How India can be part of global supply chains

The US, EU and Japan would like to reduce their economic dependence on China, especially for critical supply chains. This is the result of the realisation that China may not be averse to using the leverage this dependence provides for the pursuit of its strategic objectives. This is in addition to normal risk mitigation against supply disruption, which cannot be ruled out for a variety of black swan events.

The recent Quad statement on cooperation for resilient global supply chains is noteworthy in this regard. These developments provide India with a major historic opportunity. Strategic objectives of major powers do nudge large businesses to look at certain investment destinations seriously, But actual investment decisions flow from a careful considerations of likely profits and risks. India has to get this computation right for those parts of the global supply chains which it would like to get. This, therefore, needs smart industrial policy and investment promotion in addition to getting macroeconomic fundamentals right and improving our ranking in the Ease of Doing Business

A major shift in policy has been taking place in the pursuit of Atma Nirbhar Bharat. These found clear expression in the Finance Minister’s Budget speech. The two key industrial policy instruments being adopted are a review of import duties to promote domestic manufacturing and a PLI (Production Linked Incentive) scheme for cash payment on the achievement of pre-determined benchmarks to firms across a wide spectrum of manufacturing.

There is recognition that inverted duty structure needs to go. Import duties are to be used for promoting manufacturing. The state would also take up the development of large textile parks. This could be the beginning of a long overdue return of the state in developing industrial areas with scale and competitive infrastructure, the essential prerequisite for becoming part of global supply chains.

A revamped policy framework for SEZs (Special Economic Zones) with duty-free imports can give India the benefit of creating a parallel ecosystem for success in manufacturing and becoming a part of global supply chains. The SEZs have delivered good results in IT-related services but results in manufacturing have been modest. A major reason for this has been that the development of SEZs was the responsibility of the private sector. Most of them did not have the ability to acquire the scale required for global markets.

State agencies have, however, been doing this over decades. It is time to get the state agencies back into developing SEZs with scale and infrastructure comparable to those achieved in China and South-East Asia.

In addition to scale, expressway connectivity to the National Highway network and through it to ports and airports would add to the competitiveness of the SEZ as an investment destination. The new DFI ( Development Financial Institution) should be able to provide the long term loans that such ambitious developments need. It would also be necessary to provide facilities such as cheaper quality power, common effluent treatment facilities, skill development centres, and testing and certification facilities of international standards. The substantive change that is needed would be to permit sales from production in the SEZ to the domestic market, with the imposition of duties at the lowest rate applicable to imports from any trading partner along with value addition requirements under any trade agreement. This would create a level-playing field for investment and job creation within India vis-a-vis our trading partners.

Tax exemption

Individual units could acquire scale as they could supply to the Indian market and cater to global markets at the same time. This would, in substance, be equivalent to the present dispensation of the requirement of earning foreign exchange. Sales to the domestic market would displace imports from elsewhere and so save foreign exchange which is the same thing as earning foreign exchange.

But then the question would arise about there being a level-playing field between those who invest and produce in the domestic tariff area (DTA) and those who do so in the SEZ. The big incentive that has been given to the investors, production units as well as the developer, in the SEZ is tax exemption on profits. This has also been the source of a less-than-friendly institutional attitude of the Revenue Department in the Finance Ministry. This incentive can be done away with.

Exemption on taxes on profits are not decisive in determining investment decisions of firms who need to see reasonable profits. This is borne out by the experience of SEZs till now. Once sales to the DTA area are permitted and if an SEZ is well provided with infrastructure and connectivity then it should with its zero import duty regime, be as attractive an investment destination for global supply chains as, say, Thailand.

To succeed in making a breakthrough in getting global supply chains speedily now when a major window of opportunity has opened, it would be best to pursue a dual track approach of offering attractive investment destinations with globally competitive infrastructure in both the domestic tariff area as well as in the SEZs with the new investor-friendly regulatory framework. Direct conversations with firms in the West and in Japan and willingness to evolve and fine tune incentives would clearly help. Time is of the essence.

The writer is a former Secretary, Department for Promotion of Industry and Internal Trade

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