The border clashes with China and the COVID-19 pandemic have reignited questions about India’s dependence on Chinese manufacturing. India’s imports from China in 2019-2020 reached $65 billion, out of $81 billion two-way trade. Is the pandemic, as Union Minister Nitin Gadkari said last month, a “blessing in disguise” for Indian manufacturing? Will companies be able to move deeply integrated supply chains out of China? In a discussion moderated by Ananth Krishnan, Biswajit Dhar and Amitendu Palit discuss the options and the challenges ahead in India’s efforts to boost manufacturing. Edited excerpts:
It has been more than five years since India launched the Make in India initiative. If we look at India’s dependencies on China as one barometer, how would you assess where we are now?
Biswajit Dhar (BD): I think that the Make in India initiative was a good opportunity for us to get our manufacturing sector back on track. I don’t think that we have taken advantage of what we had planned. In the past five years, what we have seen is that the dependency on China has actually gone up.
Amitendu Palit (AP): What we are seeing is for a variety of reasons, India’s dependence on imports is getting to be localised, in the sense that there is not a wide diversification of countries from which India is sourcing. For example, if you look at critical medical supplies which India has been importing for frontline healthcare workers in the COVID-19 battle, most of these come from China. Aside from China, there are probably three or four countries on which India’s dependence is increasing. China is by and large widespread across different concentrations. To that extent, it’s going to be a difficult choice for India to get out of this dependence.
What are some of the concentrations?
AP: First, regarding capital goods, Indian manufacturing is dependent on supplies from China. This includes a wide variety of machineries, including electrical machinery, semiconductor-driven machinery etc. We import fertilizers from China. Limited value consumer goods have flooded the market. Where the criticality actually comes in is when there are a number of imports which are not really a matter of choice but which are essential. For example, if you look at humidifiers, which are being utilised in the COVID-19 battle, China is again the main source. For medical masks, China is the main source. Even for something like liquid soap, which is very much highly required across the country today, China again happens to be the main source of the supplies. We need to look at the whole situation very clearly and probably prioritise in terms of what are the areas where India can relatively more easily move back away from the dependency it has on China, and what are the areas where it will take much longer.
The conventional wisdom is we should aim to replicate what China did in the 1990s. But how different is the global environment from 30 years ago when China was opening up?
BD: Global value chains today are looking quite different. What the data suggests is global value chains are in fact becoming more local. Countries are depending more on their own economies rather than on global markets. This is an impact of the great recession of 2008. I don’t think that the strategy that China followed, which was a global market-driven industrialisation strategy, an export-driven strategy, is going to be a reality anymore. Policymakers keep making these statements, that we are going to become more open and we are going to be relying more on the global markets. Unfortunately, that possibility has now passed.
AP: If one looks at why China is so central to a very large number of global and regional supply chains, there are two elements to it. The first is the fact that China does offer the capacity to businesses to develop the supply chains by considerable lengths within itself. This is not just because of the geography that it has, but also because of the fairly wide broad-basing that it has developed over different sectors, and by and large in most products. China’s biggest value comes as a final stage assembler. China has also become a major consumer for final products. So when we look at value chains today, let’s say in a post COVID-19 situation, the emphasis on the part of businesses is to make these chains shorter, more resilient, more durable, and locate them closer to the final demand markets. Now, this is where I think we often overlook the importance of China. China continues to remain a major source of the final demand market. As a result of which, shifting physically supply chains out of the Chinese geography and its connected arms — I refer to Hong Kong and Taiwan — is going to be pretty difficult because the geography offers a tremendous amount of what in economics we call agglomeration advantages.
We have seen companies moving out, although mainly to South-East Asia. Even assuming there is limited relocation that we can absorb, what should be our policy priorities?
