The outbreak of COVID-19 has created an unprecedented situation around the world with more than 45 million people affected in over 200 countries posing a challenge in all strata of life – economics, health, business, lifestyle and general well-being. The effects of the pandemic have been sudden and sizeable causing large-scale disruptions in supply chain networks, manufacturing hubs and customer demand. Maintaining cash flow and liquidity have emerged as prime concerns for companies around the globe as they have started developing plans to minimize the aftershock.
Importance of Manufacturing
Manufactured goods are necessary for trade. According to the World Trade Organization, 80% of interregional trade – within a country is in goods, and only 20% is in services. Services industries are dependent on manufactured goods for their operation and for their own technological progress. Each manufacturing job creates three other jobs through something called “the multiplier effect.” That is, the wages from manufacturing employees are re-spent in other parts of the economy because manufacturing adds so much value to the economy. Manufacturing creates middle-class jobs that anchor a middle-class economy.
Impact of COVID-19 on global manufacturing
The global nature of COVID-19 has raised immense questions on the existing supply chains and the global manufacturing dependency on China. To add to it, the world’s two largest economies have been locked in a bitter trade battle. The dispute has seen the US and China impose tariffs on hundreds of billions of dollars’ worth of goods. The US-China trade war started on 6 July 2018, when the US imposed a 25% tariff on USD 34bn of Chinese imports, the first in a series of tariffs imposed during 2018 and 2019. China imposed 5% to 10% tariffs on one-third of the 5,078 goods it imports from America, with tariffs on the remainder scheduled for December 15. The United States imposed new 15% tariffs on about USD 112bn of Chinese imports, such that more than two-thirds of consumer goods imported from China were then subject to tariffs.
The world is now coming to terms with the fact that they had put all their eggs in one basket with China becoming the key source of raw materials and manufactured products around the world. China held a monopoly for many years and the supply chains were severely disrupted around the world as COVID-19 took China into its grip early this year in January. This black swan event helped the world come to the realization of the significant risk they were undertaking by relying on only one country for most of its sourcing. Japan has become the first country to acknowledge this unhealthy over-reliance and has announced a package of USD 2.2bn to Japanese manufacturers to help them relocate their overseas factories, including bringing them back home. It is expected that other countries will follow suit in the near future and India will have the golden opportunity tosupport global and indigenous companies setup manufacturing bases.
Opportunity for developing nations
Owing to these developments, a geographical rejig of manufacturing hubs seems likely. Several developing nations are emerging as vying contenders. India, with its multifaceted industry initiatives, may emerge as a globally preferred investment destination if it is able to align to international standards of industrial support, create the right regulatory and business environment with an adequate amount of support to industry.
Traditionally manufacturing has not done very well in India and both international and local players have struggled with managing growth and regulations. However, the current Indian government has been in a reformist mode and has taken a series of policy initiatives under the Make in India umbrella policy.
Following five industrial corridor projects have been identified and approved for development of the Government of India:
- Delhi Mumbai Industrial Corridor (DMIC)
- Amritsar Kolkata Industrial Corridor (AKIC)
- Chennai Bengaluru Industrial Corridor (CBIC)
- East Coast Economic Corridor (ECEC) with Vizag Chennai Industrial Corridor (VCIC) as Phase-1
- Bengaluru Mumbai Industrial Corridor (BMIC)
Further, to enable the manufacturing sector, the government announced some nuanced measures such as:
- Creation of dedicated National Investment and Manufacturing Zones (NIMZ) and focus on industrial corridors which would serve as fully enabled plug and play facilities for manufacturing activities
- Creation of dedicated Coastal Economic Zones/ Units (CEZ/CEU) and industrial corridors to enable logistical ease
- High-speed transportation network – rail and road, Modern airports, Ports with state-of-the-art cargo handling equipment
The Ministry of Corporate Affairs has also been attempting to simplify registering of companies, GST and procuring the necessary permits and licenses for business operations in specific sectors. The steady implementation of several such initiatives led to a jump in India’s Ease of Doing Business (EODB) ranking from 140 to 63 in October 2019. The implementation of these initiatives is likely to gain further momentum in the coming days. Multiple incentives schemes at the central and state levels were introduced under the Make in India initiative over the last few years. Further, a reduced income tax rate of 15% for new manufacturing companies was introduced to bring India on par with other developing nations. These initiatives have been applauded by domestic and foreign investors alike. The government also recently approved applications of 16 electronics companies including 10 mobile phone manufacturers for reward under the product-linked incentive scheme for total disbursement of INR 40,000Cr (USD 5.5bn). Some of the international players getting advantage of these are Samsung, Foxconn Hon Hai, Rising Star, Wistron and Pegatron apart from a number of domestic players such as Lava, Bhagwati (Micromax), Padget Electronics, UTL Neolyncs and Optiemus Electronics.
Similar initiatives for other sectors are also envisaged. The pandemic has also placed the limelight on sectors such as healthcare, retail etc. Incentives are also being announced to promote these sectors. For example, the state of Tamil Nadu has introduced fiscal incentives for the manufacture of drugs and equipment employed in the management of COVID- 19.
It is important to note that today some of the sectors have been allowed to have 100% Foreign Direct Investment such as Civil Aviation, Railways, Construction, Pharma, Medical Devices, E-commerce and Retail. Apart from this a 74% allowance of FDI within the defense sector is focused on further bolstering the growth of manufacturing.
India’s Value Proposition
Many countries have started considering a ‘China + 1’ plan to accommodate the production in another country with an aim to reduce their dependence on a single nation. India is emerging as a nation with the potential to become a contender for this position. India can be considered as a potential high-quality manufacturing destination with favorable demographic dividends for the next 2-3 decades, which is better than many of its competitors. India also has the benefit of a huge market base which is a very lucrative opportunity for investors for local consumption of manufactured products.
According to industry estimates, the manufacturing sector in India has the potential to reach USD 1tn by 2025. India’s wealthiest consumers (those earning USD 1mn or more in PPP terms) will increase by 40 million in the next 10 years. With a savings rate of 37% of GDP, India’s domestic savings fuels most of its investment requirements, and only 20% of India’s total public debt is sourced from foreign borrowing. The Indian economy offers investors exposure to a wide range of opportunities from consumer goods and pharmaceuticals to infrastructure, energy and agriculture. India being home to the most no. of Engineers anywhere in the world is also an added incentive for new entrants as they get access to a wide base of well qualified talent.
China has acted as the factory for the world but India has the opportunity to reshape the course of manufacturing for the coming decades. Two biggest policy roadblocks are lack of effective policy framework and poor infrastructure. Government has been trying to push major reforms on land acquisition, labor, tax, and solvency but so far this has not moved the needle on the manufacturing sector. India has significant labor cost advantage over China now, but regulatory web has kept a lot of companies away from setting up manufacturing in India. The window of opportunity is rather small and policymakers need to be aggressive in order to make the most of this opportunity.
If you are looking to take advantage of the India opportunity to streamline your supply chain, please write to us at solutions@fibonacci.global
References:
We would like to thank Uddeshya Khanna for his invaluable support in writing this article while interning with us
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