Turning crisis into opportunity: the 'Make in India' moment is here
Aakanksha Mishra discusses the global push to diversify supply chains away from China, and India’s ambitions to become a new global production hub. Aakanksha is a corporate lawyer based out of Bengaluru, India.
The ‘Make in India’ lion in Connaught Place, New Delhi. Image courtesy of PhotographerIncognito, Shutterstock
Over the past couple of decades, China has become the hub of global supply chain networks. It has been reducing its reliance on foreign inputs while continuously increasing its exports of intermediate goods. Therefore, any disruption to China’s value chains will have ramifications on supply chains globally. In light of the novel COVID-19 pandemic, China imposed city wide closures and quarantines, and factories in the world’s second largest economy shut down. A shockwave of ripple effects battered global supply chains.
The Urgent Need to Diversify Supply Chains
The rapid spread of the virus has sounded a clarion call to diversify supply chains away from China. Last month, Japan announced $2.2 million USD in incentives to help Japanese companies to shift production out of China, and back to Japan or to other countries. Meanwhile, the Trump administration is “turbocharging” an initiative to remove global supply chains from China. As manufacturers examine their supply chains for a post-COVID 19 world, India has emerged as an alternative destination. With low labour costs, incentives, a relaxed regulatory environment for manufacturing, and a reduced corporate tax rate, the Indian government is making an all-out attempt to hard sell India as the next global manufacturing hub. According to government sources, around 1,000 foreign companies are engaged in discussions with Indian authorities in sectors such as mobiles, electronics, medical devices, textiles and synthetic fabrics.
The political and geostrategic discomfort with China is palpable in many countries throughout the world. While trade tensions between the US and China continue to brew, India, which has major outstanding issues with China, is currently engaged in de-escalating the latest border stand-off with China as well. This has provided an impetus to the endeavours to shift supply chains out of China. India is seeking to lure US businesses, including companies in the healthcare sector, such as Abbott Laboratories and Medtronic Plc, to relocate their production units from China to India. Furthermore, state governments in India too, are leaving no stone unturned to woo foreign investors. India must take advantage of the growing global discontent with China, and secure a bigger role in global supply chains in a post-COVID-19 world. India has a unique opportunity to win this new wave of global rebalancing.
“…in a post-COVID-19 world, India can play a pivotal role in buttressing other economies and aim to become the world’s newest production hub.”
In recent years, India has taken proactive steps to facilitate foreign investment. In July 2017, the Goods and Services Tax (GST) was rolled out with the motto of “one nation, one tax.” The harmonization of tax rules, reduction in compliance costs, and adoption of simplified automated procedures were undertaken to improve the business climate in India. Last year, corporate tax rates were reduced to drive the country’s manufacturing sector up global value chains. Further, India has cleaned up its insolvency regime with the introduction of the Insolvency and Bankruptcy Code in 2016. All these efforts have helped India climb up the ease of doing business rankings from 142nd position in 2014 to the 63rd spot now.
But Indian businesses had started setting up local supply chains even before the pandemic. The Indian government raised import duties on several products to incentivize domestic value added. In March 2020, the Indian government allocated $6.3 billion USD to attract investment and also to incentivize electronics and components manufacturing as well as exports. It also aimed to create manufacturing clusters – with a minimum area of 200 acres – that have common facility centres, ready-built factory sheds and plug-and-play facilities.
Reforms Underway to Make India a Global Manufacturing Hub
In response to the COVID-19 crisis, Indian Prime Minister Narendra Modi announced a $22.6 billion USD stimulus plan (approximately 10% of India’s GDP) while unveiling his vision for “turning crisis into opportunity” – a resolve for “Atmanirbhar Bharat” i.e. self-reliant India. Self-reliant India will be built on five pillars – economy, infrastructure, a technology driven system, demography, and demand. He stated that self-reliance would prepare the country for tough competition in global supply chains and that India should play a bigger role.
Several bold reforms have been proposed under this scheme aimed at encouraging business and attracting investment. The Indian government announced reforms to: fast track investments through the creation of an empowered group of secretaries for fast track investment clearances; constitute a project development cell in every ministry of the government; launch incentive schemes for the promotion of new “champion sectors;” and rank states on their attractiveness to compete for new investments.
