earthquake of 2011, followed by the Tsunami which led to a nuclear disaster. The economic disruption caused by power outages, breakdown in infrastructure and non-availability of labour and raw materials resulted in a major setback. For example, it led to a sharp drop in Japanese automobile exports to the US.

Man-made disruptions in supply chains are also a part of the globalised economy. For example, terrorist drone attacks on ARAMCO’s oil refineries at Abqaiq and Khurais in Saudi Arabia in September 2019 suddenly resulted in a drop of 5.7 million barrels of oil per day, amounting to nearly 50 per cent of its production capacity. It led to a steep plunge in Saudi Arabia’s stock market, besides leading to a sharp spike in global oil prices.

Apart from terrorism, there are other man-made disruptions such as wars. You are all aware how global oil supplies were disrupted during the Fourth Arab-Israel War, better known as the Yom Kippur War, in October 1973, when the Arab countries imposed an oil embargo on many countries for their support of Israel. In fact, the energy crisis of the 1970s changed the face of the automobile industry, pushing development in favour of smaller fuel-efficient cars and spurring the use of diesel engines for personal vehicles.

Supply Chain Politics

Today, globalisation is being redefined. Not every country has fully benefited from the rapid integration of the global economy.

The trade war between the US and China that erupted into the open during the Trump presidency, continues to manifest itself under Biden. The US is not sitting idle as China closes the gap with the US in nominal GDP but is determined to maintain its edge. For instance, the US Innovation and Competition Act passed in 2021 seeks to allocate US$ 250 billion to spur innovation in technology, including local manufacturing of semi-conductors. The aim is obviously on keeping China out of US supply chains, including in telecommunications and cyber space where the China threat is palpably greater.

Today, there is also the trend towards regional trade pacts. We are not part of either Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) or Regional Comprehensive Economic Partnership (RCEP). China is the lead economy in the RCEP and is seeking entry in the CPTTP in which the US is still absent. This suggests that India will have to engage the major regional economies more actively on the bilateral front to ensure that our trade interests are protected.

It is in this milieu that India, Japan and Australia agreed in September last year to work together to achieve supply chain resilience in the Indo-Pacific. This is a great initiative which is expected to look at possibilities to reduce undue reliance on any one country or geography for sourcing products or materials. Automobiles and parts, petroleum, steel, textiles, financial services and IT are some of the focus sectors identified under the Supply Chain Resilience Initiative (SCRI). This initiative is expected to contribute to the global risk mitigation strategies of not only companies of Japan, Australia and India but also other nations operating in the Indo-Pacific.

The SCRI may be bolstered by the future involvement of France, though this might depend on the European Union’s position. The United Kingdom has also shown interest in the SCRI. I am not sure of the extent to which France’s enthusiasm will be tempered by its heightened sense of hurt on being kept out of the submarine deal with Australia as a result of AUKUS. France is and will remain a major Indo-Pacific power, and is likely to play a greater role in not only the evolving security architecture in the Indo-Pacific but the geo-economics of the region as well.

Digital Supply Chains

The global geo-economic contestation is not simply about goods and services of the standard kind. The future contestation in global supply chains is emerging in the digital space on which we have increasingly come to rely upon, especially due to the pandemic. Big Tech companies such as Google, Amazon and Microsoft in the US and Alibaba, TenCent, Huawei and Bytedance in China are today in control of the digital space in such manner as to compete with governments around the world. They have created digital supply chains through cloud networking and data storage including algorithms to shape public behaviour though the power of suggestion to a degree that transcends territorial sovereignty. In China, especially, Big Tech works more closely with the government to achieve national security objectives.

It is not just India and some other developing countries that face this challenge of Big Tech supply chains which are no longer in sovereign hands. Even Europe trails in this regard. We clearly must focus on the digital supply chain resilience as well.

Big Tech today is powerful enough to dictate who enters their platforms, who is dismissed, and who is able to access data and how. This cuts across political and economic realms.

Friends, geo-politics and geo-economics can never be truly separated. Today, we find that adversaries too are closely intertwined with one another as is the case between the US and China. The rest of the world is deeply engaged with both the US and China, making for difficult choices in an environment in which trade and investments are increasingly weaponised. De-coupling was a buzz word particularly last year, but the results are thinly evident on the ground.

