China and its handling of the virus has impacted the economics of globalisation, fuelled anger in world capitals, and flamed anti-Chinese campaigns. Dependent on made-in-China goods and raw materials, nations the world over are today rethinking trade ties with the country. India not only cancelled orders for ‘faulty’ rapid test kits, it revised FDI policy to curb ‘opportunistic takeovers or acquisitions’ of Indian companies, aimed at China. Not surprising, given how Indian brands like Paytm, Ola, BigBasket, Byju’s and others heavily rely on billions of dollars from Chinese venture capitalists.
Common sense dictates the world look at alternate hubs of manufacturing and sourcing. While that may not be possible immediately, nations like India can step up to the challenge.
The Atmanirbhar Bharat scheme could give the much-needed fillip to the country’s disrupted business operations by promoting Make in India manufacturing, encourage substitution of imports of low-technology goods from other countries, particularly China, and encourage local produce at lower prices.
The Rs 20-lakh-crore stimulus package announced by the government focuses on tax breaks for small businesses, as well as incentives for domestic manufacturing. The Rs 3-lakh-crore collateral-free assistance handed out to MSMEs will help crank up their operations. This move could help recover India’s factory output, which plummeted to record lows in March, with the Index of Industrial Production contracting 16.7%. Manufacturing sector output slumped 20% in March, while electricity generation shrank almost 7%, as per data. All categories of manufacturing industries showed a contraction in production in March, with the worst affected being auto (50% decline) and computer & electronic products sectors (fell almost 42%).
China has been a growing influence on other developing economies through trade, investment and ideas. Practically every household—from electronic device, household product or consumer durables—consumes China-manufactured products. Be its investor-friendly policies or efficient manufacturing base, the nation began to reform its economy in 1978, and GDP growth has averaged almost 10% a year.
As the biggest supplier to the biggest retailers across the world, World Bank 2018 data suggests, China in 2018 had $14 trillion GDP growth, which was an increase of more than $2 trillion in comparison to 2017. But all this could change. “Today, a sort of fear psychosis is visible, as shipments have been denied entry into US ports. China’s agriculture and consumable items like tea, horticulture and floriculture could see a big downfall. So investment in the food processing sector could be a big opportunity for India as trade could move out of China,” says Ajay Sahai, director general and CEO, Federation of Indian Export Organisations.
India’s GDP will grow at 1.9% in FY2021, making it the only other major economy beside China estimated to grow. A lot of its growth could be a result of a post-Covid world with anti-China sentiment. Experts feel that the global economy could emerge from the slump towards the end of the year only if supply-side constraints ease and demand revives. Biswajit Dhar, professor, Centre for Economic Studies and Planning, School of Social Sciences, JNU, Delhi, says, “China is poised to rebound quicker than some of its G20 peers, and the rest of the world may have little choice but to continue to engage with Beijing because of its ability to supply.
As long as China is able to keep the prices of its products low and produce in volumes, it will continue to sell in the global markets. Only time will tell as to how the US and the rest of the advanced countries respond to China in the post-Covid phase.” For instance, Chinese suppliers account for 70% of Walmart merchandise. If the US-China trade war disrupts the supply chain, the US can look for alternatives in low-cost production areas like Bangladesh, Thailand or Philippines.
Global companies that thrived on the efficiency and low costs of Chinese production are likely to move their base in the aftermath of Covid-19. South Korean and Japanese firms have evinced interest in migrating towards production-conducive economies like India, Vietnam and Thailand. Cambodia, Indonesia and Bangladesh have upped their game as suitable manufacturing hubs. Vietnam invested in transport infrastructure and special economic zones to offer manufacturers access to the ASEAN free trade area and preferential trade pacts with countries throughout Asia, the EU and the US.
Dhar says that in all these regions one of the key driving factors for industrial transformation is the promotion of industrial clusters, geographical agglomerations of firms and hubs of production, seen as a viable solution for economic growth.
