Hormuz. An overwhelmingly dominant gateway of fuel oil for India, although other—more distant—sources have been tapped after the West Asia war began. The absence of a coherent command on both warring sides makes progress towards restoration of safe tanker passage through the strait tangled and uncertain.
Hormuz. An overwhelmingly dominant gateway of fuel oil for India, although other—more distant—sources have been tapped after the West Asia war began. The absence of a coherent command on both warring sides makes progress towards restoration of safe tanker passage through the strait tangled and uncertain.
On one side are two countries which can fire missiles or make pronouncements without informing—let alone getting the approval of—the partner. On the other side is a country where the elimination of the Supreme Leader started the war, and led to a frayed command structure.
On one side are two countries which can fire missiles or make pronouncements without informing—let alone getting the approval of—the partner. On the other side is a country where the elimination of the Supreme Leader started the war, and led to a frayed command structure.
Tanker passage is mired by fitful eruptions of hostilities and fears of sea mines.
Hormuz has in the past had a similarly key role, as the monopoly point of despatch for horse exports, starting in the late 13th century.
Scholars estimate that at its peak in the early 18th century, annual horse imports into the Indian landmass exceeded the value of exports from Bengal to all European East India companies combined. The horse trade eventually declined with the replacement of cavalry warfare with artillery.
The import of horses between the 13th and 18th centuries was buoyed by unceasing warfare in the Deccan between the Vijayanagar kingdom and its neighbours, but there was also trade malfeasance.
An early 16th century Italian traveller, Ludovico di Varthema, found that a ban on the import of mares was imposed by horse traders so as to disable horse breeding in the Indian subcontinent.
Marco Polo reported another ban—on the immigration of farriers (trained in horse care), put in place by horse merchants “lest that should in any degree baulk the sale of horses, which brings them in every year such vast gains.”
Hormuz came under the control of Afonso de Albuquerque around the same time as his capture of Goa.
Several such long memories of trade malfeasance underlay trade hostility in post-Independence India until the economic reforms of 1991. Thereafter, trade openness has clearly enabled spectacular growth spurts in India. But this was pursued without attention to the dangerously extreme dependence on imports which has happened in some sectors, reminiscent of the horse story.
We are of course helplessly in need of imported crude oil to the extent of 90% of our total requirements. We ignored coal gasification, the only source that could substitute for oil to any substantial degree.
This has now been corrected with Cabinet approval on 13 May for a provision of ₹37,500 crore targeting gasification of 75 million tonnes of coal and lignite.
There has certainly been a policy push in renewables, but the harder task with renewables is to create capacity for long-duration energy storage. A fiscal incentive scheme for this too is reportedly underway, but it will be designed and ready for offer only a year from now.
Atmanirbharta (self-sufficiency) adopted in April 2020 was operationalized through India’s performance-linked incentive (PLI) scheme for chosen sectors, criticized at the time for being a retrogression to pre-reform style appropriation by the state of the right to choose sectoral winners.
The PLI scheme in some cases shifted import dependence from final products to key inputs in the supply chain for domestic manufacture of the product. For example, upgraded point-of-sale machines for card payments, newer versions of which include a secure pathway to the Unified Payments Interface (UPI), have run up against a shortage of chips from China. Since earlier more makeshift access to UPI had led to widespread fraud and misuse, cash is coming back for small payments.
The PLI 2.0 scheme being designed for electronic products and components frontally addresses input import dependence by offering greater incentives for local sourcing of inputs. China has already pushed back through its recent tightening of regulatory laws threatening punitive action against companies that shift production out of China.
Pharmaceuticals, on the contrary, offer a successful case where PLI incentivized the domestic manufacture of the key active pharmaceutical ingredient in medical drugs, so releasing the chokehold of their source of supply (China).
The globalization experience has shown that overwhelming scale economies can enable a first-mover to become the lowest price, go-to supplier of a key input for the rest of the world. Efficient, yes, while it lasts. But when supply from that source is withheld or otherwise disrupted, production facilities built up all over the world in the expectation of smooth availability close down. From a global perspective, this is terribly inefficient.
Global supply chains must be treated like what they are, a useful but risky instrument for improving production efficiency, safe only when dependence on any one source is limited to a percentage that should not be crossed. What that percentage should be can be worked out by modelling multiple supply sources and the reliability of maritime or air transport routes specific to each.
Optimal levels of dependence on multiple alternatives for each link in the chain can then be worked out. These models will have to be continually updated in accordance with shifting geopolitical risks and changes over time in the production capacity of source countries.
The author is an economist.