This provides a second chance for India to emerge as a global manufacturing hub. While India has managed to capture the services outsourcing wave to become quite the back office of the world, the ability to expand the manufacturing sector – with its trickle-down effect – will be critical to job creation and balanced growth.
The trillion-dollar question though is, can India become a ‘Plus One’ destination, while simultaneously reducing its own dependence on China? China accounted for 16% of manufactured goods exports globally – and a fifth of imports of both the US and EU – between 2015 and 2019, so that is a tall mountain to climb. A double-quick push on four fronts identified by CRISIL Research can help.
Hasten structural reforms that foster competitive ecosystems:
India’s manufacturing sector’s share of GDP has stagnated at ~15% for the past three decades, reducing the contribution of merchandise exports to GDP to barely 12%. The comparable numbers for China are ~30% (of a nearly five times bigger economy!) and 20%. Even Vietnam stole a march over India and emerged as a manufacturing hub for goods such as electronics, leather and textiles because of lower labour costs and free trade agreements (FTAs) with China, which also exports goods for manufacturing and assembly in Vietnam.
The manufacturing opportunity opening up is huge. Large tech companies like HP have taken steps to diversify their supply chain to mitigate the impact of tariffs in the US as revealed in their 2019 annual call. The US has slapped tariffs on $500 billion worth of Chinese imports in the past two years.
“Govt could borrow a leaf from Vietnam’s playbook and redistribute large parcels on lease along with the right to rent, sub-contract and mortgage.”
India has moved up 14 places to the 63rd position on the World Bank’s ease of doing business ranking in 2019, following structural reforms like GST and fast-tracking of environmental clearances. But it still lags far behind countries like South Korea and China.
To seize the opportunity, CRISIL Research has analysed India’s competitive strengths and weaknesses and identified gaps that must be plugged – and the sectors that must be targeted. India remains uncompetitive on labour, infrastructure and logistics. Logistics efficiency is poor with ~70% of freight moving by road which, at Rs 2.58 per tonne-km, is expensive compared with Rs 1.41 per tonne-km for Railways and Rs 1.06 per tonne-km for waterways. Plus, critical inter-linkages between different modes of transport are weak.
Implement immediate reforms to boost competitiveness:
While reforms such as the recent amalgamation of 44 labour laws into four codes are welcome, some immediate-term measures could help expand the manufacturing base and attract investments. Increasing the number of working hours – around five Indian states have adopted this so far – and ensuring the ability to fire workers could help enhance competitiveness on labour.
Land reforms are also crucial. The government could borrow a leaf from Vietnam’s playbook and redistribute large parcels on lease along with the right to rent, sub-contract and mortgage.
Improve contract enforcement and dispute resolution timelines:
India takes almost 1,440 days to implement a contract versus 150 days in Singapore because of huge pendency of court cases. Crunching this timeline is essential to ease of doing business. CRISIL Research’s look at various public domain documents shows India at 63 on this parameter, well below China’s 31 and South Korea’s 3. The Economic Survey 2019 said delays in contract enforcement and disposal resolution are “the single biggest hurdle to the ease of doing business in India.”
“India takes almost 1,440 days to implement a contract versus 150 days in Singapore because of huge pendency of court cases.”
The government has promoted a culture of resolution with the Insolvency and Bankruptcy Code and Arbitration and Conciliation (Amendment) Act, 2019. But a lot more can be done to quicken out-of-court dispute resolution, thereby reducing costs. To wit, interest and penalties account for 75% of the Rs 92,641 crore adjusted gross revenue dues of telecom companies. A swifter resolution could have resulted in huge savings besides enhancing the sector’s viability.
Adopt multi-pronged approach to boost sectoral level manufacturing:
The government should take a long-term view and provide tax and other incentives to build manufacturing ecosystems in new-age sectors such as mobile phones, defence equipment and lithium ion batteries. Simultaneously, it should pick the low-hanging fruit by capitalising on established strengths in sectors like textiles, leather, auto components and pharmaceuticals to spawn scale-ups.
“Govt should take a long-term view and provide incentives for new-age sectors like mobile phones, defence & lithium ion batteries.”
In readymade garments (RMG), India has ceded ground to Bangladesh and Vietnam, largely because the latter enjoy FTAs. For instance, India’s RMG exports to the EU, its biggest market, carry a 9.6% import levy versus zero from Bangladesh, Vietnam and Pakistan. In both RMG and leather, India should focus on entering FTAs apart from resolving issues related to the Merchandise Export from India Scheme.
The pharma success of last-mile facilitations must be replicated. After the pandemic, global pharma majors are securing supply chains and reducing dependence on China. China’s huge economies of scale account for the 25-30% cost difference between Chinese and Indian APIs and intermediates. India imports 68% of its requirements from China.
To be sure, the government has launched a Rs 3,000 crore scheme for setting up bulk drug parks. It has also announced a production-linked incentive scheme of Rs 7,000 crore, targeting domestic manufacturing of 53 APIs with high dependence on imports. While this is great, drug-makers expect more anti-dumping duties and strategic manufacturing incentives – as do chemicals exporters.
(The writers are Directors, CRISIL Research)