BD: We need to ask why is it that there has always been a huge gulf between FDI inflows into China and into India, and why is it that we have been attracting so little despite being one of the most open economies, and despite being a country which offers very attractive terms to foreign investors. The Make in India strategy talked about FDI in manufacturing, but if you look at the data and see which sectors have been preferred by the foreign investors, you’ll see it’s the service sectors. And many of these sectors are those where India does not need any investment, for instance IT services. I think the reason is clear, and that is there are skill set problems in India. Foreign investors get into the sectors where there are acknowledged skills, for instance in IT. But we don’t have similar skill sets in manufacturing. The second issue is infrastructure. It’s not just about having a good policy, but you need to have the infrastructure in place so that the foreign investor can make profits. There is a view that since the wage rates are low, investment is going to come here. That’s not true. We all know that it’s actually productivity-linked wages that matter, and productivity in India is pretty awful. We can talk about offering land, but I don’t think that land is an issue because from 2005, after we announced our special economic zones policy, the government of India has gone and acquired land all over the place. There is also the red tape. It’s not enough to say that we are going up the ease of doing business rankings. We know what the situation is on the ground.
We often hear industries calling for labour reforms, and complaints that in India labour unions are too powerful and it should be easier to hire and fire workers. Is that the issue, or is it a skills issue?
BD: It is actually easy for industries to hire and fire. If one lesson COVID-19 has taught everyone, it is that there’s virtually no labour laws in this country. Labour was retrenched at the drop of a hat. The reverse migration we are seeing is because of this problem. This is a false kind of a narrative that has been parroted time and time again, that we need more flexibility.
AP: If you look at the kind of FDI that India has been getting over the last three to four years, and the big ticket FDI, whether it is Walmart’s acquisition of a large stake in Flipkart, or that of Facebook in Reliance Jio, all of these are essentially intending to acquire existing assets. None of these are in the nature of building a boat from scratch in terms of the typical greenfield investment, which is capable of creating substantial jobs.
One thing India can probably offer that other countries in South-East Asia cannot to the same degree, is the market. Can we leverage that better?
BD: The unfortunate reality is we have not cared to harness the dominant domestic market adequately. And this is linked to our overall strategy of increasing the manufacturing sector, allowing the sector to absorb more labour, especially from agriculture, and so easing the burden of agriculture, and then having a more resilient manufacturing sector, and reducing the dependence on countries like China. What we are finding is that since none of these things have actually fallen in place, we find that the unemployment rate has actually gone up. And the direct implication of this increase in unemployment rate is that the domestic market has shrunk. And we’ve been seeing that growth was tapering off even before COVID-19. At the end of the day, if you have to create your own market, you got to have enough demand on the ground.
Is there a contradiction between India aspiring to become a lynchpin in global supply chains and being wary about trading agreements?
AP: Even if we go by what India’s stated objective is, that is reduce dependency on China and work towards relocation of supply chains with like-minded partners, countries like Japan, Korea, Vietnam, those are all members of RCEP [Regional Comprehensive Economic Partnership], which is going to be concluded without India. And they’re all going to work on the same rules of origin, which this agreement is going to give them. What I am trying to reconcile, and I am unfortunately failing to, are these contradictory sets of objectives, with India looking to position itself as a hub and working to relocate supply chains along with a group of countries, but with countries which are part of a completely different sub-regional understanding. The question India needs to answer upfront is, is it going to stay engaged with the trade agreements or not? There could be two elements to this — reduce dependency on China, and reduce dependency on the rest of the world. Just reducing dependency on China has one set of implications, but reducing dependency on the rest of the world is an approach that will drive you up the road of economic nationalism.
BD: I think we are going to go more towards the road of economic nationalism. There have been very clear signals in the last few years. India has gone more protectionist, and the average tariffs have actually gone up. There have been statements made by the major Ministers saying that we need to promote domestic goods, we need to shun imported goods, and even products made by foreign companies. That is very, very disturbing. If for everything, we start talking about indigenisation, that means we are trying to go down the path of import substitution. In this day and age, you can’t really do that. There are practical problems, because in order to go down that path, you have to garner huge resources which India doesn’t have. One thing which is very important for any country today is that policies must be predictable and transparent. Unfortunately, we seem to have neither.
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