India | Covid | 3rd December 2021 | Virtual Wire
The COVID-19 pandemic has revealed the inherent weaknesses in the existing global supply chain and the over-reliance on China’s manufacturing industry.
Countries such as Japan and the United States (US) have announced their decision to “on-shore”, or pivot, their supply chain out of China.
Currently, Japan relies on China for more than 20 per cent of its requirement of parts and materials, mainly electronic components such as motherboards, RAM chipsets and hard disk drives.
On September 3, 2020, Japan added India to the list of relocation destinations as part of its effort to move manufacturing bases out of China.
The Atmanirbhar Bharat Abhiyan
Prime Minister Narendra Modi has called on the Indians to seize the chance presented by the disruption to global supply lines.
The Atmanirbhar Bharat Abhiyan (Self-Reliant India Movement) launched by Prime Minister Modi in May 2020 is aimed at merging the global with the local, generating manufacturing investment, and becoming the new global nerve centre of multinational supply chains in the post-COVID world.
However, despite long-term aspirations to become a high-value manufacturing hub, India remains lagging in this area.
The pandemic presents new opportunities for India to rethink its national industrial strategy, especially policies concerning the growth of its manufacturing sector.
Can India position itself to be the next global manufacturing hub?
According to the United Nations Industrial Development Organisation (UNIDO), in 2019, India ranked 42 out of 152 countries, with manufacturing value added (MVA constant 2015 US$) totalling $430.25 billion, or equal to 15.5 per cent of its gross domestic product (GDP).
However, India’s policy on foreign direct investment (FDI) and ease of doing business has improved tremendously since 2015.
According to the World Bank’s Ease of Doing Business Ranking 2020, India jumped 79 positions from 142 in 2014 to 63 in 2019.
India would have to capture a place among the top 50 in the ranking to become a global player in manufacturing.
India’s Manufacturing Lag
There are several reasons why India lags in the manufacturing sector.
India’s bureaucratic setup continues to mire foreign companies due to weak legal and regulatory systems.
In addition, land, labour and law largely fall under the State List, which foreign companies see as further hurdles as each state may use different systems of approval.
India is still being flagged out for its complex regulatory environment.
India also continues to see a lack of investment in connectivity and in both physical and digital infrastructure development.
This includes roads, highways, ports and electricity generation.
Most of India’s manufacturing items are still transported using ground transport.
There have been constant issues with the reliability of supply procedures, high power outages in factories, difficult access to lines and high costs to get connected to the electrical grid.
A 2010 study quoted that the electrical shortage in India reduced the average plant’s revenue by six to eight per cent and that the production surplus dropped by 10 per cent, of which roughly half is due to the cost of backup generators.
India can emerge as the next global manufacturing hub.
In times of deep economic crisis, such as the one brought on by the COVID-19 pandemic, swift government intervention through strong fiscal response and injection of capital into the economy is necessary.
While the economy as a whole needs significant support, the government must see this as an opportunity to strategically invest in high technologies for priority sectors such as agriculture, electronics and electrical equipment, including computers, telecommunication and space.
It should inject aggressive economic incentives and review the current business practices to bring in more trade and investments into advanced manufacturing sectors.
India’s Manufacturing Policy Initiatives
The government announced various incentives like the PLI scheme to boost domestic manufacturing and cut imports.
Many global handset manufacturers participated in the scheme, boosting domestic production of handsets including the premium one and helping the country save its forex reserve.
Later the Centre extended the PLI scheme to 10 other key sectors like the automotive industry.
Experts say these schemes will help attract global auto manufacturers, who have been complaining about rising costs in China.
Also, India has an established auto sector and a big consumer base, which further incentivises these auto giants to shift part of their manufacturing base to India.
According to a report, original equipment manufacturers (OEMs) in the auto sectors are now increasingly opening international purchasing offices (offshore outfits that procure parts) in India.
India now has at least 30 international purchasing offices (IPO) as compared to 8-10 earlier.
The ET report further mentioned that these IPOs are now witnessing a 40-50% increase in inquiries.
These IPOs have set larger targets for sourcing from India.
This indicates they expect a geographical diversification in the global supply chain hub, and India is seen as a favourable destination.