In India’s case, we took several steps in the aftermath of the Galwan incident to implement the principle of linkage between political and economic aspects in our ties with China.

Government of India amended FDI rules to prevent opportunistic takeovers of domestic firms by Chinese companies, and also introduced scrutiny of ultimate beneficiary ownership in regard to portfolio funds flowing in from China and Hong Kong. The e-market place was sanitised to prevent Chinese dominance at the cost of our domestic manufacturers. The banning of Chinese apps also resulted in some pressure on China. However, despite the overall freeze in bilateral relations, India-China trade shot up in 2021 to touch US$ 100 billion with both Chinese and Indian exports growing.

The real ballast in the ship of bilateral relations is not trade but mutual investments. And that is where India and China still have a number of trust issues to consider.

Japan’s Strategy For Supply Chain Disruption

Recently, Japan has earmarked US$ 2.2 billion for an economic stimulus package to help Japanese companies shift production out of China.

In Phase-1 of the Relocation Package, which was worth US$ 653 million, one noticed however that 89 Japanese companies/projects availed subsidies to shift out of China. Of these, 57 companies relocated to Japan, 30 moved their manufacturing to Southeast Asia and 2 companies transferred manufacturing to India.

This means that de-coupling is difficult. There is no guarantee that close strategic ties between India and Japan would translate into all Japanese investments flowing into India. In a competitive world, India must vie for investments through judicious policies and a business friendly environment full of opportunities.

Defence Sector

India’s ‘Atmanirbhar Bharat’ policy, particularly in Defence, offers such opportunities. The government is providing a big boost to defence manufacturing under the ‘Make in India 2.0’ programme. It has identified a negative import list of 351 items. There is a tremendous opportunity for foreign companies to enter into tie-ups with reputed Indian defence manufacturers to tap into the growing defence market in India.

Friends, the world can avoid paying a heavy price by not treating pandemics as one-off events. Given the incidence of SARS, MERS and similar outbreaks in the past, COVID-19 is hardly an unexpected “black swan” event. The human race may have to contend with many more of nature’s calamitous challenges.

Before I end, I should briefly touch upon ecological sustainability and social well-being. These are inter-dependent. They affect the present and future quality of life. The politics of the pandemic and the debate over the origins of the virus highlighted the dangers of tinkering with nature, whether in a Petri dish or in the zoonotic environs of wet markets. The ecological balance that nature creates can never be fully matched by human endeavour.

Today, China’s zero-tolerance policy in regard to the virus is touted by Beijing to establish the superiority of its political system and response to the pandemic. But it is also a huge drag on economic revival and places new risks on global supply chains. The draconian lockdowns underway in Xian as a result of a fresh outbreak of the pandemic may be prompted by the desire to ensure the success of the Beijing Winter Olympics and the 20th Party Congress later in the year.

China’s current visa policies have kept half a million foreign students from returning to their educational institutions across China. Apart from the risk of further disruptions in economic supply chains that complete lockdowns can cause, this is a major disruption in the critical supply chain of human resources, education and social well-being in many developing nations that rely on China for higher education.

In a way, this is true of the entire world as the lack of mutual recognition of vaccines and travel restrictions disrupt essential supply chains in human resources.

In the late 1950s, Chairman Mao Ze Dong proclaimed a mass campaign against the Four Pests – rats, flies, mosquitoes, and sparrows. Sparrows were targeted because they ate large quantities of grain and fruit. With sparrows no longer around to control the locust population, China experienced several years of famine. Eventually, China had to import 2,50,000 sparrows from the Soviet Union to restore the native population. The moral of the story is that it is best to refrain from upsetting the ecological balance created by nature through evolution.

India in this regard has a better record than most countries around the world. Our Vedic culture and philosophy has always taught us to maintain a symbiotic relationship with nature or prakriti.   

And our National Song is a wonderful reminder of the nature around us: Vande Mataram! Sujalam, suphalam, malayaja shitalam, Shasyashyamalam, Mataram!

(I bow to thee, Mother, richly-watered, richly-fruited, cool with the winds of the south, dark with the crops of the harvests, The Mother!)

Thank you. Jai Hind!