As per the US-India Strategic and Partnership Forum, 200 American corporations had already sought to move their manufacturing bases from China to India in mid-2019. This could accelerate post-Covid. Around 100 US firms may shift base to Uttar Pradesh from China, among them Mastercard. UPS and Fredix showed interest to invest in Jewar airport by developing logistic centres. Boston Scientific has plans to set up a medical equipment plan.
As UP is home to more than 90 lakh MSMEs and skilled labour, the state could be among the frontrunners on the growth trajectory. Casa Everz Gmbh, the owner of Germany-based healthy footwear brand Von Wellx, will be shifting its entire shoe production of over three million pairs annually in China to India with an initial investment of Rs 110 crore, as per a top official of the company’s licensee Iatric Industries. A new manufacturing unit will be set up in Uttar Pradesh through a collaboration with Iatric Industries as part of an understanding with the state government, as per PTI.
Where India can score
India Cellular and Electronics Association (ICEA) chairman Pankaj Mohindroo finds enormous opportunity in building India as an additional export base, and not just a producer for the domestic market. “Dependence on one geography and China’s increasing wages have forced global value chains to look for other destinations. India built its mobile phone industry primarily for the domestic market by increasing production during 2014-15 with mobile handsets worth Rs 18,900 crore, which increased to Rs 54,000 crore in 2015-16, to Rs 90,000 crore in 2016-17, and over Rs 2,10,000 crore in 2019-20,” he says.
The Indian smartphone market surpassed the US for the first time, becoming the second-largest smartphone market globally, reaching 158 million shipments in 2019 with 7% YoY growth, according to Counterpoint Research. The market grew due to the expansion of Chinese brands with their aggressive pricing and promotional strategy. Though China still dominates and makes up for around 70% of the global phone exports, India has got 15% of this pie, with Vietnam fast emerging as a key player with around 10% of such exports and with key players like Samsung setting up facilities there.
But as per the ICEA, India’s exports of electronics—leaving aside mobile phones—have remained more or less flat at around $5 billion since the beginning of the decade. Vietnam’s exports rose nearly 10 times, from $3.6 billion in 2010 to $34.5 billion in 2018. The ministry of electronics and information technology (Meity) has planned for the newly-notified schemes worth over Rs 48,000 crore to promote electronics manufacturing, as it wants to utilise the opportunity in making India a suitable alternative to China.
Major brands have set up their manufacturing facilities and some companies have sub-contracted manufacturing to electronics manufacturing services (EMS) companies operating from India. Technology giant Apple plans to produce up to $40 billion worth of smartphones in India and move almost a fifth of its production capacity from China to reap benefits of the new production-linked incentives (PLI) scheme, which offers a 4-6% incentive for local production. Similarly, mobile player Lava International will shift its production and design centre for the export market from China to India within six months. In fact, threatened by the interest in India, US President Trump has threatened to slap taxes on companies like Apple keen on shifting manufacturing to India.
India has also experimented with high custom duty (5-10%) on imports of mobile phones and their parts. Chinese firms like Xiaomi, which had been importing products from China, were forced to establish manufacturing facilities in India after the government hiked import duties. But India’s new FDI rules have brought disappointment to these players.
As the world eyes agri produce from China with caution, this is where India can score. As part of the Atmanirbhar scheme, a slew of incentives for the agriculture sector and allied activities have been announced which will help in building cold chains and post-harvest management infrastructure. The Centre will establish a legal framework that will enable farmers to engage with processors, aggregators, large retailers, and exporters in a fair manner. A Rs 10,000-crore scheme will help formalise micro food enterprises (MFEs). Funds have been allocated for dairy processing, herbal cultivation, and beekeepers.
India is a big exporter of rice, tea, meat, milk products, honey, horticultural and organic products, which will have to overcome the Covid challenge. Pre-Covid, the Centre identified 21 agricultural products, including honey, potatoes, grapes, soybean and groundnut, which India could export, taking advantage of the trade restrictions against Chinese goods.
