Covid-19, an opportunity for Indian industry

Subash S | Updated on March 21, 2020

The void created by disruption in global supplies can be filled by India, given its large workforce. It can focus on pharma and auto

The coronavirus outbreak has sent shivers down the spine of the global economy. It has disrupted the complex global supply chain network. The worst-hit sectors include technology and auto. To overcome the threat of production disruption, Jaguar Land Rover was flying in parts to the UK from China in suitcases. In a recent development, Samsung electronics decided to shift its production of premium flagship phones to Vietnam.

China accounts for close to 30 per cent of global exports of electronics and electronic components. This significant dependence or, in some cases, over-dependence on China is hurting the global economy and companies are now on a lookout for alternative production hubs.

Now for many companies, the shift from China began prior to the Covid-19 outbreak, thanks to the rising input costs and the US-China trade war. The virus just added fuel to the fire, and with the disruption caused by it likely to persist until mid-April, the manufacturing companies are staring at an imminent crisis. This has had a catalytic impact on companies looking to relocate their production hubs.

The movement of companies away from China to other less-developed countries would trigger a new wave of industrialisation. Consequently, the expansion of the manufacturing hub linked with global supply chains would increase not only productivity but also create large-scale employment.

But where could the companies possibly go? Vietnam? The country is one of the leaders in the supply chain in Southeast Asia. However, the country is already reeling with labour shortages in the aftermath of the movement of firms to Vietnam to avoid US tariffs. Further, its roads and ports are already clogged. Given the scale of the supply chain operation in China, India could be China’s doppelganger.

In a recent talk at IIM-Calcutta, the Chief Economic Advisor mentioned that “the outbreak of coronavirus provides a good opportunity for India to follow an export-driven model.” But the question remains whether India has the necessary tools and infrastructure to replace China. India does not only have the potential to match China in terms of scale, but it is endowed with rich pool of unskilled labour, and a robust service sector. Given the complex supply chains that China operates, the biggest stumbling block will be the lack of skill. Apple’s iPhone is a striking illustration of this bottleneck.

Apple’s manufacturing stint in India began in 2016, and since then it has been producing four models in the country, all of them old models. However, the new models are still manufactured in Shenzhen, China. This is because of the extensive network of suppliers that operate in that region, easing the logistics process involved in manufacturing. Further, the complexity of the components manufactured goods warrants a standard of skill which may be lacking in the Indian labour force. Also, the quality of infrastructure and connectivity issues does not aid India’s cause.

The present belief is that China may resume its production by mid-April. But given the massive scale of the Covid-19 outbreak, April seems too soon for a recovery. Hence, there is scope for India to take pre-emptive action — driving companies towards India. In this regard, the first step would be to acknowledge that having a large population is not a necessary precursor to attract foreign investment, instead a better environment, lower administrative bottlenecks, more incentives would.

Second, if India is to come closer to the level of China’s operations in supply chains, there is a need for a massive push for creating a robust infrastructure. This calls for investments in steady power supplies, efficient port and road operations, and greater ease in custom clearance.

Third, India needs to move away from an input base system to a more support base system (manufacturing of parts and components) that would promote participation in the supply chains.

Every industry is different. Hence it is vital to understand the diverse need of these businesses and focus on specific sectors (such as pharma and automotive), which could yield greater and faster gains. These steps are eminently feasible, with first steps like the adoption of national logistics policy already in progress. India cannot dethrone China before the world recovers from Covid-19. It, however, can establish itself in the manufacturing space.

(The writer is Associate Professor (Economics), Department of Humanities, IIT Madras)

Published on March 21, 2020

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