Context: Japan, India and Australia agreed last week to launch an initiative to achieve supply chain resilience in the Indo-Pacific region, in an apparent bid to reduce trade dependence on China - a major trading partner for all three nations. In an online meeting, India's commerce and industry minister Piyush Goyal and Japanese and Australian counterparts Hiroshi Kajiyama and Simon Birmingham raised the need for a free, fair and predictable trade environment and called on like-minded nations in the region to take part. The ministers said in a joint statement they instructed officials to work out the details for a launch later this year. Many nations dependent on China for trade have suffered from supply disruptions, highlighting the need for diversification.

Supply Chain Resilience

• In the context of international trade, supply chain resilience is an approach that helps a country to ensure that it has diversified its supply risk across a clutch of supplying nations instead of being dependent on just one or a few.
• Importance: In unanticipated events -whether natural, such as volcanic eruptions, tsunamis, earthquakes or even a pandemic; or manmade, such as an armed conflict in a region that disrupt supplies from a particular country or even intentional halts to trade, could adversely impact economic activity in the destination country.

Supply Chain Resilience Initiative (SCRI)

• The initiative aims to reduce the dependency on a single nation (at present China).
• SCRI is a direct response to individual companies and economies concerned about Chinese political behaviour and the disruption that could lead to the supply chain.
• The initiative, first proposed by Japan with India and Australia as partners, potentially see other Asian and Pacific Rim nations later.

Objective

• To attract foreign direct investment to turn the Indo-Pacific into an “economic powerhouse”.
• To build a mutually complementary relationship among partner countries.
• To work out a plan to build on the existential supply chain network. Japan and India, for example, have an India-Japan competitiveness partnership dealing with locating the Japanese companies in India.

Where does Australia stand?

• China has been Australia’s largest trading partner and accounts for 32.6% of Australia’s exports, with iron ore, coal and gas dominating the products shipped.
• But relations including trade ties between Australia & China have been deteriorating for a while now. 
• China banned beef imports from four Australian firms in May 2020, and levied import tariffs on Australian barley. 
• In June 2020, China’s education Ministry warned its students aspiring to study or already studying in Australia, of ‘rising racism’ in that country.
• Australia, Japan and India are already part of another informal grouping, the Quadrilateral Security Dialogue, or the Quad, which includes the U.S.

What does India stand to gain, or lose? 

• It is significant that Japan has taken the initiative to include India despite India having pulled out of the RCEP that Japan helped stitch together
• Following the border tension between India and China, partners such as Japan have sensed that India may be ready for dialogue on alternative supply chains.
• But an internal push to suddenly cut links with China would be impractical
• China’s share of imports into India in 2018 (considering the top 20 items supplied by China) stood at 14.5%, 
• Chinese supplies dominate segments of the Indian economy
• In areas such as Active Pharmaceutical Ingredients for medicines such as paracetamol, India is fully dependent on China. 
• In electronics, China accounts for 45% of India’s imports

Reasons for the Initiative
Covid-19 Realization: With spread of Covid-19 globally, it has been realized that dependence over a single nation is not good for both global economy and national economies:

• Assembly lines are heavily dependent on supplies from one country.
• The impact on importing nations could be crippling if the source stops production for involuntary reasons, or even as a conscious measure of economic coercion.

USA-China Trade Tensions: The tensions began when the United States and China both applied tariff sanctions on eachother.
India as an Emerging Supply Hub: The businesses have started seeing India as a “hub for supply chains”.
Chinese Import to India

• As per the Confederation of Indian Industry, China’s share of imports into India in 2018 (considering the top 20 items supplied by China) stood at 14.5%.
• Chinese supplies dominate segments of the Indian economy. Sectors that have been impacted by supply chain issues arising out of the pandemic include pharmaceuticals, automotive parts, electronics, shipping, chemicals and textiles.
• In areas such as Active Pharmaceutical Ingredients for medicines such as paracetamol, India is fully dependent on China.
• In electronics, China accounts for 45% of India’s imports.

Indo-Japan Trade Relationship

• Japan is the fourth-largest investor in India with cumulative foreign direct investments touching USD 33.5 billion in the 2000-2020 period accounting for 7.2% of inflows in that period, according to quasi government agency India Invest.
• Imports from Japan into India more than doubled over 12 years to USD 12.8 billion in FY19.
• Exports from India to Japan stood at USD 4.9 billion for FY19.
• Also, India is carrying forward the sentiments of self-reliance focussing on less dependence on China which is one of the reasons behind SCRI.
• Japan has included India under the SCRI initiative despite India having pulled out of the Regional Comprehensive Economic Partnership.
• Further, India and Japan are a part of QUAD (also includes the USA and Australia) and malabar (naval) exercise (also includes the USA).

Suggestions for India
India needs to enhance self-reliance against China, so that it could build resilience into the economy’s supply networks. Economic measures are of real value in this regard.

• Ease of Doing Business: While India appears an attractive option for potential investors both as a market and as a manufacturing base, it needs to accelerate progress in ease of doing business and in skill building.
• Tax incentives: These will help in attracting investments from China and other attractive locations like Vietnam and the Philippines.
• Boost Domestic Manufacturing: India’s strategy should be to boost manufacturing competitiveness and increase its share in world trade.
• Infrastructure Boost: In this pursuit, there is a need to create an infrastructure that raises the competitiveness of India’s exports.
• Removing Structural Bottlenecks: There is a need to push through long-pending legislation that aims to address the structural bottlenecks (in 4Ls: Land, Labour, Law, Liquidity) that continue to plague and hinder domestic competitiveness.
• Leveraging Service Sector: In spite of banning Chinese imports, India should tackle trade by trade.

India can lobby for a more liberalized service sector (India’s comparative advantage) in China.

Road Ahead

• Suddenly cutting links with China would be impractical: Fully dependent in Active Pharmaceutical Ingredients for medicines, in electronics. 
• Need to become self reliant: If India enhances self-reliance or works with exporting nations other than China, it could build resilience into the economy’s supply networks.  Accelerate progress in ease of doing business and in skill building. 
• SCRI initiative is at the strategy stage and has some way to go before participants can realise trade benefits  Over time, if India enhances self-reliance or works with exporting nations other than China, it could build resilience into the economy’s supply networks. Also, India needs to accelerate progress in ease of doing business and in skill building.