#29 Make in India = Not (Make in China)?

There is a tide in the affairs of the world, which taken at the flood, leads on to fortune

This newsletter is really a public policy thought-letter. While excellent newsletters on specific themes within public policy already exist, this thought-letter is about frameworks, mental models, and key ideas that will hopefully help you think about any public policy problem in imaginative ways. It seeks to answer just one question: how do I think about a particular public policy problem/solution?

Welcome to the mid-week edition in which we write essays on a public policy theme. The usual public policy review comes out on weekends.

I can live with the lockdown for some more time. I’m made of sterner stuff. I can watch Uttar Ramayan daily too. But I can’t countenance another op-ed speculating on the post-COVID global order. But I’m sure you, dear reader, in sharp contradistinction, are happy to read another such article. Aren’t you?

Well, I’m happy to oblige.

‘Gated globalisation’

That’s where we are headed if you listen to global trade experts. Globalisation won’t be the giant sprawl that it is today where the strands of global value chains (GVCs) are so widely distributed that companies and countries often don’t have a complete map. Instead, comparative advantage, super specialisation, and near-zero inventory will be titrated with resilience, redundancy and trust to arrive at reset GVCs of the post-COVID world. Globalisation will continue but within a smaller circle of trust. Organisations will reshore their manufacturing capabilities among countries that share common values and adhere to bilateral norms.

China, that was already seeing a mini exodus of manufacturing over the last year because of rising labour costs, a trade war with the US, and its own desire to move up the value chain, will lose more as companies count their lessons from this crisis. China exports about $2.7 trillion of manufactured goods annually. Over the next 3 years, it is possible about a quarter of this ($0.7 trillion) might find new bases. India should set its sight on capturing 20 per cent of this opportunity. That will add between 4-5 per cent to its GDP annually without counting the multiplier effects. This is an unmissable opportunity.

But nothing falls into your lap without efforts. Except, of course, if you are a star scion; in which case, a Karan Johar movie does fall freely. India needs to put a plan to ride this opportunity and implement it to perfection.

So, what would companies look for as they choose among the reshoring alternatives available to them? We believe there are three criteria to base the country decision:

  1. Social environment: size, quality and cost of the labour pool, lawful and tolerant society, the attractiveness of domestic market

  2. Political environment: stable, democratic, reliable and open to the world

  3. Enabling environment: ease of doing business, infrastructure, maturity of the ecosystem, respect for IP, and consistent regulatory, tax and legal regimes, international politics

It isn’t difficult to see India ranking first on social and political environment among those vying to be alternatives to China. India is a functioning democracy with an open society that has a large, growing domestic market. It has had periods of social unrest over the years and the Modi 2.0 regime has waded into newer areas of contention. We believe political capital should be spent on resolving them through discussions and consensus if India has to be seen as a long-term investment destination.

The enabling environment is India’s Achilles’ heel. While there is a need for deeper, structural reforms to set this right, we believe ring-fencing this opportunity with a series of specific policy interventions will be adequate for now. We have outlined five areas that need the attention of policymakers for short and medium-term interventions.

1. Identify winning ecosystems

MNCs will look for how quickly a likely destination will be able to integrate into the GVC. This is beyond offering plug-and-play manufacturing capacity. It requires having an existing ecosystem – suppliers of parts and components, availability of raw materials, staff with technical know-how and the knowledge of how that specific GVC works. India should choose sectors where it has the ecosystems ready or partially ready. Auto and auto ancillary, pharmaceuticals, food processing, electronics and mobile phones, steel and finished garments are likely areas where India already has a comparative advantage. A targeted approach to MNCs in each of these sectors that have a manufacturing base in China should be made on priority. Political and diplomatic support from the government to lobby with key OECD countries, looping in the influential Indian diaspora to support the move in their countries and pitching to global consultants that advise companies on supply chain strategy must be part of this agenda. India should be seen as willing and keen to capitalise on this opportunity. This was missing when US-China trade war had presented it with an opportunity last year.

