Rising Up To The Occasion India As The Next Global Manufacturing Hub

by Arnab Chakrabarty - 5 February, 2021, 12:00 2122 Views 0 Comment

A year of uncertainty, lock-downs, rapid unemployment and financial imbroglios has slammed humanity into an era of chaos. In no uncertain terms has the Corona virus propelled mankind towards a point of no return, but has also dashed all hopes of a quick recovery. Repeated and enforced lock-downs has harmed businesses of all types, restricted international trade and commerce and provoked political dramas all over the world. With an ever belligerent but powerful Peoples’ Republic of China (PRC) and its gargantuan economic prowess, India stands at the crossroads of history where it can become an alternative to the PRC with its immense potential as an economic powerhouse in addition to its democratic ethos and respect for international law.

While prior to the 1990s the Indian economy was inward-looking and spoke highly of a growing internal market, its limited capacity of production, the imbalanced ratio of cost and output, lagging demand and the infamous licence Raj did not create enough chances to exploit its otherwise robust potential The subsequent liberalisation of the economy did away with bureaucratic controls and changing consumption patterns attuned with the rest of the world offered varied incentives for the manufacturers to experiment. A growing middle class, more disposable income and a burgeoning market were also some other factors behind the rise of India as a manufacturing powerhouse. Even then it would be years before India can catch up to the PRC due to its glaring lack of infrastructure and protectionist tendencies. Nevertheless, the pandemic presents an opportunity to lure international firms away from the PRC in terms of setting up businesses and manufacturing.

In the current scenario even though fingers of accusation have been pointed at the PRC due to its alleged role in obfuscating the truth regarding the Corona virus and its disdain towards international scrutiny, the fact is that it is still regarded as a global manufacturing powerhouse. Its economic clout translates into its political whiplashing and also adds veracity to the age-old dictum of maintaining economic superiority over its adversaries. In this regard, Prime Minister Modi’s statement on economic self-sufficiency in the context of an Atma Nirbhar Bharat or self-sufficient India needs to be considered seriously. While several plans and policies have been implemented to attract businesses from all over the world, proper and timely implementation is required for these to bear fruits.

The Production-linked incentive (PLI) scheme introduced by the Government of India seeks to boost domestic production while cutting down on imports. It attempts to off er domestic producers incentives on sales and also looks forward to inviting foreign companies to set up manufacturing units in India in addition to the expansion of existing units. Labour incentive in nature, the scheme best works for low-end electronic and digital units along with pharmaceutical, medical and tertiary units. Since there is a shift in the global supply change, it is imperative for India to seize the initiative and to attract foreign investment in terms of manufacturing. Not only will this aid in lowering the investment costs related to capital but will also boost employment. Of course, forethought must be borne when it comes to attracting global capital and manufacturing units, but the over-reliance on the PRC has exposed the fault lines within the economies of many states. Already states such as Japan, South Korea, the United States and many others from Europe have announced their willingness to circumvent the PRC. While Japan agreed on relocating many of its manufacturing bases to India from the PRC the same can be expected from others if the government streamlines its policies. The world has finally accepted that over-reliance on any particular state may be damaging in the long run, especially in the context of the PRC with its well-known disdain for international law and norms. That should however not entail a huge loss for the PRC, but India in its right competitive sense may be able to edge out the PRC in terms of attracting investments.

As the trust deficit with the PRC increases, it would not be wrong for India to seize the initiative and come out as an alternative. While the government seeks to increase the inflow of FDI, it witnessed an increase of 20 percent in 2019 as compared to a meagre 2.1 percent for the PRC. To follow up, the Department of Industrial Policy and Promotion reworked the National Manufacturing Policy to increase the share of manufacturing to the GDP to 25 percent by 2022. The focus was laid on the creation of National Investment Manufacturing Zones, Small and Medium Enterprises and the augmentation of industrial training and skill upgradation. It was understood way back that to engage a stronger workforce, a thorough training process was required. Even the ‘Make in India’ initiative launched in the year 2014 focussed on 25 key sectors of the economy which ranged from information technology to pharmaceuticals and automobiles. Also, the Defence industries were encouraged to tie up with foreign partners to manufacture higher-end defence equipment within India. To top it, policy foundations focussed on self sufficiency in the form of the Phased Manufacturing Programme (PMP) in order to increase the number of components manufactured in India for everyday items ranged from smartphones to automobiles. The National Policy on Electronics aims at manufacturing goods worth U.S. $ 400 billion in India by 2025. Other policies are aimed at reducing bureaucratic hassles such as ease of achieving electricity, clearance for obtaining land, construction permits and also protecting minority investors and creditors. In order to foster India as the next destination for manufacturing special emphasis must be laid on reworking multilateral trade agreements, improvisation of infrastructure and connectivity. In order to attract foreign investors, India also has to reconsider its position on external tariff s and defence of domestic industries where non-negotiable policies often turn away potential investors.

Critics are however quick to point out that decades of laggard thinking and bureaucratic bondage with little emphasis on Research and Development has hampered the growth of manufacture in India. Still dependent on the PRC and other states, India lacks critical components which it requires to realise its dream in its entirety. For instance, it depends on the PRC for basic solvents and Key Starting Materials in terms of its growing pharmaceutical base. The disparities between both the Asian giants are glaring. As explained earlier decades of bureaucratic lack, unwillingness to experiment and diversify its production bases has hampered India’s dreams to a large extent. For instance, the United Nations Industrial Development Organisation (UNIDO) placed India in the forty-second position out of 152 states in terms of Manufacturing Value Added, while the PRC was placed in the second spot. India mainly focusses on chemicals, refined petroleum products, basic metals, food and beverages, light vehicles and auto parts while the PRC has a more diversified base with medium and higher-end technological goods making the most of the count. In terms of Ease of Doing Business Ranking India was placed in the sixty-third position even in which the PRC stood at the thirty-first position. Even then, the PRC’s manufacturing output decreased by 14.1 percent in the year 2020 while India’s manufacturing capacities increased by 8 percent in the same year. In terms of lower labour costs, India has a distinct advantage in addition to far more transparency in conducting business. Necessarily, while the PRC has a distinct advantage due to its years of growth-oriented policies, the pandemic which traces its origins to Wuhan in the PRC has severely hampered its credentials. Needless to say, India is poised to rise up to the occasion, even though the task is quite challenging in nature.

Problems galore, but India does have the required potential to rise as a manufacturing hub for the world. With a very young population, there is an urgent requirement for jobs and also the growing demand for finished products augment in this direction. While much has been done a lot of reforms are required such as in terms of Research and Development, logistical improvement in terms of physical, electronic and digital connectivity. The education sector also needs a lot of reforms in order to stand out as a cynosure for research and collaboration with other centres for knowledge. Access to clean, efficient and cheap energy is another factor that must be borne in mind. Finally, it would be imperative to reduce bureaucratic backlogs and offer easier access to the basic requirements for engaging in business especially for the small and medium industries which should be promoted to achieve competitiveness in the international arena. The pandemic has indeed pushed back mankind into an age of darkness, despite which it has enabled newer opportunities and avenues. Whether the world will be kind to the PRC or will its loss enable others such as India to rise up the occasion needs to be observed at a far greater length.

Arnab Chakrabarty
Author is a Research Fellow at the ICWA (Indian Council of World Affairs) specializing in Latin America

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