Covid can trigger industrial revival

Every crisis brings its own set of opportunities by disrupting the extant norms and creating new trends. Long before the Covid-19 outbreak, the decoupling between US and China had begun; but with the spread of this pandemic, every major economy is looking to reduce its reliance on Chinese exports.

This has created terrific opportunities for industries in developing countries, such as India, that earlier struggled to compete with the Chinese industry. In sectors such as chemicals, pharmaceuticals, and electronics, opportunities have arisen for Indian industries to enter into high-value product segment and move up the ‘smiling curve’ of global value chains (GVC).

As companies around the world rethink their sourcing plans, India can leverage its large and growing young workforce trained in digital technologies and its long-standing reputation as a hub for IT global in-house centres for expanding its footprint in digital services such as network and data management, cybersecurity, advanced analytics and even in other related industries like auditing and financial services. Multinationals, too, are looking to relocate their manufacturing facilities out of China for diversification and geopolitical reasons.

However, India should remain extremely cautious of getting dragged into the race-to-bottom for luring foreign businesses and avoid regressive tax breaks, wage suppression, or dilution of labour and environmental laws.

The recent incident at Wistron’s facility near Bengaluru is a reminder of how foreign investment can do more harm than good when it comes at the cost of labour rights. In the context of measures to attract long-term investment (both, domestic and foreign), the government needs to rethink the direction of reform.

Hasty reforms

So far, the government has taken some bold but hasty reforms without due stakeholder consultation. Instead of dismantling regulations on all sides, the government should go through with pent-up organisational reforms within its machinery and work towards ease of compliance, primarily through internal digitisation and single-window external interfaces, while staying away from discredited and ideologically-biased frameworks such as the World Bank’s ease-of-doing-business index which has been only recently resumed after a three-month suspension owing to data manipulations by its staff; the Bank is launching an external review of the Doing Business methodology.

More importantly, the volatility in political economy needs to be taken care of with immediate steps towards restoring the faith of investors and citizenry, alike, in the institutions of democracy. Eminent economists like Kaushik Basu, Raghuram Rajan, and Abhijit Banerjee, among others, have been rightly worrying about deteriorating social cohesion in the country — an important precursor to economic growth.

Media reports suggest that the government is also planning incentives in the form of preferential tax rates and holidays to attract foreign firms. Doing this through the recently launched Production Linked Incentive scheme might keep the typical outcomes associated with neo-Lafferism (tax-cuts not resulting in incremental growth) at bay, but other perverse outcomes such as those predicted by Leprechaun economics (GDP increasing at a much faster rate than GNI as more investment income accrues to foreigners) still looms large.

Staying out of this self-harming race to attract foreign investment is, however, not to prescribe that the Indian industry should cut itself from GVCs and embark upon some autarchic vision of self-reliance; the focus should be more on integrated resilience.

One reason why businesses across the globe struggled to cope with the Covid shock was that they had vigorously removed “slack” from their systems as they became the disciples of lean management and just-in-time production. The spectacular failure of these management principles during the pandemic showed us that what was perceived as excessive slack was necessary redundancy, or the ‘factor of safety’ as we call it in engineering.

Pushing infra investments

To withstand future shocks, businesses must adapt and extend their view of long-term resilience within value chains. The government needs to lend its support to industry by making massive public investments in infrastructure starting with efficient ports, rail and road operations, and grids ensuring steady power supply throughout the country.

Government spending of this kind has large multiplier effects, especially during and after economic shocks. Increased capital expenditure will not only prop up the domestic demand for goods and services by generating employment for low-skilled workers but would also improve the environment for doing business for big industrial players and MSMEs alike, not to mention the tremendous opportunities it will create for the logistics industry.

It is promising to see this agenda being set in motion by the recently unveiled National Infrastructure Pipeline; a lot more is expected from the upcoming National Logistics Policy. Facilitating public investment in these big infrastructure projects through either mode — government borrowing directly from domestic savers or RBI expanding its balance sheet by purchasing securities of government agencies like NHAI, REC, IRFC, etc. — seems like the apposite move during these uncertain times when business confidence is low.

Moreover, adding to public debt now will prove to be an effective way to reduce debt-to-GDP ratios over the medium term as growth picks up and tax revenues rise on the back of higher incomes. After decades of falling behind in cutting-edge technologies, the case for a renewed national industrial policy is stronger than ever.

The focus should be on the key sectors: health, pharma, energy, climate, auto, chemicals, and digital technology, with specific initiatives in microelectronics, speciality chemicals, batteries, electric vehicles, IoT and artificial intelligence (AI). Without a coherent industrial policy, excess capacity (zombie firms) and price wars emerge, slowing down investment flows — as has often happened in India (witness the recent trajectory of Indian telecom and aviation sector).

The policy should be designed within a framework that not only prevents coordination failures (i.e., ensure complementary investments) but also avoid competing investments in a capital-scarce environment (time to bring back Development Finance Institutions). Broadly, the industrial policy should cater to the entire ecosystem by fostering innovation, training the workforce, and providing a stable and sustainable business environment.

The writer is Policy Consultant at UNDP India. Views expressed are personal.