2. Follow the Global In-house Centre Approach (GIC2.0)

In IT/BPO sectors, India has allowed global MNCs to set up GICs that follow the insourcing model. There’s no dearth of global manufacturing giants that have their technology or processing centres in India. This model can be replicated in manufacturing: create a ring-fenced zone where global manufacturing companies work under a set of guidelines specifically created to free them up from the wide array of economic laws and inspector raj. They can set up plants easily, import machinery and export goods with lesser friction and manage their local and global employees under their global code of conduct.

Arvind Panagariya in his recent book, India Unlimited, reclaiming the lost glory, has advocated for something similar in the creation of what he calls autonomous employment zones (AEZs) where all power to frame laws of economic engagement rests with local administration. Nitin Pai makes a similar pitch for such zones here. It is difficult to reform the entangled maze of industrial and labour laws across the board in a hurry. But India’s IT/BPO experience has shown it can create multiple pockets of excellence where it holds companies accountable to their global best practices while governing them under a more enlightened set of laws. This is the sine qua non for becoming the world’s factory.

3. Reduce risks of investments

Arbitrary judicial interventions and failure to protect corporate interests deter global companies from investing in India. India has a remarkable track record of changing the rules of the game midway while dealing with global MNCs. Its regulatory regimes have earned themselves a reputation for being whimsical and cussed. It will have to undo this image with efforts in good faith. A governance mechanism that is free from changes in political fortunes at centre and states and ​setting up of special tribunals for projects moving out of China​ will assure companies that grievance redressal will be faster. Longer-term contracts with fewer arbitrary clauses that allow the state to intervene or change its mind should be drafted by the commerce ministry proactively to signal good intent.

4. Take advantage of competitive federalism

The easiest way to improve ease of doing business is by letting the states compete among themselves in being manufacturing hubs. The commerce ministry should encourage MNCs to structure RFPs where technical bid encourages states to go the extra mile on ease of doing business within the AEZs. The Ministry of Corporate Affairs should coordinate with states and companies so that a change in dispensation doesn’t lead to a change in commitments. India should let state governments have permanent trade representations in global business hubs to establish lasting relationships. The current model of yearly investor summits and Chief Ministerial visits is necessary but insufficient.

5. Clear supply chain bottlenecks

Inefficient logistics chain, inadequate physical infrastructure, and stringent local sourcing norms combine to create formidable supply chain constraints. India should focus on the following:

  1. Make movement of goods easier within India: China has deregulated transport by moving away from the check posts and permits regime. They instead rely on self-declarations by assessees. This “Trust, but verify” approach should be replicated in India to reduce regulatory requirements in transport.

  2. Create two new megaports: Government’s infrastructure push after Covid-19 should target the improvement of its logistics network. Good port infrastructure is important for global manufacturing. Indian ports are ill-equipped to handle large loads with quick turnaround times.

  3. Transition to a low import duty regime: Global firms moving out of China already have optimised global supply chains of suppliers. They are unlikely to change all the elements in the supply chain altogether. Reduction in import duties will allow them to continue buying from across the world while manufacturing in India. To Make in India, it need not restrain buy from abroad. Signing a trade agreement with the US, Japan, and ASEAN can be another way to lower import tariffs.

6. Use geopolitical trends to our advantage

India can shape the existing geopolitical schism into an economic advantage. The more that arrangements such as the Quad cooperate on economic issues rather than security ones, the better it is for India. Political reform arguments utilising the Quad ‘economic conditionalities’ might also help convince the domestic interest groups that are opposed to reforms.

It has been repeated ad nauseam that for India to grow rapidly it has to develop a large manufacturing sector that’s embedded within GVCs. This is the only way to shift its semi-skilled and low-skilled workforce away from a low productivity sector like agriculture. The likely post-COVID scenario that will unfold presents India with an opportunity to redress this imbalance. India, the critics often quip, never misses an opportunity to miss an opportunity. Will it prove them wrong this time?

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