Over the past decade, China has been one of the world’s fastest growing economies. It has become central to the global supply chain. But currently, its going through a black swan event, which will have a significant impact on global trade dynamics.
The unfortunate impact of coronavirus has already started showing effects across supply chains of most global companies. At the current levels, the GDP growth in China during the first quarter is expected to fall as low as 4 per cent and, if the effect of outbreak continues, the adverse effect on annual growth could be much worse. China’s top exports include products such as electrical machinery, appliances and equipment. India’s exports are dominated by mineral products, chemicals and precious metals.
The current disruption in China will essentially mean reshaping of global supply chains, providing a window of opportunity to India. Most global companies are looking to mitigate their ‘China’ exposure and create alternative supply options. Travel restrictions may dissuade companies from undertaking new product development in China for some time.
Given the dynamics of world trade, other Asian economies like Vietnam or Thailand are the first stop for these global companies. A window is now open for India to take immediate steps to position itself as an attractive alternative sourcing destination to China.
A sourcing destination
The story of India in manufacturing exports, with some notable exceptions, has been one of unrealised potential, and we are a local production and consumption focussed nation. China’s GDP per capita is five times that of India’s and its manufacturing sector is 10 times bigger than India’s.
Chinese industry has become globally price competitive by virtue of its large production volumes driven by domestic consumption. In addition, the Chinese government has supported creation of large excess capacities for exports. Creation of special economic zones and industrial clusters has helped the Chinese to create export champions. Indian industry can do the same, provided we encourage growth in domestic consumption by moderating taxes and support risk taking for capacity creation.
The reshaping and de-risking of global supply chains can help position India as a sourcing destination, subject to the government taking courageous and quick steps to focus on exports. The government should immediately initiate a dialogue with exporters as well as industry bodies to chalk out a rapid action plan for the same.
Land availability, cost of capital, technology, absence of global scale manufacturing, poor logistic infrastructure are some of the pain points restricting the growth of Indian industry. Commodity prices in India remain higher as compared to China. Also, countries like Vietnam have free trade agreements which allow them to import raw materials at low cost.
Compared to the 10-12 per cent cost of borrowing in India, Chinese borrowing costs have fallen to 1.5 per cent after their recent stimulus package. The government should bring down the cost of capital and improve availability, especially for export and import substitution projects. To provide an immediate boost, interest rates should be slashed drastically or subvented making cost of capital globally competitive.
In addition, duties on raw materials like steel should be reduced to help in local capacity creation. To encourage global companies to set up units in India without a long gestation period, the government should consider providing “plug and play” infrastructure. This facility should disaggregate assets such as land, building, common infrastructure services, and plant and machinery.
Flexible terms and competitive rentals in these mega parks should also be considered to encourage more participation. Mega benefits for new export units for limited period should be provided to kick-start this activity. Also, labour laws should be relaxed in line with those of competing countries in Asia. The advantage of lower labour costs in India than China can mean higher exports in sectors such as textiles and garments, provided we relax labour laws to encourage employment rather than employees .
The government should create an empowered joint industry government task force to help in building awareness of India as a sourcing destination. It should launch an India sourcing portal like Alibaba where qualified products and services can be listed. The US is the biggest consumer market and currently has an ongoing trade war with China. We need to focus our efforts on increasing exports to the US, especially in sectors where we can be competitive. As part of this effort, trade delegations should be sent to the US and other large consumer markets.
Who should act?
Manufacturers : They should identify how to approach customers and segments which earlier may not have been receptive; support global customers to establish deeper linkages in India by supporting tier 2 sourcing; and ensure exceptional quality (this is the time to create visibility for Brand India, inferior quality product will do more harm than good).
Bankers : They must step up credit support to exporters.
Commerce and External Affairs Ministries : They should provide additional export benefits for three to six months like increased MEIS; activate export promotion councils; ensure quality norms and better incentives to those who get certified for quality products from accredited certifying agencies; release all pending refund, scrips, norms fixation cases on urgent basis that would put money in hands of exporter and send a positive signal across industry spectrum; Indian consulates must act in mission mode to support Indian companies to identify export opportunities. The power of these missions can be focussed on export diplomacy for the next year; and use the power of the Indian diaspora to support sourcing efforts from India
State governments : They must tie up with the Central government for arranging exhibitions; and give special subsidies for exports for a limited period
Export promotion councils, trade associations like CII and FICCI : Sensitisation of trade; build synergies along their members representing government; ensure quality in Indian products sent abroad; open export support cells; and work as trading house for exports by members so that small manufacturers can concentrate on manufacturing or processing and rest is taken care of by them.
Shipping, road transport and railways : Ensure smoother and faster clearances (benchmark must be China); take up road augmentation work for roads connecting to ports from industrial centres; and support lower cost transport by railway to compensate for higher Indian logistic costs
The RBI : It must modifying CRR/SLR norms to ease liquidity; devalue the rupee to promote exports; and ensure faster credit to worthy exporters.
To capture the short window which is available, the government will have to take many bold and quick decisions to showcase that India is ready to fill the vacuum in trade which is created.
The writer is Past Chairman,CII Western Region