In India, the Micro, Small and Medium Enterprises (MSME) sector is integral to supply chains. MSMEs are vital to employment generation, output, and exports, as the sector accounts for one-third of India’s manufacturing output and 45% of its exports. Keeping this in mind, several measures such as a moratorium on bank payments, larger collateral free loans, special refinancing windows, special credit guarantee schemes, subordinate debt funding, and equity support windows were extended to provide relief to the stressed MSME sector. Special focus will also be given to enhance exports, with particular efforts to reduce power costs, logistics costs, and production costs.
Labour reforms in India are also in the pipeline. The government is codifying 44 existing central labour laws into four codes–wages, social security, occupational health, safety and working conditions, and industrial relations. In the immediate aftermath of the pandemic, several Indian states reeling under severe economic distress have ushered in radical labour reforms by suspending a number of labour laws (pertaining to work hours, holidays with pay, occupational safety, notice periods before retrenchments etc.). These reforms are intended to kick-start industrial activity and to attract firms exiting China. However, the move has been severely criticized for not only violating basic rights of workers, but also for being introduced in an undemocratic manner by sidestepping the usual legislative process.
Furthermore, acquiring land in India is highly complex and time consuming with multiple stakeholders involved, which has often dampened foreign investor sentiment. Recently, it has been reported that India is developing a land pool nearly double the size of Luxembourg to lure businesses moving out of China. Under the Atmanirbhar Bharat scheme, the Indian government has announced that it will use a geographic information system (GIS) based platform to create a digital network of land banks to boost industrial development.
Time to Seize the Opportunity
For all the talk about India being a more lucrative destination for investors willing to hedge against overdependence on China, it is still ambiguous whether India will be able seize the opportunity. With Chinese factories slowly resuming operations, it is possible that multinational firms may not shift supply chains in their entirety anytime soon. While some lower-value sectors, such as apparel, may move out of China, the higher-value sophisticated manufacturing clusters related to technology and consumer electronics will find it difficult to turn away from China’s distinctive allure.
India will also face stiff competition from countries such as Vietnam, Taiwan, and Thailand, as each vies for a bigger slice of the manufacturing pie. The production cost difference between India and other south-east Asian countries is about 10 to 12 %. Due to the pandemic, many companies are currently focused on cash preservation which will limit shifting production lines in the near term. Nevertheless, India is looking to capitalize on its market size. Domestic consumption absorbs a large part of the output in India. Though exports are important for meeting foreign exchange requirements, global markets are likely to remain subdued for a considerable period. Post COVID-19, India’s domestic consumption is expected to bounce back sooner than exports.
India could profit from greater trade with high income markets, but this will require a reorientation of trade specialization towards labour intensive product lines. Firstly, unexploited potential in traditional unskilled labour intensive sectors such as textiles, clothing, footwear etc. must be harnessed. Secondly, India should focus on “network products,” where production processes are globally fragmented and controlled by leading multi-national enterprises within their ‘producer driven’ global production networks. Examples of such network products are computers, electronic and electrical equipment, telecommunication equipment etc. To this end, greater efforts should be directed towards skill upgrading with increased focus on vocational training and training in new age skills like artificial intelligence, blockchain, data analytics, etc.
Finally, India must also augment work on infrastructure, logistics and trade facilitation so that transaction costs are reduced. The Indian government has announced a slew of measures under the Atmanirbhar Bharat scheme for boosting infrastructure in various sectors such as agriculture, coal, power, etc. A simplified permit and single port clearance, while addressing bottlenecks concerning the transport industry and increasing logistics sufficiency, will be steps in the right direction.
Even as the Indian economy is battered by the pandemic this year, it is still likely to be better off than all other G20 countries, with a forecasted growth rate of 2.1%. The stimulus package and the liquidity measures undertaken by India may help its economy edge towards a V-shaped recovery. Thus, in a post-COVID-19 world, India can play a pivotal role in buttressing other economies and aim to become the world’s newest production hub.