China’s share of global manufacturing output climbed from 8.7 percent in 2004 to 28.4 percent in 2018.
China is the world’s largest manufacturing hub. It is also the biggest exporter of many products like steel, chemicals, toys, rare earth, mobiles, electronics, garments, bulk drugs, etc.
The coronavirus outbreak has exposed the over-dependence of the world economy in China. The lockdown in China severely impacted various sectors like pharmaceuticals, automobiles, electronics, textiles, solar power, etc across the globe. It has disrupted supply chains and brought out the risk of depending on one country for intermediate and finished goods.
[You may read: Impact of COVID-19 on Pharmaceutical sector in India]
Even before the pandemic, major economies were looking to diversify their supply chain due to the protracted trade war between the US and China. The COVID-19 shock might accelerate the process.
[You may read- What is the trade war between the US and China?]
The first country to make explicit announcements in this regard was Japan. Japanese Prime Minister Shinzo Abe has proposed building an economy that is less dependent on one country, China so that the nation can better avoid supply chain disruptions.
In its emergency economic package adopted on April 7, the Japanese government called for the re-establishment of supply chains. It earmarked more than 240 billion yen (about $2.2 billion) in its supplementary budget plan for fiscal 2020 to assist domestic companies to move production back home or to diversify their production bases into Southeast Asia.
U.S companies have also been leaving China. Even South Korean companies want to diversify their supply chain in the aftermath of the pandemic. Many other countries are expected to follow suit.
On the surface, India is a credible alternative for companies looking to relocate from China, given its emerging economy status and demographic advantages.
But, the question is, will India really benefit?
Companies have been rethinking their supply chains for a while now because of the trade war between the US and China. But, most companies have shifted to Vietnam. It has become their first choice due to many enabling factors. [Apart from factors such as close proximity to China and cultural similarities, Vietnam is way ahead of India in terms of infrastructure development. It has also invested a huge amount in healthcare and education necessary for building human capital. Like China, Vietnam has planned its manufacturing hub (Ho Chi Minh city) in a way that factories and suppliers are located close to each other. It cuts costs and saves time]
In light of the trade war and coronavirus pandemic, even Microsoft and Google are looking to move some hardware production to Vietnam and Thailand.
Moreover, according to a study by Nomura, out of 56 companies that relocated their production out of China between April 2018 and August 2019, 26 relocated to Vietnam, 11 to Taiwan, and 8 to Thailand, and only 3 to India.
This is because, though India ranks higher than Vietnam in Ease of Doing Business ranking, the cost of starting a business is higher in India. Red tape, difficulty in acquiring land, license, etc are still prevalent. At present, investors have to acquire land on their own. This involves negotiating with several small land-owners. This is time-consuming and difficult. The investment plans of companies like Saudi Aramco to Posco have been frustrated by delays in acquisition. India has rigid labour laws as well.
[You may read: Why labour law reforms required in India?]
In addition, the difference in the cost of production between India and Southeast Asian countries is about 10-12 percent. For instance, industrial power in Vietnam is 40% cheaper than in India; this is the case across ASEAN.
[You may read: What is Ease of Doing Business?]
It should serve as wake-up call for India.
If India doesn’t undertake necessary reforms, it will be left behind in the current exodus of companies from China as well.
That said, all is not yet lost.
India has advantages of the large market size of 1.3 billion people and the availability of cheap labour in abundance.
“If you manufacture mobiles in Vietnam, what do you do with them? You have to essentially export. You can’t sell there as there is no local market”
Recently, global manufacturers have initiated talks with India to source automobile components and electronic products from India. As per a report by Business Today, 1,000 foreign companies are engaged in discussions at various levels with the Indian authorities to shift manufacturing to India.
It is to be seen how many of these discussions materialises into actual investment.
India has not been able to tap its full potential in attracting investments and is also nicknamed as ‘Sleeping giant. That’s why the PM has asked states to prepare well and woo companies looking to shift from China.
The Government intends to aggressively push its Make in India programme by offering domestic and foreign manufacturers policy and fiscal incentives to manufacture locally after the lockdown ends on 3rd May.
But, the Government should have announced these measures earlier, given the fact that Vietnam had already issued several incentives to attract foreign investors on 6th April.
Despite that, India has not yet missed the bus. Apart from policy and fiscal incentives, the Government should use this crisis as an opportunity to push for necessary reforms to capitalise such opportunities that have the potential to bring in much needed foreign capital as well as generate jobs.
As identified, India has to undertake labour and land reforms; lower power tariffs and invest heavily in infrastructure and human capital. India has to make it easier for businesses to start manufacturing in India and focus on reducing the cost of production across all sectors to compete against other countries for drawing foreign investment.
[You may read- Types of Foreign Investment in India]
Update on 6/5/2020: Economic times reports that India is developing a 462,000-hectare land pool to lure businesses moving out of China. Land acquisition has been a big hurdle for companies looking to invest in India.
The government has identified 10 sectors — electrical, pharmaceuticals, medical devices, electronics, heavy engineering, solar equipment, food processing, chemicals, and textiles — as focus areas for promoting manufacturing.
A detailed scheme for attracting foreign investments is expected to be finalized by the end of the month
[You may also read: Why India’s textile sector lost out to Bangladesh?]
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