9 min read.Updated: 27 May 2020, 04:33 AM ISTGoutam Das
The govt seeks to push domestic manufacturers up the value chain. But that needs a lot of work on the ground
Besides consistency in policy, the success of the strategy would need relief from what the industry calls ‘disabilities’ from poor infrastructure and inefficient logistics
NEW DELHI :
The sales head of an Indian consumer products company got cracking, a day after Prime Minister Narendra Modi advocated that India become self-reliant and become “vocal for their local". He circulated a survey with two questions among his contacts on LinkedIn.
“When buying a new product, what would be your preferred choice?
Jessie Paul, founder and CEO of Paul Writer, a marketing services firm, saw the questionnaire. “I think it was to gauge market sentiment. But both the questions don’t make sense," she told Mint. Why is that? A consumer will vouch for the brand, not its place of origin, she explained. “I will buy it irrespective of where it is made because I trust the brand."
On the other end of the spectrum are domestic manufacturers like Sunil Vachani, chairman and managing director of Dixon Technologies (India) Ltd, a contract manufacturer. “Vocal about local is the first step in hardware," he said, adding “What Y2K was for Indian software companies, post-covid would be for the hardware industry. It has made us realize that we have to be self-reliant." Indian software companies made a killing debugging Y2K, called the millennium bug, from computer systems worldwide.
Multinationals and their advisers, meanwhile, are grappling to understand the ideological underpinnings of the term “self-reliance". There are several doubts. Is self-reliance a swadeshi movement that would eventually lead to a boycott of foreign-owned brands? Or is it just about targeting Chinese products? After all, Rashtriya Swayamsevak Sangh-backed Swadeshi Jagran Manch has been campaigning against dumping from China.
Or could it be just a repackaging of Make in India, a campaign that launched in September of 2014 with an aim to make India a global design and manufacturing hub? Some feel an era of import substitution could well and truly kick in—this government has increased duties over the past four years in order to give protection to domestic industry. What then would be the chances of India slipping into some form of economic isolation that resembles the pre-1991 era?
Baijayant “Jay" Panda, national vice-president of the Bharatiya Janata Party (BJP), stressed that self-reliance is definitely not a return to that era. “In the decades of the 1950s through the 1990s, we were on the wrong side of globalization. Now, we should not be again on the wrong side of the curve when the world is looking at a different model. In the last several years, the world seems to be moving away from the unfettered globalism of the previous several decades," he said.
He went on to add: “We are going to be part of the global trading mechanism with the level of openness global economies have today as opposed to what they had 10 years ago. And we would take advantage of the opportunities by helping our players get a leg-up."
The winners of the post-covid industrial strategy, therefore, could be Indian manufacturers. Even small ones—at least on paper.
Finance minister Nirmala Sitharaman fired the first salvo on 13 May. “Indian MSMEs and other companies have often faced unfair competition from foreign countries," she said during a televised address. “Therefore, global tenders will be disallowed in government procurement up to ₹200 crore (about $25-26 million)."
While this seems a significant move, the reality is a bit more complicated.
With the $26-million cap, global companies cannot bid for many government contracts, many of which are in the range of $10-20 million. Many companies will lose 80% of their government contracts, said an executive from a multinational manufacturer in India who did not want to be identified. “However, I doubt if the smaller Indian companies can benefit—the capabilities, skill sets, funding of the MSMEs are not the best," he added, suggesting that government departments could be short changed with poor supplies.
Moreover, there appears to be no consistency in policy. Many government contracts also have criteria that favour large firms—in telecom, for instance. While small firms are ostensibly going to benefit, the long-term stability of this policy shift remains to be tested.
As things stand, the new version of Make in India seeks to protect domestic manufacturers and push them up the value chain.
Since Make in India’s first version launched in 2014, India has primarily become an assembly hub in industries such as mobile phones, lighting and consumer electronics. In other words, manufacturers assembled products from imported electronic components to meet domestic demand. Assembly created jobs. Nonetheless, the domestic value addition continued to be low at under 30%.
Make in India 2.0 is likely to press the accelerator on vertical integration, where the component supply-chains are coerced to be local because of import substitution. “Yes, there will be a lot of import substitution going ahead, but the second step is localizing the supply chain because a high level of components is still imported," said Sunil Vachani of Dixon.
Nevertheless, import substitution does not mean the government is giving up on export dreams either. The idea is to help domestic companies get to scale, first. “Till such time you build that scale, you are not going to be competitive. So it is about protecting from imports till you reach scale," said R. Jagannathan, editorial director of Swarajya.
How easy will it be to be protectionist on one hand and achieve export competitiveness on the other side? Well, both can be theoretically achieved in certain sectors.
