2 min read.Updated: 29 Aug 2019, 09:03 PM ISTLivemint
The government has eased foreign investment rules in an exercise aimed at turning India into a global manufacturing hub. Success, though, requires us to gain a competitive edge
The best way to look at India’s latest strategic thrust, aimed at turning the country into a manufacturing hub for the world by linking up with supply chains that girdle the globe, is from a global vantage point. With the US-China trade war in its second year now, old business arrangements are under severe stress. American companies that have long used Chinese factories to crank out low-cost products for various markets find themselves under US policy pressure to either pull out of China entirely, or rework their production models to shift key operations elsewhere. US President Donald Trump might just raise tariffs on Chinese imports to 30% this October, enough to disrupt the cost calculations of the most resilient firms that make products in China. This presents India an opportunity to plug a vacuum, and the Narendra Modi government has moved in to seize it. On Wednesday, it said it would open the domestic field of contract manufacturing to 100% foreign ownership of ventures, a move explicitly designed to attract global players currently in search of low-cost locations for production units. Coupled with the easing of local-sourcing conditions imposed on foreign single-brand retailers in India, the reform serves as a big “Welcome" board, especially to chief executive officers in the US who have been mulling a response to the worsening commercial ties across the Pacific. In this context, all eyes are now on Apple Inc.’s Tim Cook. If this marquee brand were to quit China for India, goes the hope, several others may follow.
It is one thing to issue an invitation, however, and quite another to win decisions in India’s favour. Our country does not have much of a reputation for manufacturing efficiency. The sector has languished, as a proportion of the overall economic pie, even as services have leapt ahead. While it is true that new investors could transform the way products are put together by bringing in practices perfected elsewhere, analysts have long expressed concerns about low productivity here. Excessive red tape, which tends to raise corruption levels, has been another deterrent to foreign investment. The ease of doing business in India has risen in recent years though, as measured by the World Bank, and inflows from overseas businesses have been rising apace. Quick ground-level clearances could make a difference as well. In other words, the problems of the past need not persist in the future.
Or could they? For India to try replacing China as the world’s factory, a prospect that holds out the dream of job generation by the million, the country would need to enhance its overall competitiveness as a manufacturer. This is primarily about allowing companies to meet high quality standards at the lowest possible cost. Broadly, the Chinese success formula so far has involved the large-scale use—and even diversion—of state resources to subsidize mass production, not to speak of labour conditions that some consider repressive. In a democracy like ours, due caution should be exercised before attempting to emulate such ideas. Even on keeping export price tags low, China is not a good role model. Indeed, integration with global supply chains would require the Indian rupee’s value to be export-oriented, which could mean letting it slide when appropriate, but policymakers must resist currency manipulation. India must make its market and democratic forces work in tandem as it sets about creating conditions that would spur efficiency and turn “Made in India" into a routine sight across the world.