16 AUG 2020

India - Untangling the Supply ChainBy ELP Law Firm

Background
The Covid outbreak has affected several industries in India. The economy is reeling and jobs are diminishing. During this time a border confrontation with China has brought about a fundamental re-alignment in India’s strategy of engagement which disrupts the supply chain for many companies doing business in India.

Numerous reasons have recently led to a comprehensive review of India’s strategic engagement with its trading partners. The notifications as they have been drafted has affected trade with countries that share a land border with India – and the most affected is China - which is India’s second largest trading partner after USA.

Through a rapid spate of notifications, India has put in to place many restrictions - be it listing out 101 defence items which must be made in India by 2025 and immediately banning 106 mobile applications for national security – including the ever popular Tik-Tok application owned by a Chinese company. And, it seems this is just beginning as there is much speculation and conjecture about what will come next:

A plethora of measures have already taken effect:
  • bringing in Bureau of Indian Standards (BIS) specifications on products being imported in to India;
  • a steep duty increase on certain imports (solar, toys); initiating anti-dumping probes on numerous products (aluminium foil 80 micron, chemicals, polyester);
  • amending the Foreign Direct Investment (FDI policy) for countries who share a land border with India;
  • restricting government procurement from nations sharing a land border with India and
  • mandating country of origin marks on all goods sold via e-commerce sites.
Skewed nature of Import dependency on China
Statistically, China accounts for 14% of India’s import while India accounts for 3% of China’s import. However, India’s dependency on China cannot merely be stated in numbers.

It is far more complex as majority of imports from China are of necessary ingredients for core sectors. Figures suggest that organic chemicals, electronic components & mechanical appliances form 60% of import from China. These imports form the backbone for multiple domestic industries. If one wades a little deep in these statistics, the real picture emerges- 65% of API requirements for pharma, 80% of solar panels, 84% of electronic parts, semi – conductors are sourced from China.

The importance of this trade relationship was alluded to by the Chinese Ambassador to India who said "China advocates win-win cooperation and opposes a zero-sum game. Our economies are highly complementary, interwoven and interdependent. Forced decoupling is against the trend and will only lead to a 'lose-lose' outcome."

Difficulties Faced by Exporters
Clearly the border situation has precipitated matters to a point where China’s trade with India has been severely impacted. A series of unilateral actions taken by the Government is of concern to exporters and importers of Chinese goods into India both for the measures taken, and measures still to be taken.

The impact of these changes have hit several industries hard: Those who seek to make in India undoubtedly see an opportunity with the exclusion of the China presence; those who import need to rapidly re-jig their supply chain and those who have long term ambitions in India are exploring manufacturing in India.

Fixing the Supply Chain
To tackle the prevailing scenario, the Government has multiple tariff and non-tariff measures at its disposal, such as licensing regime for goods manufactured by priority sector; imposing quantity restriction through quota system; revamp mandatory prescription(s) of product standards (already done for electronic items like LCD, Laptops) introduce central import monitoring system to track & control surge of import (already in place for Steel).

For the first time, the Government is aggressively pursuing this math of import de-growth and a campaign inviting exporters to make their products in India.

Companies need to react fast, and urgently re-visit their strategy for the Indian market. Goods must be able to flow with certainty or regulation and least burden into India:
  • Where products are hit by changes in the import policy/high tariff there is an urgent need to find alternative sources of supply
  • Trade remedial measures need to be defended before the DGTR so as to ensure smooth flow of goods at reasonable rates
  • Products which have an increase in basic duties will need to be addressed through a combination of “Make in India” and potential FTAs that India has in the pipeline.
  • Other non-tariff measures such as BIS mandatory standards and country of origins marks need to be complied with
The Way ahead
India’s approach to the future seems to be guided by its ambition to be “self-reliant” & to promote exports through an aggressive “Make in India” strategy. The process is ongoing and we can expect several more measures to make these ambitions a reality; however in the short term this is going to be hugely disruptive for those who have their supply chains dependent on China.

The government is clearly determined to grow trade with like-minded nations, while industry sees this as a path to recovery from the Covid impact, and consumers seem supportive of this strategy for multiple reasons, ranging from job security to national pride. The question is whether your business is ready to tackle these changes and is ahead of these curve?

If executed well, it could be a game changer, and lead to an alliance of like-minded trading partners who will re-align based on geopolitical ambitions. India is a market of a billion plus aspiring people. A young work force of consumers who cannot be ignored.

We trust you will find this an interesting read. For any queries or comments on this update, please feel free to contact us at [email protected]

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