By Tim Foster
India’s star is on the rise. After more than a year in office, Prime Minister Narendra Modi’s unceasing efforts to position the country internationally as a destination for trade, investment and economic cooperation mean India is now figuring more prominently in multinational companies’ investment plans.
Mr. Modi has injected a sense of optimism into the economy, initiating internal reforms designed to enhance trade, transportation and manufacturing efficiency. Retailers like Amazon and Flipkart are building robust, efficient logistics networks to serve the needs of the country’s emerging middle class.
But multinationals shouldn’t be immediately transfixed by India’s entrepreneurial glow and tantalizing domestic market. If India is serious about fulfilling its potential, it will need serious legislative changes and substantial infrastructure upgrades that aren’t likely to happen overnight. Companies should be cautious in setting up their supply chains, taking these realities into account.
Policy and incentives around taxes, land and infrastructure
Without land reform and some permutation of India’s proposed (and currently stalled) Goods and Service Tax (GST)—designed to create an “Indian Common Market”—India will continue to struggle with large-scale supply chain inefficiency and global competitiveness. India’s nine major ports and almost 200 minor and intermediate ports are administered by a mix of central and state governments and growing public–private partnerships. Transporting freight across state borders in India is often more complex than crossing international borders, adding 30 percent to the costs of goods sold in the country.
Some of India’s state governments have taken matters into their own hands, attracting businesses with infrastructure and economic incentives and competing with one another to make their own hubs the most efficient. But it’s important to evaluate states that offer better land deals holistically before making the leap to site plants and warehouses. A single warehouse siting can take up to six months, with uncertainty around availability, negotiations and legal processing, and it will take years to get some of these hubs up to speed.
Likewise, water and electricity availability, potential labor law reforms, and connectivity to major highways, railways and waterways will impact modal options and optimal supply chain network design over the longer term.
Meeting domestic demand for the foreseeable future
Since India does not export nearly as much as other BRIC countries, doing business in India right now is all about finding the best supply chain solutions to meet shorter-term domestic demand—whether that means reviewing or automating supply chain operations, addressing transportation infrastructure and network inefficiencies or partnering with third parties to augment or complement current capabilities.
If you are already doing business in India, it’s time to address any and all supply chain inefficiencies, because global competition is coming, thanks to India’s growing domestic consumption.
Pluses and Minuses of Sourcing Locally
India has largely protected and insulated its local manufacturing industries. New entrants into this emerging market often find it difficult to import products into India and must look to local sourcing as an alternative supply solution. But entering short-term partnerships or setting up small manufacturing plants to take advantage of growth and demand is just a first step. Many companies will eventually need to scale up themselves or use larger third parties, so they should think long-term about building manufacturing and distribution capacity domestically.
India’s evolving regional and international role
As India’s prosperity and labor costs continue to grow, rather than competing with low-cost manufacturing providers like Vietnam, it will likely do well to target industries and manufacturing sectors that will provide it with a competitive advantage, employing its educated workforce for more advanced, higher value-added manufacturing. This will put it on a collision course with China, which has a centrally controlled economy that can drive relatively rapid manufacturing and logistics change.
That adds a sense of uncertainty about its place in the future of global manufacturing at a time when lower costs can no longer cover up inefficiencies. The key is enhanced competitiveness through investing in infrastructure, rail and grid and developing more projects like Sagarmala, which is aiming to rapidly enhance port efficiencies, mechanization, hinterland connectivity and seamless movement from manufacturing bases to consumer bases. Achieving those goals will be the difference between India seizing or squandering this potentially transformative moment for its economy.
Tim Foster is managing director for Asia-Pacific in Atlanta-based Chainalytics’ Singapore office. He has more than 20 years of supply chain experience across the APAC region. He stays abreast of the local, regional and by-country picture across Asia—from macro-economic factors impacting the region to each market’s unique logistics demands and business complexities. Contact him via tfoster@chainalytics.com or learn more about Chainalytics at www.chainalytics.com.