Hyderabad: A complete lockdown of economic activity in many large economies, and that of global trade, does require that each country and its business leadership reviews the country’s and their business’ dependence on global supply chain and manufacturing hubs. The world has never faced a supply chain disruption of this magnitude and this certainly opens up new opportunities for India in manufacturing.
Experts believe there are two reasons why an alternate to China is being sought. One, companies from the US, Japan, South Korea and Europe have noted how risky it could be to build and depend only on their Chinese manufacturing facilities to meet large part of their global demand. Secondly, geo-political stress is rising even as the world is battling the pandemic. Post-Covid, investment would be directed at spreading the supply chain to mitigate risks. India has a role to play but is going to face some competition.
Anil K Sood, professor and co-founder, Institute for Advanced Studies in Complex Choices (IASCC) told Telangana Today, “While we will see a rethink about where to produce, it is not likely to be about China only. Global business leadership teams are likely to look at how to balance their supply chain and bring production closer to consumption centres, rather than asking whether to produce in China or not.”
Assocham secretary general Deepak Sood, said, “The global manufacturing firms had set up their facilities in China, taking initial comparative advantage of labour cost and speedy decision making. Plus, the Chinese authorities had built massive infrastructure to facilitate the global manufacturing. However, with the US-China trade war, even before the outbreak of Covid-19 virus, the cost advantage started decelerating.”
“We can aspire to be a manufacturing powerhouse, of the size of Japan, but not in the short run, i.e., it will take us at least 10 years, assuming that we grow at the rate of 9.8 per cent per annum. Our growth rate during the last 10 years has been just 6.8 per cent, compared to 12 per cent for China. China has a dual advantage, as it is the world’s biggest economy in purchasing power parity terms and is the factory of the world, which is 2x the size of the US manufacturing,” noted Anil.
Not only Vietnam and its neighbours Bangladesh and Sri Lanka, India will have to prepare to compete with existing manufacturing powerhouses such as Italy, France, the UK especially after Brexit as they try to bring back production closer home-either to their own countries or free-trade areas that they are part of. Anil added, “We may also see the emergence of a strategy like what Japan has planned. Japan is offering to allot Yen 220 billion (about Rs 16,000 crore) to companies for shifting production to Japan and also packages to those that plan to shift production to countries other than Japan.”
Deepak said, “India stands a very good chance to emerge as an alternative to the global manufacturing hubs. The nation has advantage of vast pool of highly skilled, skilled and semi-skilled manpower. Both the Centre and States are keen on receiving global investment under the Make in India banner. The Ease of Doing Business should improve further and specific strategy put in place for each product category. While Japan and South Korean companies would be among the global companies, looking for alternative manufacturing facilities, Vietnam and Taiwan are surely competitors, but we need to be agile.”
India can expect to compete with China in sectors where manufacturing is either already at a global scale in India or the Indian businesses have the ability to invest to build global scale manufacturing plants. Unfortunately, the list of global scale manufacturing capacity in India is not that long.
At best, Indian manufacturing has done reasonably well in automotive (particularly two-wheelers), pharmaceutical, assembly operations of mobile & household appliances, etc., as domestic demand provides Indian producers the ability to invest for building scale. Indian firms have also done reasonably well in steel production, but China, Korea and Japan continue to be formidable competitors.
Deepak said, “India can scale up global manufacturing in the entire automobile supply chain. Most of the major manufacturers are already here; we need to follow up with them much more intensely. Then, sectors such as electronics, pharmaceuticals, medical devices, food processing, specialty chemicals, consumer durables hold potential for global manufacturing. But we need to be competitive in world-class infrastructure, logistics and have modern laws governing labour, land and other regulatory compliances.”
India’s import dependence, which had come down significantly till 2017, has started going up. On one hand, it is a function of oil prices and on the other, it is determined by India’s trade balance with China. It is only just recently that China’s share in Indian exports have started rising.
Nearly half of India’s imports from China are organic chemicals and engineering goods (including nuclear and non-nuclear power generation equipment). In both these areas, scale matters and India has lost the opportunity to build scale all these years when the economy was growing.
“We seem to have missed the bus during our earlier investment cycle. It has been a similar story in telecom equipment manufacturing, where the domestic demand was met through imports,” noted Anil. Now, it will be possible to build domestic manufacturing capability and scale only during the next investment cycle, which is not on the horizon currently. It is not going to be easy for the Indian firms to build scale and be able to compete with China, unless they become part of the global supply chain or the large Chinese or international firms invest in India for assembly operations.
“As we build more capabilities and capacities, both for internal and external demand, our import dependence would come down. The Covid-19 outbreak has taught the world how it is important to be self-reliant across the value chain-from raw material to finished goods,” Deepak said.
As a first step, Anil says, “I would like the government to identify engineering sector, including defence manufacturing, as the focus for investment to create capacity and capability as envisioned by the National Manufacturing Policy and Make in India programme. It must be a national programme that leverages our strengths in existing engineering clusters, particularly in South and the West of our country.”
India has an opportunity to create capacity and manufacturing eco-system in new technology areas, for example, electric vehicles. The nation has already missed the bus in the energy sector, when the world needed large-scale manufacturing for building solar-power plants. India continues to be a Low Value-Adding Exporter, as Vietnam is moving into the league of High Value-Adding Exporters.
“We have done a lot in reducing the corporate tax but the taxation is one area where continuous reforms would be required. There is abundant skill available in the country; re-skilling is a continuous process for the global firms,” Deepak said.
At this stage of economic cycle, India is a capital-starved economy, as neither the banking nor the private-sector firms have enough equity and long-term capital. Bad loans in the banking system are continuing to rise. Public sector banks have not been having adequate capital to kick-start the next credit cycle. Private sector banks are also struggling to raise enough equity capital.
Anil recommends, given that India business and financial system is starved of capital, the country needs to set up a National Manufacturing Renaissance Fund that not only provides equity capital and long-term debt to entrepreneurs and medium-sized businesses, but also invests in technology-led product and process innovation in partnership with public and private sector firms and academic institutions. The fund would also invest in manufacturing-focused education and training programmes that help upgrade knowledge as well as intermediate and advanced level skills.
“The liquidity problem that we are facing now is the short-to-medium term issue, mostly for domestic industries. Capital would flow into the country along with the global majors setting up facilities in India,” Deepak added.
If India needs to compete with China or other manufacturing powerhouses, the nation needs to invest in building scale, unless businesses are happy being small players in a global supply chain dominated by 10 large countries.
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