Mitra discusses what India needs to do to attract GSCs in ET

Mitra, Devashish(The Economic Times | June 23, 2020 | By Devashish Mitra)

View: India has to catch up in infrastructure and skill-building to play role in global supply chains

Attracting GSCs to India is actually very hard work, without having any attractive catchphrase.

On May 12, in a televised address to the nation, Prime Minister Narendra Modi stated that "the need of the hour [is] that India should play a big role in the global supply chain (GSC)." On this matter, no one can disagree with him. Production of any good or service under one roof, or even within the boundaries of a single nation, has become, for the most part, a thing of the past.

A firm now breaks the production process down into several fragments, or tasks, in a way that each such task can be located in that part of the world where it is the cheapest to perform, adjusting for its quality. This way, both firms and consumers are better off. Besides, as technologies in developed countries can now be combined with inexpensive labour in developing ones, workers in the latter can benefit from new and higher-productivity opportunities through this process of production fragmentation.

Now, to "play a big role" in GSC for labour-abundant India requires grabbing big opportunities arising from rising wages in China. These opportunities are getting magnified by current geopolitics that includes US-China trade tensions made worse by the Covid-19 pandemic. Despite all this, however, GoI seems to lack vision with regards to ways in which this can be achieved.

According to a Nomura report, between April 2018 and August 2019, of the 56 companies that relocated from China, 26 went to Vietnam, 11 to Taiwan, eight to Thailand and three to India.

This, despite India’s population being 13 times, and economic size about 11 times, that of Vietnam’s. There seems to be a belief that, given the current situation, movement of GSCs out of China is a foregone conclusion, and that countries like Vietnam and Thailand are too small to replace China, so they will automatically come to a big country like India. This isn’t so obvious.

First, relative to China and the ASEAN countries, the average Indian worker lacks training and education and, therefore, skills. While school enrollment rates are growing in India, there is rampant teacher absenteeism, along with teaching of questionable quality, leading to unimaginably poor learning outcomes. A country like Vietnam, however, has invested considerably in quality school and university education, as well as in public health, both being important determinants of a country’s stock of human capital.

So, while the ASEAN developing countries together are smaller in population compared to India, they are unlikely to be smaller together in terms of semi-skilled and school-educated labour force.

Miles to Go Before I Leap
Second, infrastructure in India is far below the level that will attract multinational manufacturing firms. In a December 2015 Wharton Magazine article, "3 Reasons India Isn’t the 'Next China'," Wharton School dean Geoffrey Garrett wrote, "China has been built on infrastructure, investment and manufacturing; India has barely scratched the surface on all three." The relative situation hasn’t changed much since end-2015. 

Garrett mentions "an infrastructure revolution of new cities, high-speed rail lines, airports and ports" and "China’s ability to quickly and efficiently move what it produces domestically and around the world." Thus, a close substitute of China is going to be unlikely for many GSCs.

In Vietnam, over the last 30 years, rapidly growing investment in infrastructure has been strongly supported by the likes of World Bank and Asian Development Bank (ADB), specifically in developing and expanding the network of trunk and feeder roads, connecting growth centres to rural areas, and prioritising connections to sea and airports, along with maritime development along its coastline. 

Add to this a very well-developed power infrastructure with 100% de facto rural and urban household electrification, with an excellent transmission and distribution system. In sharp contrast, India lacks reliable power supply, which, along with transportation and logistics problems, is a real bottleneck for manufacturing firms. Some GSCs may actually ‘go back’ to the west. The degree of automation in production cannot be taken as a given. If there are no good substitutes for China in the rest of the developing world, with China becoming less attractive, the cost-benefit calculus for automation changes, and there could be more investment in it. 

Countries like Vietnam have signed trade agreements with many countries and are systematically signing new ones. They are becoming part of various networks that facilitate moving into different GSCs. India has resisted joining free trade agreements (FTA) and, hence, is considerably handicapped.

Labour, Not Laboured, Rules
Finally, India needs real labour reforms providing flexibility to firms in adjusting their labour input, and not, like in some of its states, a wholesale gutting of labour regulations, including those that protect worker safety and rights. Multinationals care about their reputation, and are reluctant to move to such places, fearing boycott of their products in their home countries.

What all of this means is that GSCs won’t be served to India on a platter. In 2017, in the context of criticism from economists against demonetisation, Modi had said that "hard work is more powerful than Harvard."

Attracting GSCs to India is actually very hard work, without having any attractive catchphrase. There is no strategy other than considerable additional investment and effort into infrastructure and skill-building, tackling power bottlenecks, reforms in labour and land regulations and keeping protectionist forces at bay.