Sahai says, “Post-Covid, countries are looking towards India for processed food, marine produce, meat, fruits and vegetables, tea, rice and other cereals as they are apprehensive to import edible products from China. An amendment in the Essential Commodities Act will not only enable better price realisation for farmers in respect of edible oils, oilseeds, pulses, onions, potatoes and cereals, but will also help exporters to stock for timely delivery. India is all set to be the world leader in marine exports and the current downfall is very temporary.”
When it comes to textiles, however, India has not been able to stand its ground in the export market. In 2000, its share in the global exports of clothing was 3%, while Bangladesh and Vietnam had relatively lower shares. However, in 2018, while Bangladesh and Vietnam had increased their shares to 6.4% and 6.2%, respectively, India’s share increased to only 5.8%.
The time taken to align to the new GST regime and revised export incentives in past years have clearly impacted exports, and the recent slowdown in global demand has increased competition in markets. As per CARE Ratings 2019, India is projected to lose market share to Bangladesh and Vietnam for readymade garment exports to the EU because of lower competitiveness, as Bangladesh has duty-free access to the EU. India’s apparel exports comprise mainly of cotton garments (51%), with man-made fibre (MMF) accounting for around 28%. India needs to diversify its fibre base, as global consumption is diversified and MMF holds a much larger share as compared to cotton.
Apparel Export Promotion Council (AEPC) president A Sakthivel identified measures to enhance apparel exports in India which has huge potential from markets like the US, Japan and South Korea. “Demand for MMF textiles all over the world is increasing as a substitute for cotton amid changes in global fashion trends. Currently, MMF dominates global textile fibre consumption, with 72% share for MMF and 28% for natural fibre. The share of MMF has been steadily increasing due to the inherent limitations of growth of cotton and other natural fibres. Hence, we plan to tie up with NIFT alumni to produce MMF garments. Also, the removal of anti-dumping duty on PTA (purified terephthalic acid) will promote the growth of MMF companies. Lower PTA prices will boost operating profits of polyester yarn makers by 15-20%,” says Sakthivel.
The pharma sector is not self-reliant and is largely dependent on 60-70% of China’s bulk drugs. “China is a leading supplier of basic chemicals and active pharmaceutical ingredients (APIs) by volume to the global market. Indian companies focus on formulations, but there’s a need to reduce import dependence,” says Ravi Uday Bhaskar, director general, Pharmaceuticals Export Promotion Council of India.
India exported pharmaceuticals to 202 destinations during FY20. Though Covid-19 impacted Indian pharma exports, bringing down growth to single digits, this has constituted almost 32.74% of our total exports.
As per strategies to reduce import dependence of APIs, the Cabinet approved a scheme on promotion of bulk drug parks of Rs 3,000 crore for the next five years to reduce manufacturing cost of bulk drugs in India and dependency on other countries, along with the PLI scheme to boost domestic manufacturing of critical key starting materials (KSMs), drug intermediates and APIs.
If this crisis is seen as an opportunity, there is a need to introduce structural reforms like significant labour and land reforms, allowing businesses to hire and fire, handholding investors, direct tax benefit in SEZs and plug-and-play facilities. “Countries like Ethiopia and Kenya have sector-specific skills imparted to labour and have created world-class infrastructure to attract foreign investors to start production in a week’s time. The investor has many choices. Countries like Vietnam are proactive in approach and notify an officer to provide statutory clearances and authorisation for every investment in the country,” says Sahai, adding that creation of new industrial clusters won’t happen overnight.
“Vietnam offers cheap labour, but its 100-million population is small compared to China’s 1.3 billion, and its roads and ports are already clogged. India has the manpower, but skill levels fall short and government rules are relatively restrictive. The US-China tariff war has given India an opportunity to ramp up market access in commodities like steel and cotton,” he says.