Five lessons from India’s economy that can help policymakers make supply chains more resilient
The rise of supply chains has been an important driver of economic growth and development across the world. Yet, recent supply chain disruptions caused by the COVID-19 lockdowns highlight how supply chains also can spread shocks across the economy, while amplifying shortages and increasing inflation. Understanding the resilience and robustness of complex supply chains would allow policymakers to benefit from the efficiency gains of supply chains while mitigating economic shocks.
Even though we have detailed data from a handful of countries (e.g., Costa Rica, Belgium and Chile), until recently, there was a lack of meaningful data that would allow researchers and policymakers to investigate these issues in large emerging economies like India, which are important connection points in global value chains.
In collaboration with state governments in India, I worked with a group of researchers to use administrative data to better understand the roles supply chains play in the Indian economy. These administrative data record firm-to-firm transactions, both within India and with firms abroad, and allow the research team to reconstruct the entire supply chain from the data. A few important facts emerge from this research.
Five Lessons on Supply Chain Resilience
First, supply chain resilience and robustness strongly determine whether adverse shocks like the COVID-19 lockdowns have long-term economic consequences. For instance, this research finds that companies with more suppliers in COVID-19 lockdown regions were much more likely to stop buying from their suppliers, leading to a 30% decline in purchases, both of which had downstream effects on the supply chain.
Second, resilience (or the ability of supply chains to recover in the aftermath of a shock) and robustness (the ability of the supply chain to not be impacted by the initial shock) depend on various characteristics of the supply chain. Interestingly, more complex supply chains, as measured by having more and varied inputs, which are any resource used to a create goods, are more resilient. This is likely because firms with more complex products – think machines instead of rice – have likely fostered strong relationships and built contingencies for such shocks. Furthermore, firms that had large and important suppliers were also more resilient to such shocks. In contrast, firms that trade in widely available products, like rice, were more likely to break links, as they perhaps had less incentive to invest in strong relationships.
Third, we studied how firms in India reform after such shocks. In the aftermath of shocks, firms concentrate their purchases on larger and better-connected suppliers and to closer suppliers, i.e., reshoring.
Fourth, in subsequent work with additional collaborators, we document that in the presence of such shocks, firms in India find it difficult to find new suppliers. The inability to quickly switch to other suppliers – who were, say, not in a COVID-19 lockdown zone – is one of the most important reasons why India’s GDP fell drastically in 2020, as shocks were amplified along the supply chain.
And fifth, given the relatively weak enforcement of contracts in this context, many firms are worried that suppliers will renege on their contracts. As a result, most firms form new links and trade based on prior relationships and social networks. This leaves potentially profitable and productivity-enhancing trades on the table. As such, better contract enforcement by the government can facilitate profitable trade, boosting productivity.
These five lessons from supply chains in India tell us that policy should focus on the resilience and robustness of supply chains, facilitate links with larger and better-connected suppliers, facilitate matching between firms and suppliers, perhaps with the help of online platforms, and invest in contract enforcement.