Time to hustle
Business Standard, 6 September 2021
Global transportation has taken a series of knocks and is considerably disrupted. The problem is severe and it's not going to end soon. These difficulties are hampering the most important engine in the Indian economy, exports. Conversely, there is more upside in export orientation than has been visible so far. Firms need to look at the situation in a few novel ways.
In the depth of the pandemic, a lot of production and transportation had stopped. When vaccination and fiscal stimulus brought demand in advanced economies roaring back, this resulted in a price-led process of reassembling global production chains. Demands upon manufacturing the world over have been particularly strong, given the extent to which household consumption has shifted away from services in favour of goods.
Containers are stuck in the wrong places. Container ships are waiting at ports worldwide to an unusual extent. There have been stoppages in the working of the Suez Canal, and Covid-induced stoppages at many Asian transportation hubs.
Prices of transportation have skyrocketed. The Drewry World Container Index, produced by the British firm Drewry, has gone up from about $2000 for a 40 foot container last year to about $10,000 on 2 September. To some extent, vessels have been diverted from India to the Pacific, so the problem here in India is a bit worse. Over and above high prices, there are reports of a 100% premium for instant availability. Air freight has also faced limitations on account of Covid restrictions on crews, and prices have gone up there also.
A modern car is made of 30,000 parts, that are produced all over the world. Global specialisation is essential to modern prosperity, but it makes demands on reliable and low cost transportation. Supply chain managers are scrounging together improvised solutions to keep production going under these difficulties.
We are now in September and the global production system is gearing up for the holiday season surge in consumer purchases of late 2021. This is likely to place greater demands upon transportation in the last 4 months of 2021.
These problems will significantly shape the world economy in 2021 and 2022. Frictions in transacting of any kind hamper the gains from international trade. The economic reasoning which teaches us that tariff barriers are bad for welfare equally implies that non-tariff costs are bad for welfare. Global improvements in transportation were central to the prosperity that was brought about by globalisation. Conversely high costs of transportation induce reduced transacting and therefore reduced well being.
For firms in India, there are four implications.
- Under traditional conditions -- e.g. last year -- there was a certain organisation of production in the world economy. That organisation stands significantly disrupted. We can view this as just an challenge for every internationally oriented firm. It is also an opportunity. All global firms are scrambling to creatively solve sourcing problems. Many a firm -- worldwide -- is failing on its deliveries, which creates opportunities for you, either in the products that you make or in an adjacency that you can rapidly occupy.
- Under traditional conditions there were mature mechanisms for moving goods and there were few arbitrage opportunities. There was little money to be made by (say) purchasing a widget in India and selling it in Colombo. Widget prices worldwide are so disrupted that there are opportunities for many an entrepreneurial hustle. Firms operating in the real economy should devote greater attention to identifying and exploiting these arbitrage opportunities.
- Under traditional conditions, we knew that it was easier to get coal from Australia to Madras instead of bringing it from Bihar. Firms in the Indian peninsula generally look out at the world for business counterparties. But if the costs of cross-border transportation have gone up, sourcing from within South Asia is more feasible. There are now many opportunities in the peninsula for sourcing from the heartland. These profit opportunities can even pay for the fixed costs of establishing business relationships and getting a weak producer in the heartland up to speed. Overland routes that cross the Indian border are more important, given that sea and air routes have become expensive. It is better to organise Indo-Pak trade across the border rather than through Dubai.
- For about a year, it has been well understood that there is a case for Indian firms to harness demand in the countries which had state capacity for vaccination and fiscal stimulus. The leadership of every firm should prioritise the overseas market. To some extent, this is now visible in the remarkable exports data. However, the scale of the disruption in global transportation suggests that the facts in hand for Indian exports growth are only a foretaste of how things can work out in the coming 18 months. The basic message of emphasising the overseas customer is stronger than is suggested by the exports data.
For the Indian state, there is amplified importance of the main economic policy response required after the pandemic: to remove trade barriers, so as to reduce the costs of raw materials for Indian firms, and help the Indian economy better harness the global recovery. This message is amplified at a time when transportation costs have increased the frictions of cross-border activities. This is a time to carefully look at the full range of trade barriers operated by the Indian state, and remove them as much as possible. We should also create conditions in South Asia to feed inputs to the internationally oriented firms of the Indian peninsula, using roads and rail.
Alongside this, there is a case for reviewing the ground realities of infrastructure, and removing barriers to price adjustment. This is a situation like masks or vaccines. What the economy requires is a massive effort by private people to produce more transportation services. The market economy achieves this through price signals. State interference in price movement hampers this supply response.
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