India is always projected as a potential winner in every conceivable business relocation opportunity but it is just that. The so-called-potential never gets translated into reality, thanks to built-in lethargy and indifference in our system.
Credit Suisse has hinted at possible relocation of Chinese industries on account of shrinking Chinese manufacturing workforce and of course all –too-known US-China Trade War. Rising Chinese wage structure could be another reason.
One of the possible outcomes of US- China trade war is shifting out of labour intensive manufacturing from China, particularly textiles, toys and furniture. Our overconfidence notwithstanding, the ultimate beneficiaries of such manufacturing relocation have been countries like Vietnam, Cambodia, Taiwan, Thailand etc. India dis miss the textile bus and Vietnam and Bangladesh benefitted big time due to their low wages, higher productivity and duty free access to developed countries’ market (Bangladesh being LDC). Textile manufacturing has become even more difficult recently on account of massive inversion in duty structure in manmade fibre value chain and consequent blockage of funds due to non-utilisation of accumulated input stage credits. We need to address these basic issues.
Increased tariff on Chinese imports by USA is also designed to disrupt Chinese participation in GVC (Global Value Chain) model of manufacturing, which in turn will impact supply of components of electronic, communication and computer components to China from Japan, Korea, and Vietnam etc. India, which hitherto is not a participant of GVC, could have potentially gained from disruption of GVC model but our inadequate investment, focus and orientation towards R & D accompanied with lack of genuine ease of doing business, central government’s massive effort notwithstanding, would most likely prevent that possibility.
Remember, Vietnam is becoming another China and it was rumoured that within months of the onset of US-China trade war, the GDP of Vietnam went few notches up. EU and Vietnam have signed a trade deal on 30th June 2019 and consequently customs duty on 71% of tariff lines on import from Vietnam to EU will be completely eliminated and within 7 years tariff on 99% of lines will go. This will give an added advantage to an already competitive Vietnamese exports in terms of increased market access to EU. Chinese investment in Vietnam hence would open further opportunities of market access to EU.
Due to FTAs signed with ASEAN countries and consequent duty free access to Indian markets , it has become more profitable for Indian entrepreneurs to set up factories in ASEAN countries like Indonesia, Malaysia & Thailand and export to India rather than set up unit in India to cater to huge Indian domestic demand. Additionally, FTAs, particularly CECA/ CEPA with Japan & Korea and Indo-ASEAN FTAs have caused duty inversions and in many sectors it is a viable option to trade than manufacture.
It would thus not be a bad idea to make Chinese manufacturing companies invest in India rather than expect manufacturing activity undertaken in China to shift to India on its own. That would help ease the pressure on adverse trade balance with China, which already runs into approx. 57 billion USD.
Integration of Indian manufacturing into Global Value Chain high-end manufacturing is vital to stay in the game of manufacturing. Faster customs clearance, reduction in cargo dwell time to the international benchmarks, improvement of port infrastructure etc are essential pre-requisites for that. However, since these are long-term measures, to begin with, duties may be lowered/ eliminated on strategic items (say, components of electronic and telecommunication equipments etc ) and some select leading manufacturers with proven track record be given genuinely facilitated import/ export clearance
The relocation of manufacturing activity is linked to ease of doing business in the new destination. Most of the ASEAN countries do rank higher than India in terms of ease of doing business (Singapore ranks 2 Malaysia 15 Thailand 27 Brunei 55 Vietnam 69 Indonesia 73 ) and therefore naturally get preference over India. We need to create & create urgently the conducive eco-system for manufacturing. Currently, clearances by the central government are given rather speedily but things largely get stuck at state government level, which are now responsible for crucial permissions like land acquisitions and environmental clearances. State govts. in their worthy search for inclusiveness, have created voluminous laws and regulations regarding the environment, forests, tribal areas and land acquisition. Even if New Delhi clears hundreds of projects, state level clearance remains. This is one reason why mass clearances by New Delhi has not yielded investment boom. Even central regulations are implemented by officials at the district level. The states themselves have to approve many issues relating to forests, tribal areas, the environment, mining rights, pollution and land acquisition. The states need to rethink their approach. They have limited technical and bureaucratic capacity. Their overburdened bureaucracy simply cannot handle the hundreds of new rules and regulations. The states must simplify regulations. Despite the federal structure, the Union government needs to make state governments toe the line of reforms. A better trade –off perhaps is required between the needs of production and the needs of other issues like the environment and land acquisition.
About the Author : Shri Mithileshwar Thakur is a member of the Indian Civil Service having a very illustrious academic career which includes being a Gold Medallist in Mechanical Engineering and has been a recipient of many merit scholarships. Was with Railways as IRSME and has worked with top notch industrial cos like NTPC, Tata Steel and Tata Motors before joing the Govt of India.
Has been a regular visiting faculty for IITK, IIFT, RBI Officers traing Institute to name a few. He has presided over functions of FICCI, CII and other Industrial & Commerce Chambers and has been key speaker in a plethora of events.
He has served as the Chairman , Export Facilitation Committee, Western Region, Member- REIC , (Mumbai , Chennai and Kochi), Government Nominee Member- RBI Working Group on Local Currency Trade, Member , Cochin SEZ Authority of India, on Quality Complaints , Chennai and Cochin, Government nominated Member – State Level Export Promotion Committee, Maharashtra, Management Representative- ISO Certification, Government nominee Member – Cotton Advisory Board, Indian Government Delegate & Member – Steering & organizing Committee ,
International Cotton Advisory Committee- 76th Plenary ,etc . He loves to read and write and is a popular public speaker at very prestigious forums.