Amit Khandelwal, director of the Jerome A. Chazen Institute for Global Business at Columbia Business School, said that the economic rationale behind import substitution is to generate learning and economies of scale within a country. “Both of those forces could lead to efficiency gains that make your exports competitive in global markets. However, the history of import substitution working is very mixed (and for India, it fared poorly). It can work in specific sectors, but I would say the guidance on which sectors it could work is not particularly well understood," he said.
Besides domestic scale, export competitiveness in the Indian context would mean offsetting what the industry calls “disabilities". Poor infrastructure and inefficient logistics lead to higher costs, for instance. According to United Nations Conference on Trade and Development (UNCTAD), in 2018, the median time spent by a container ship during one port call in China was 0.62 days versus 0.93 days in India.
Besides logistics, disabilities in India include higher cost of finance, lack of quality power and limited design capabilities. According to industry bodies, India’s electronics manufacturing sector runs a disability of up to 11% versus competing nations.
China and more
Invest India, the national investment promotion and facilitation agency, has a busy website replete with gamified data, state and sectoral analysis, case studies, news and many reports. One of its latest, Great Places For Manufacturing In India, is a handbook crafted along with real estate services firm JLL India.
A section focuses on “Covid-19 & opportunities post-pandemic", marketing India as one of the most viable locations for business continuity planning for multinationals re-thinking their supply-chains. “India, on account of its large domestic market and low-cost production base is well-positioned to host new investments in a range of sectors," the report stated. One of the carrots is the country’s “very large domestic market—as big as 18% of the world population along with prospects of a manufacturing export hub to the rest of 82%".
In fact, nearly all conversations with industrialists and industry bodies have an element of the “China opportunity". The new Make in India rides on hope. “We see an opportunity in the crisis," Chandrajit Banerjee, director general of Confederation of Indian Industry (CII), said. “We are seeing some changes in the labour laws already. Contractual sanctity would be very important for global companies. Besides, we need certainty in reforms. This is the right time for India to take those steps to attract global capital," he added.
The focus obviously is on sectors that can provide plenty of jobs. “Textiles is one industry where we should be able to make for ourselves and the world. The other sectors to focus must be leather and the footwear (because it involves small companies), furniture, agricultural/marine products and electronics (India runs up a huge import bill here)," he added.
Apart from these, the Invest India-JLL report stated that India is well-positioned to host new investments in pharmaceuticals, medical devices, automobiles, capital goods, electrical machinery, chemicals and petrochemicals, plastic products, and telecom equipment among others.
Close to the historic ruins of the Vijayanagar empire in Karnataka’s Hampi, Krishna Prasad Chigurupati and his wife Uma owns a vineyard that produces Chardonnay, Sauvignon Blanc, and Cabernet Sauvignon, among other wines. “Profit-wise, in wine making, we are always in the red," said Chigurupati, who is also the chairman and managing director of pharma company Granules India Ltd.
The pharma industry saw red last year when China suddenly increased the prices of pharmaceutical intermediates by 30-40%. Intermediates are key starting materials that go into the manufacturing of active pharmaceutical ingredients or APIs. “India used to make everything from scratch. Then, our pollution norms started getting tougher and we found it easier to buy from China around 1985-90s," Chigurupati said. Intermediates are chemical products and their production pollutes the environment. “Now, the pollution norms in China have become tougher, which is why prices shot up," he added.
Self-reliance in pharmaceuticals, in vogue because of covid-19, would imply India restart intermediates production. How feasible would that be? “If I get a premium of 5-10% on the API price, I can do it in India. If customers don’t pay that premium, the only way to manufacture would be for the government to subsidize the project cost—up to 25%," Chigurupati said.
Every industry, similarly, needs a different playbook to achieve vertical integration or self-reliance.
For instance, Kulin Lalbhai, the executive director of apparel maker Arvind Ltd, said that there is an opportunity to repeat the success story around personal protective equipment (PPEs) in other segments of the textiles industry. As the epidemic hit, the textiles industry partnered with the government. Factories that made jeans, suits and shirts were repurposed with new machinery. India now produces 400,000 PPEs a day.
PPE is a sub-set of technical textiles— India imports a chunk of technical textiles, worth nearly $16 billion a year. While India has done well in fabrics and home textiles, there are pockets where it has little scale. Lalbhai sees an opportunity to become globally competitive in both technical textiles and man-made fibres.
The playbook in textiles can’t be simply subsidies. The government has got to work on preferential access, given the covid-19 fallout. “Global trade may have different alignments in time to come. Beyond India being ready from a supply-side, it would help if we take advantage of these alignments. If there are trade agreements with the western world, it can lead to a step change in Indian exports," Lalbhai said.
The three large markets for textiles are the US, UK and EU, where competing countries such as Bangladesh and Vietnam have preferential access. A level playing field globally next needs to be supplemented with good infrastructure assets. “Then it becomes a powerful cycle," he added.
Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.
Never miss a story! Stay connected and informed with Mint.
our App Now!!