Will India do enough for a lead role in the new world order?
Taking the tough road could ensure India gains a more powerful role in the post-pandemic global stage.
Now that we have lived with the Covid-19 pandemic for a month or two, we dare say – there is no going back to where we were. The question is – will India be in a better place? History shows that major economic crises have been followed by make-or-break reforms. That freedom of choice and direction is what India needs to exercise at the moment.
To be sure, the shock wreaked by the pandemic and extended lockdowns on the global and Indian economy – with a lot of uncertainty still over how long or deep – might wear off over time. But some things would have changed forever. For a start, the way we work and do business.
Global supply chains will be re-wired. With worldwide lockdowns hitting sectors such as electronics and auto hardest, newer supply chains are being forged in other parts of the globe, beyond China.That would only telescope a trend that had already begun, of shifting manufacturing out of China, particularly for low value-add industries, what with labour becoming costlier and trade tensions with the US escalating.
In the new order, some firms may contemplate moving on-shore and automating to cut labour costs. Others might consider staying in the Asian region, which provides benefits of low cost labour, favourable agreements with trade partners, better access to resources or raw materials, and proximity to consumers.
Will India seize this opportunity?
Attracting investments in manufacturing could be one of the pillars on which India’s recovery from fiscal 2022 could be scripted. But this is not an opportunity without competition. Peers like Vietnam, Indonesia, Bangladesh, and Philippines are already there, perhaps doing better than India.A 2016 CRISIL study points out that in the last decade, as China moved up the ladder of sophistication in manufacturing, the vacated space in low-end manufacturing – for textiles, readymade garments, footwear, toys and leather products - was rapidly taken up by Vietnam and Bangladesh, with India losing market share in global exports.
India might have a lot going for it: a consumption-driven economy with a large domestic market, relatively faster growth, young demographics, abundant labour supply at reasonable cost, and proximity to rest of Asia but it needs much more than that to become a serious investment destination.
Only hard structural reforms can do the job. Land and labour markets, availability of physical infrastructure (power, water, roads, logistics and transport), and ease of doing business in particular, policy certainty on regulation, taxation, license acquisition and clearances – need a big jolt. Investing in human capital is another crucial area.
Not all these changes entail a fiscal cost. But some are hard reforms avoided for years. Pushing these, such as easing of land and labour-related rigidities, might find somewhat better acceptance as the lockdowns have struck hard on jobs with many sectors likely to witness permanent loss of employment.
The domestic investment climate too, remains weak. Reforms such as amending existing laws to provide greater flexibility in acquiring land and hiring of workers to enable large-scale production bases, and a predictable tax regime favourable to attract big-ticket investments – are prerequisites to revive it. That will also set off a desirable cycle of higher domestic and foreign investments, and employment generation over time.
Never before has the role of states been more crucial. States have a substantial hand in providing land for setting up facilities, access to power, roads, water, and other physical infrastructure. And that is about to grow even bigger post pandemic. Reports suggest states have been engaging with prospective countries offering incentives to move manufacturing bases to India. Yet, this is happening in pockets. What the country needs is a bigger, more focused push. Amid all this, policy certainty and showcasing a more pragmatic vision for India will be crucial to attract foreign investment.
A 2012 Organisation for Economic Cooperation and Development (OECD) report* observed how economic crises have served as catalysts for pushing wide-ranging reforms in countries. This was observed after the 2008 global financial crisis in OECD and BRICS countries. In India, the 1991 balance of payments crisis lead to liberalisation, the 1997 Asian financial crisis gave a larger role to the private sector with the government diluting stake in state-run companies, and the 2012 domestic economic crisis eventually led to the clean-up of banking sector, the Insolvency and Bankruptcy Code, real estate regulation, adoption of fiscal restraint and reform (including the Goods and Services Tax implementation) and adoption of inflation targeting.
So what will the current crisis trigger?
Apart from the much-needed track on reforms, the government must not also lose sight of upgrading the country’s human capital by ramping up health and education initiatives, exposed as grossly inadequate by the pandemic. Investing in infrastructure workers – be it construction, health, or education – and not only infrastructure, must be prioritised. Success stories of China and the ‘east Asian tigers’ have shown how upskilling workforce helped them move up the manufacturing value chain, progressively improving their income prospects.
India ranks 68 in the World Economic Forum’s global competitiveness index, compared with China’s 28, Thailand’s 40, Indonesia’s 50, and Vietnam’s 67. Taking the tough road could ensure India moves up the charts and gains a more powerful role in the post-pandemic global stage.
To not do that, would be to live in denial and a grave mistake.
May 08, 2020