Factory of the world

Global efforts at diversifying supply chains:

  • Global companies have stepped up efforts of diversifying their supply chains in the wake of the Covid-19-induced disruptions and US-China trade tensions.
  • They are looking to implement the ‘China Plus One’ strategy i.e., not depending on China alone for any supplies, and looking for more locations.
    • For example, large companies like HP have taken steps to diversify their supply chain to mitigate the impact of tariffs in the US, after US slapped tariffs on $500 billion worth of Chinese imports in the past two years.

India can benefit from this:

  • The supply chain diversification in manufacturing provides India a chance to emerge as a global manufacturing hub.
  • The ability to expand the manufacturing sector – with its trickle-down effect – will be critical to job creation and balanced growth.

India has double task of becoming manufacturing location while cutting its own imports from China:

  • While India tires to become a ‘Plus One’ destination for manufacturing to China, India simultaneously must work to reduce 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.

Steps needed for India to realize the huge possibilities

Hasten structural reforms that foster competitive ecosystems:

  • India’s manufacturing sector is stagnant:
    • India’s manufacturing sector’s share of GDP has stagnated at about 15% for the past three decades, reducing the contribution of merchandise exports to GDP to barely 12%.
      • In comparision, manufacturing share in China is 30% of GDP (of a nearly five times bigger GDP), while contribution of merchandise exports to GDP is about 20%.
    • Even Vietnam moved fast compared to India to emerge 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 exports goods for manufacturing and assembly in Vietnam).
  • India should improve logistics to improve competitiveness:
    • 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.
    • India remains uncompetitive on labour, infrastructure and logistics.
      • Logistics efficiency is poor with ~70% of freight moving by road despite the fact that moving freight by road, 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.
      • Also, critical inter-linkages between different modes of transport are weak.

Implement immediate labour and land 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.
  • Labour reforms: 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.
  • Labour reforms are also crucial: The government could follow practices similar to Vietnam, and redistribute large parcels on lease along with the right to rent, sub-contract and mortgage.

Improve contract enforcement and dispute resolution timelines:

  • 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.
  • Reducing this timeline is essential to ease of doing business.
  • 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. 

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 capitalise on established strengths in sectors like textiles, leather, auto components and pharmaceuticals to scale up these sectors.
  • FTAs could be useful:
    • 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 (MEIS).
  • Strategic incentives:
    • After the pandemic, global pharma majors are securing supply chains and reducing dependence on China.
    • India is constrained by the fact that imports 68% of its API requirements from China.
    • Towards this, 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 these schemes are useful, drug-makers can be further helped through more anti-dumping duties and strategic manufacturing incentives.

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