Supply chain disruptions hog the headlines with the raging Russia-Ukraine war. The supply chain, which is the centre-piece of global trade, accounting for three-fourth of the world trade, will face turbulence with the global demand fracturing due to war. Oil prices skyrocketed and will increase further. Inflation will increase, squeezing the demand. Stock markets fell, and plummeting bond prices will increase borrowing costs. Given these elements, clouds are shrouded over supply chain disruption and will impact global manufacturing and trade. China’s predominance already ebbed and China+1 or decoupling from China are the new strategies for diversifying supply chain. To this end, Vietnam and India, pairing low labor and manufacturing costs, have adopted several policy measures to make their nations alternative supply chain hubs. In this regard, Vietnam is ahead in the race and leaving India behind.
The factors attributing to Vietnam racing ahead were mainly two. First, a plethora of FTAs (Free Trade Agreements) were signed by Vietnam with the big market for supply chain. It entered a FTA arrangement with European Union in June 2019, with the UK in December 2020 and reworked elements with the remaining members of CATPP (Comprehensive Agreement of Trans-Pacific Partnership). Second, by issuing new policy, it offered mega tax incentives to attract FDI. Vietnam issued Decree No 57/2021/ND-CP, by which allowing a tax incentive of 100 percent tax holiday in corporate tax for the first 4 years in offering to the Supporting Industry, who started manufacturing before 2015 and for a further 9 years a 50 percent tax holiday will be offered. The policy came into effect in June 2020.
These elements gave a big push to FDI in Vietnam. South Korea and Japan splurged in big cash investments in the supply chain industry in Vietnam. Eventually, the export of supply chain merchandise from Vietnam sparked. The global key player like Foxcom, a Taiwanese base contract manufacturer of Apple, invested US$1.5 billion in 2020 and further raised its investment by US$700 million in 2021.
Keeping pace with the offshoot of alternative supply chain sources, India also adopted several policy initiatives to boost supply chain manufacturing by giving new focus in Make in India. It extended PLI scheme ( Production Linked Incentive) from three to thirteen manufacturing sectors. Under the scheme, it offers a 4 to 6 percent incentive through sales.
Alas! there were few takers. Lack of transparency, red tape and cumbersome procedures marred the implementation of the policy. Inadequate reforms in bureaucracy is the major obstacle in implementation of the schemes.
Eventually, while Vietnam could reap greater benefit of policy initiatives by revamping the supply chain industry even during the pandemic, India is trailing behind. For example, exports of electronic and electric items by Vietnam, comprising of mainly component parts, increased by 14.4 percent in 2020 and by 18 percent in three quarters of 2021, albeit pandemic dented the global market. In contrast, India’s exports of electronic and electrical items declined by 6.4 percent in 2020-21. Noteworthy to mention that FDI induced manufacturers in Vietnam accounted for 95 percent of exports of these items.
These unveil one of the principle characteristics of the success of supply chain industry. That is, strong trade tie up with assembly markets, such as FTA engagement, is imperative. USA, EU and Japan are the biggest assembly markets. They account for nearly 40 percent of Vietnam exports of electronic and electrical items. Vietnam has signed FTA with Japan, besides the EU.
India has signed 13 FTAs. Unfortunately, India’s experience with FTA has been a bitter-sweet. The majority of the FTAs were beneficial to partner countries. The India-ASEAN FTA is a case in point. ASEAN exports to India increased by 12 percent since it entered its FTA with India in 2012. In contrast, India’s exports to ASEAN increased by only 4 percent.
One of the factors impeding India’s benefit was the market size of the partner countries and the economic philosophy of these nations. These nations are small nations and their economies are export based. Further, the majority of the partner countries are engaged in FTAs with low cost manufacturing countries. Given this, intra-trade between these countries played an important role in lowering the manufacturing costs. Intra-trade between ASEAN nations through AFTA (ASEAN Free Trade Agreement) is a case in point. This led India’s manufacturing cost to be uncompetitive. According to ADB, India’s utilization of FTAs is one of the lowest in Asia.
Against these backdrops, India should reinvent its policy perspectives towards FTAs. It should hurry up FTAs with big markets like the EU and USA. Negotiation for a FTA with the EU has been stretching over fourteen years and not concluded yet. Both the EU and USA account for nearly 40 percent of India’s export of electronic and electrical items, pitching the biggest supply chain market. With tariffs done away under FTA, not only trade potential between India and the EU and USA will increase, but will also leverage trade related investment. The USA and EU have the advantages of technology and financial muscles and India has an edge in providing low cost of production base. FTAs will encourage USA and EU investors to invest in India to gear up supply chain industries.