Mitra discusses what India needs to do to attract GSCs in ET
(The Economic Times | June 23, 2020 | By Devashish Mitra)
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.
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.
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.
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.
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.
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.
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.
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
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
barely scratched the surface on all three." The relative situation hasn’t
changed much since end-2015.
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.
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
airports, along with maritime development along its coastline.
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.
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.
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
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.
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."
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.