India must strike while the iron is hot

by May 2, 2020 0 comments

We must act fast to capitalise on the flight of firms from China. Initial indicators are suggesting that we are unable to project ourselves as an alternative to China and Japan has already made a move in this direction by offering major incentives

The lockdown has been extended yet again although this time there is a relaxation of some restrictions to enable economic activity. It will be interesting to see how the Government as well as the industry negotiate this challenge.

Despite the doom and gloom scenario in the country right now due to the lockdown, the fact remains that the current Corona crisis has provided an opportunity, too, for India. But for the country to take advantage of this spell, it would require major initiatives and that too, at a fast pace. Covid-19 has provided the much-needed elbow room to the political leadership to push for transformation, more particularly land and labour reforms. If a Communist China can serve the economic interests of the capitalist West, then India is even better positioned to do that.

Now, more than ever, global firms are aware of the dangers of putting all their eggs in one basket and they must implement strategies to reduce that risk. It is quite surprising that the risk-governing framework of all these corporates didn’t highlight the concentration of manufacturing in one territory as a key risk and even their boards overlooked this aspect. China has established itself as the manufacturing hub for the global economy and it is also positioned as the first-tier supplier in the overall global supply chain. Even India is hugely dependent on China for raw material, chemical and engineering goods. Our telecom, pharmaceutical, power and mobile accessories sectors are largely dependent on China for raw material, semi-finished goods and skilled manpower.

It would not be easy for any country to replace China and position itself as an alternative to it, but we can start leveraging our competitiveness in areas like information technology, to gradually move in this direction. The world order is expected to change and diplomacy will play a key role in establishing India as an alternative, low-cost manufacturing destination. For this to happen, first and foremost, Indian manufacturers must start thinking globally.

Integration with the global supply chain is the key to this and instead of just setting up assembly lines, our companies should start thinking of developing industrial clusters where India can be a first-tier supplier in the global supply chain. It is worthwhile to understand the difference between first-tier and second-tier supplier. All the entities and activities in the supply chain are dependent on the first-tier supplier and, therefore, placing India as one will provide sustainable economic development which can be enjoyed for decades.

This is a long-term task and apart from structural reforms (like land, labour, sanctity of contracts, tax certainty and so on), this will require skilled manpower and latest technology, for which the Government and private players, both, must come forward.

Some sort of additional tax incentives should be considered as a stimulus for local players to start investing in these areas. Friendly nations like Japan can be our potential technology ally and this would serve the economic as well as political interests of both the countries.

However, under all circumstances India must act fast to capitalise on flight of firms from China. Initial indicators are suggesting that we are unable to project ourselves as an alternative to China and Japan has already made a move in this direction by offering major incentives.

India is lagging despite lowering income tax rates last year, which has increased the competitiveness. However, policymakers should understand that tax rates are just one among the various factors which a person looks at before committing his resources. As per a Nomura report, out of 56 companies which have decided to shift operations from China, only three have decided to come to India.

We can either continue to blame the bureaucracy or India Inc. can realise that it is high time to get the bull by the horns.

In 2017, Deloitte research identified five countries, which it dubbed  the MITI-V (Malaysia, India, Thailand, Indonesia, and Vietnam) as an alternative to China in which India was positioned at top.

We have our advantage in terms of a young population, cheap labour, domestic consumer market, rising income levels and so on, but this will remain in theory only till the time policy interventions grab the eyeballs of investors.

If we lose this opportunity, then we will lose out for at least the next three decades and provide millions of employment opportunities to our Asian peers.

India must take a host of measures and do it fast while the iron is still hot, to convince Western investors to come here and position itself as an alternative in the global supply chain. Initially our manufacturers can supplement the Chinese global supply chain but we should think of establishing ourselves as an alternative to China for all time to come.

(Writer: Shashank Saurav; Courtesy: The Pioneer)

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