Factory Of The World

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Factory Of The World

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• China Plus One strategy: Many global firms are now trying to diversify their supply chains away from China, due to pandemic reasons and US-China trade tensions. This is India's big opportunity to become a global manufacturing hub. India already captured the outsouring wave in 1990s and 2000s to be the back-office of the world.
• Trickle-down effect: If India can actually capture these mfg. opportunities, then a large trickle-down effect of incomes and wealth can happen. Can India be that "One Plus" destination, while depending less and less on China, herself? Today, China's share in global manufactured goods exports is 16%. But four things can help India.
• The right strategy: It will have four components:

1. FIRST - Speed up structural reforms to build more competitive ecosystems: Manufacturing as % of GDP is stuck at just 15% for many decades, thereby reducing the share of merchandise exports to GDP to just 12%. For China, the figures are 30% (of an economy that is 5X) and 20%. Consider the success of Vietnam. It used low labour costs and FTA with China to succeed in electronics, leather and textiles. India, despite some work on ease of doing business, and launch of GST etc., is going slow. India has to remove the lack of competitiveness in labour, infrastructure and logistics. As an example, the per tonne-km cost for waterways is just Rs.1.06, compared to Rs.2.58 for roads, which is the primary freight moving mode in India.
2. SECOND - Reforms to raise competitiveness: The four new Labour Codes will give medium- to long-term results. For immediate improvement, raise the number of working hours and ability to fire workers. Land reforms can help. Like Vietnam, India can redistribute large parcels on lease with the right to rent, sub-contract and mortgage.
3. THIRD - Improve contract enforcement and dispute resolution: The pendency in court cases impacts contractual disputes resolution. It is the most serious impediment in ease of doing business. The IBC 2016 and the AC Act 2019 were brought in, but more needs to be done for out-of-court settlement. The telecom sector's AGR dues of Rs.92000 cr include 75% of interest and penalty. Imagine what it would be under quicker resolution. (IBC - Insolvency and Bankruptcy Act, AC Act - Arbitration and Conciliation (Amendment) Act)
4. FOURTH - Boost sector-level mfg.: By providing tax incentives for new-age sectors like mobile phones, defence equipment and lithium ion batteries, new champions can be created. The reason India lost ground to readymade garments (RMG) to Bangladesh and Vietnam was they had FTAs, which India lacks. For RMG and leather exports, India must now get into FTAs.

• Summary: It is possible to build new manufacturing strenghts, if the remedial measures are implemented quickly. The benefits will be tremendous.

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