Establish a
China Exposure Index
India currently lacks a unified mechanism to
assess its vulnerabilities related to dependence on China. A sector-specific China
Exposure Index would provide a structured, quantifiable way to evaluate
exposure in critical industries. This index would go beyond anecdotal evidence,
enabling policymakers to compare sectors directly and identify where urgent
interventions are needed.
Early
Warning System
The index would function as an early-warning
system, regularly updating indicators such as input reliance, supplier
concentration, and inventory buffers. By flagging sectors at risk of
disruption, it would allow preemptive action before crises arise. Each sector
would receive a composite score based on three pillars:
- Input Dependency: The
percentage of key components sourced from China (e.g., 90% of rare earth
magnets for electric vehicles).
- Supplier Concentration: The
diversity and number of alternative suppliers, weighted by their
scalability.
- Inventory Lead Time: The
duration a sector can operate on existing stocks before facing a halt.
This index could be managed by NITI Aayog or a
dedicated cell within the Ministry of Commerce, guiding investment incentives,
trade diplomacy, and risk modeling. For instance, if a sector is 85% reliant on
Chinese supplies and has less than 30 days of inventory, it would trigger
alerts for intervention.
Learning
from Global Examples
Similar frameworks exist internationally. The
US Department of Defense has developed a supply chain risk management mechanism
to identify vulnerabilities in its supply chains. The UK’s Bank of England has
created a framework to measure global supply chain exposure, revealing that
China is a major supplier through indirect channels.
By identifying sectors where Chinese inputs
and low inventories intersect, India can strategically decide where to invest
in domestic capacity and where to pursue diplomatic hedges. This proactive
approach would help avoid crises like the current rare earth magnet shortage,
where supplies have halted and inventories are critically low.
Implement
Selective Stockpiling
Not every dependency warrants a stockpile, but
certain materials pose critical vulnerabilities that could have immediate
national security implications. For these vital materials, stockpiles serve as
an insurance policy, allowing time to activate fallback supply chains and
stabilize prices when normal trade is disrupted.
Strategic
Materials Stockpile
India should establish strategic stockpiles,
similar to its Strategic Petroleum Reserves, managed by a central body such as
the Department for Promotion of Industry and Internal Trade (DPIIT). This
stockpile would focus on materials that are:
- Irreplaceable or have long sourcing lead times.
- Essential for national security or industrial competitiveness.
- Vulnerable to potential supply disruptions from China.
India’s dependence on Chinese imports for
critical minerals is alarmingly high—bismuth (85.6%), lithium (82%), silicon
(76%), and others. For example, China controls nearly 73% of global bismuth
production, leaving few viable alternatives. Establishing stockpiles for such
materials would ensure that Indian industry and defense manufacturers can
maintain production during crises.
Lessons
from the US
The US maintains a National Defense Stockpile
to support military and civilian needs during emergencies. In a 2021
assessment, China was identified as the primary supplier for over 20 critical
materials expected to be in short supply during conflicts. India's reliance on
China for critical minerals is likely comparable, underscoring the need for
strategic stockpiling.
Introduce a
'Resilient Trade Partners' Clause
India should implement a 'Resilient Trade
Partners' clause in its procurement policies for critical sectors like
defense, telecom, infrastructure, and energy. This clause would prioritize
sourcing from countries with low geopolitical risk, stable diplomatic ties, and
transparency.
Short-Term
Costs, Long-Term Benefits
While this approach may increase procurement
costs initially, the long-term advantages—reduced supply shocks, enhanced
investor confidence, and greater policy stability—far outweigh these costs.
Japan’s response to China’s 2010 export halt illustrates this strategy well. By
incentivizing firms to shift sourcing to countries like Vietnam and Australia,
Japan reduced its reliance on Chinese rare earths from 90% to around 60%.
India has already begun to apply similar
measures in the telecom sector by requiring 5G equipment to be sourced only
from government-approved “trusted sources,” effectively limiting Chinese
participation. This strategy could be expanded to other critical sectors.
Conclusion:
A Proactive Approach to Supply Chain Resilience
India’s industrial growth will depend not only
on its production capabilities but also on its ability to anticipate and
mitigate supply chain risks. As China continues to leverage its dominance,
India must adopt a proactive stance, combining long-term planning with agile
responses to prevent pressure points from escalating into crises.
The battle for supply chain control has
intensified since the COVID-19 pandemic, making it imperative for India to act
swiftly, beyond reliance on long-term strategies like the Production Linked
Incentive (PLI) scheme. While PLI and targeted subsidies stimulate growth,
immediate, flexible measures are crucial to avert supply chain crises akin to
the current challenges.
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