For global trade, our food industry has to be competitive. Poor supply chain management takes a long time for the goods movement from factory site to port of delivery which only adds to the cost, writes Rajat K Baisya.
Table of Contents
India’s Decision to Refuse RCEP
India refused to join the RCEP in its recent Bangkok meeting saying that India’s concern has not been addressed. The Regional Comprehensive Economic Partnership (RCEP) is a free trade agreement in the Asia-Pacific region between the ten member states of the Association of Southeast Asian Nations and their five FTA partners. India, ASEAN’s sixth FTA partner, opted out of the agreement in 2019. I have tweeted that India should have joined by appropriately renegotiating certain areas like IT and Pharma sectors if required. The deal, as proposed was a good one even for India and many of our fears have been reasonably addressed.
Why then we refused to sign. Even Japan also has pleaded that India should join and appealed to other nations in the region to take care of India’s concern. India is the only country that has opted out of this trade agreement. As India opted out the number of countries in RCEP stands at 15 now. The 15 countries are the 10 ASEAN nations, China, Japan, South Korea, Australia, and New Zealand. A joint statement by the RCEP countries said that the 15 remaining nations will begin formal work towards inking the pact in 2020 while still making efforts to resolve India’s objections.
Benefits and Challenges of RCEP
The RCEP is the world’s largest free trade zone covering almost half of the world’s population, 40% of global trade and 35% of the world’s wealth. Our farmers have been given protection from imports of agricultural products including milk. But the issue is our export competitiveness. No country can grow without export. And we are failing in that. If other smaller countries like Vietnam, Thailand, Laos, Philippines, Myanmar can compete and grow and benefit why India cannot. Between 2013 and 2018 a small country Vietnam’s international trade grew by 300% whereas India’s trade volume is constant and stagnating. India will not gain by not going ahead along with the other 15 nations in RCEP. But time is still there till March 2020 for India to join.
Reforms Needed for India’s Competitiveness
India needs big-ticket reforms like on labour laws that are rigid, simplify tax laws and reduce or eliminate all kinds of subsidies at the cost of the industry to make our trade, commerce and businesses more competitive, flexible and investor’s friendly. In a digital economy interference and involvement of various government departments with the public directly has to be reduced and made online. But these are much broader issues related to government policy. I would like to concentrate on what the industry can do for themselves.
Challenges in the Dairy Industry
There was a serious concern about dairy products. India is the world’s largest producer of milk. About 25% of world milk production is in India but when it comes to global trade India do not have any comparative advantage. New Zealand’s price is considered as the index price for dairy products for global trade. New Zealand is a small country but more competitive In my next article I propose to cover the issue related to the dairy industry in India. But here I would like to stress upon the reasons, in general, tracing the reasons why our food industry is not being globally competitive. It is not necessary for me to tell the readers again that India has two distinct advantages in food processing and they are low farm labour cost and low farm-level prices for our agriculture and horticultural produce. But in spite of that, we are not globally competitive when it comes to doing international trade.
Supply Chain Management’s Role in Competitiveness
The primary reason has to be traced to our supply chain management practices. We also have suffered from a lack of scale in many processed food categories and on poor yield in many horticultural products. A lot of things now are happening in supply chain management areas in the country. We have technology, and knowledge as well as skilled manpower. Warehouse management practices have also been modernised and cold chain management practices are advocated to control waste. But in spite that why in food industry competitiveness is not improved? One reason is that large numbers of processors are still practicing age-old technology and not making fresh investment and remained old fashioned although they have the knowledge to imbibe new technology and management practices.
Supply Chain Management and Infrastructure
A careful analysis of the value chain will reveal where the value is lost and the only cost is being added without any added value. For global trade, our industry has to be competitive and therefore we cannot afford to lose value. We lose a lot of value on account of the quality and cost of multiple handling of any agro commodity. Although it has reduced, the middlemen’s role in agriculture and food processing has not been totally eliminated. Our distribution is still very complex. It takes a long time for the goods movement from factory site to port of delivery which only adds to the cost. Part of the reason is of course relatively poor infrastructure. Although corruption has reduced in high places but at lower level, corruption still is an issue and that also reduces efficiency. Although GST has been rolled out for almost two years now but the full impact of GST is still to be realised. Toll gates are still a source of delays in cargo movement and hence the increase in-transit inventory and the cost.
Optimizing Vendor Relationships
We also have the issue with respect to cargo handling efficiency at seaports when compared with other leading countries in the world. The supply chain now has to be taken as an integrated end to end function along with logistics to gain competitive advantage. Such a view is missing in the food industry although other industries including automobile are highly efficient. The manufacturers of food products will have to develop the vendors and suppliers of input materials around the factory location to reduce the time to travel which in turn reduces the working capital locked up in various kinds of inventories reducing the competitiveness.
For example, packaging material suppliers should be very close to your factory so that you don’t need to keep a large inventory of packing materials. The vendor development and rating should be practiced to improve lead time, quality and price. Inventory management practices should be improved and there is a possibility of remarkable improvement and where possible vendor managed inventory should be practiced. Material handling is another area of concern and the food industry is still very labour intensive. Industrial labour costs have been revised upwards now and it is not very economical to go for manual handling of products any longer.
Supply Chain Management in Global Trade
Supply chain management covers very wide areas of business functions including procurement, production, warehousing, transportation and distribution and the only way to be competitive in global trade to create value in the entire value chain which is another name of the Supply chain. The performance management and bench marking have to be undertaken by industry to create a cost advantage through innovations and efficient and effective supply chain management practices.
