South Asia must now build resilient supply chains | Analysis
The outbreak of the coronavirus disease (Covid-19) pandemic has brought about new opportunities for regional cooperation in South Asia. On March 15, Prime Minister (PM) Narendra Modi organised a regional conference with the South Asian Association for Regional Cooperation (Saarc) leaders and set up an emergency fund of $10 million to fight the pandemic. A senior official-level meeting was held on March 26 to frame mechanisms to further health cooperation. The region is also witnessing cooperation at a bilateral level, with Bangladesh supplying food and medical equipment to Maldives, and India stepping up its medical assistance to the region.
Many commentators envisage that there will be a decline in globalisation and relative strengthening of regional supply chains. Geography will assume an important role in supply chains, with the proximity of production centres weighing equally against conventional elements such as facility, labour, and transportation time and cost. India, in particular (and largely the South Asian region), is foreseen to benefit from this for two reasons — one, it is expected that several firms moving out of China will look at India as a potential destination, and two, India’s importance as a market for its neighbouring countries will also increase. While the shifting focus on localisation of global supply chains provides an opportunity for the region to become better integrated economically, there are existing challenges that must be addressed.
In the recent Brookings India report, India’s Limited Trade Connectivity with South Asia, we have mapped the trends in India’s low trade connectivity with the region, the gaps that need to be addressed, and recommendations for increasing trade in the region. Despite huge potential, intra-regional trade in South Asia is among the lowest in the world at 5% (World Bank). To date, India’s trade with the region has ranged between 1.7% to 3.8% of its global trade. China has steadily increased its exports to the region from $8 billion in 2005 to $52 billion in 2018. As a result, only Afghanistan, Nepal and Bhutan now have a higher trade share with India as compared to that with China. However, India continues to be an important market for all its neighbouring countries, except Myanmar and Pakistan.
The pandemic created both supply and demand-side shocks to global trade. A recent report by the Economist Intelligence Unit shows that companies with localised industries and supply chains were able to mitigate the shocks better.
Recently, PM Modi also stressed on self-reliance while emphasising on bolstering India’s supply chains. South Asian economies, particularly the small and medium enterprises in the region, can benefit from strengthening regional supply chains. The relatively younger population of the region and a rising middle-class, is well placed to supply workforce for labour-intensive production and generate demand for goods and services, respectively. To achieve better regional integration, there are several steps that South Asian countries can take.
First, supply chains can only be strengthened if protectionism in the region is reduced to facilitate the flow of goods and services across borders. This includes the reduction of both tariff and non-tariff barriers to trade. This can be done either through the revision of the free trade agreements or unilaterally by India. India’s health exports in particular — such as medical devices, surgical equipment, and pharmaceuticals — are beneficial to the neighbourhood.
Second, cross-border logistics and infrastructure must be improved for supply chains to be economical. The region also lacks seamless end-to-end connectivity, has high logistics cost and inadequate infrastructure for warehousing. Over the last few years, there has been a focus on improving infrastructure at trade ports in the region — approximately six Land Customs Stations (LCS) have been upgraded to Integrated Check Posts with 13 more in the pipeline, connectivity infrastructure with Nepal and Bangladesh (rail, road, pipelines and inland waterways) has increased in number, and air connectivity with Sri Lanka has grown with the operationalisation of Jaffna airport. Despite this, there is a need for South Asian countries to focus on reducing logistics barriers.
Third, the pandemic has shown the importance of digitisation. As sanitation measures increase in cross-border movements, there is a need to increase investment in digital infrastructure to reduce human interactions. The digitisation of documentation and installation of radio frequency identification at land ports are some of the measures that can be explored.
India’s dominant presence in South Asia necessitates that it must take steps to strengthen cooperation, build resilient supply chains and support economic recovery in its neighbouring countries. The pandemic has provided an opportunity for India to reverse its sluggish trade with the region. Since regional markets are easier to connect than global markets, India is seen as an attractive market by its neighbours; Bangladesh, for example, has shown interest in connecting with the Northeast. By optimising its strategic location in South Asia and its availability of labour and a growing middle class to generate supply and demand of goods and services, India has immense potential to attract investments and make itself an export-led economy.