Opportunity for Make in India

How India can make the most of the opportunity presented by the groundswell of emotion against China for its disinformation about coronavirus

The Covid-19 pandemic has highlighted the dependence of the global economy on China’s factories. When Wuhan was shut down, the need of having alternative locations for global supply chains was acutely felt. Since then, there has been a groundswell of emotion against China for its disinformation about the virus. Efforts are on to create sources of supply outside China to reduce vulnerability. Will India be able to take advantage of this major opportunity?

This would depend on our understanding of how China succeeded in becoming a global industrial power. Foreign investment in manufacturing in India has been largely restricted to catering to the Indian market and usually when it cannot be profitably done through any of the Free Trade Agreements. A popular but erroneous myth is that we cannot have comparative advantage in manufacturing and that services are our forte. Even a hundred years back, India had a globally competitive textile industry. It now has internationally competitive manufacturing capacities in pharmaceuticals and in small cars with related component supply chains. Further, competitive advantage in manufacturing is created and is not a natural endowment.

Inspired by the success of Korea and Japan earlier, the first thing that China got right was a conscious policy of keeping its exchange rate artificially depreciated by building up dollar reserves. A 10 per cent depreciation of the exchange rate is equivalent to an across the board increase in import duties of 10 per cent. It improves the business case for value addition and job creation. When Japan followed by Korea and more recently China became major exporters of industrial goods, they all faced pressure to give up their exchange rate policy. China has only recently managed to get out of the US list of currency manipulators.

 

 

In India, there is the mistaken belief that a strong currency means a strong economy whereas the reality is that it weakens the economy. In the last decade, the Indian rupee experienced a real exchange rate appreciation of 19 per cent. This alone was enough to cause the relative industrial decline which has occurred. Market forces are undoing this with the Rupee falling below 75 to a dollar and will bring it down further. This is a positive development. Further, no one should object to the Reserve Bank of India (RBI) having the explicit policy goal of preventing the appreciation of the real exchange rate. This would give great confidence to potential investors who act on expectations. But if the expectation is that once normalcy returns, money again flows liberally into the Indian capital markets, the real exchange rate begins appreciating and the RBI would do nothing, then the business case for investment in supply chains with substantial value addition becomes weak.

The other major thing that the Chinese got right was seeing the advantages that flow from economies of scale. The state created large special economic zones along their eastern sea coast with first rate infrastructure and connectivity to ports. The state did not depend on private investors to either assemble land or to develop the infrastructure. They followed the historical experience of the earlier industrialising powers; the US, Germany and Japan. Workers housing was also an essential part of these new developments. With attractive infrastructure and investor-friendly local authorities, they pursued investments in manufacturing, especially from Japan and Korea, and got their firms to become suppliers to US retail giants such as Walmart. The benefits of externalities, increasing returns to scale and rapid movement down the cost curve came into play and China took off.

In a similar manner, we have seen the IT sector take off with good real-time connectivity to their markets and IT professionals staying on campus in facilities that were comparable to those of their competitors. The benefits of externalities and increasing returns to scale have been witnessed in the national capital region, Bengaluru and Pune, which had taken off by the early nineties. But later, India’s special economic zones were left to private developers and none of them had the capacity to develop a manufacturing zone of, say, 10,000 acres. If we really want large manufacturing investments, the state has to commit sufficient resources to assemble land, create world class infrastructure and expressway connectivity for cargo to the National Highway network, ports, rail and airport terminals. There should also be provision of workers’ housing and their training. In manufacturing parks for specific industries, the authorities should be able to make credible commitments on the time to be taken for environment, building and other clearances.

The Chinese successfully targeted industry segments and individual firms for investments in strategic areas. For instance, they linked a large order of planes to Airbus setting up an assembly plant in China. India has not attempted leveraging the size of its market for getting investments for Make in India. There are offset provisions in defence procurement contracts only and these have also lacked any strategic focus as it is left to the vendor to choose how to fulfil his offset obligations. India should be able to target a few strategic sectors and create negotiating teams who should have the mandate to settle incentives for getting investments in these industries with substantial value addition. The incentives could range from land being leased at nominal rates initially, to special dispensations in goods and services tax or GST rates as well as import duties, to supply of cheaper electricity from older NTPC plants, to interest subsidies, to actual capital investment in a joint venture with no role in management, to assured government procurement.

There are alternative locations to India for investors to choose from for production for the global market. Unless India is able to make a compelling case to potential individual investors, it will continue to be bypassed for investments for global supply chains. For every Japanese, Korean or German manufacturing facility in China today, India should have the ambition to try and have an equal number of manufacturing plant of these firms in India in the next five to seven years.

The author is former secretary DIPP, GOI