Opportunity in the crisis – How will India grab a share of global supply chainsfeatured
Much has been said about the opportunity for India to grab a share of what China will lose, in the global supply chain. The process will not be quick, as supply chain diversification will happen only as when new investment is made in expansions. However, India needs to rapidly progress on several parallel tracks to be ready with a more attractive proposition than in the past.
- Large domestic market is key to achieving scale
a) Imports have been more competitive than domestic manufacturing for a range of products like cellphones and household goods; computers; telecom equipment; computer accessories; toys, etc. These are also products that make up bulk of China’s exports to the US.
b) Our policies have (i) artificially differentiated between export and domestic markets; and (ii) encouraged small over large manufacturing. Any steps that remove these distinctions, and trigger growth in domestic demand, are good for competitiveness of manufacturing.
c) Disrupted imports from China, and “import barriers” being acceptable as the new-norm, are tactical opportunities, but should not be mistaken for a permanent advantage, moreso as India will want access to other markets, as trade treaties get renegotiated.
d) The pandemic also provides the opportunity to rapidly scale up on sectors that have otherwise been neglected. Medical devices is one such sector, whose manufacturing could cluster around healthcare R&D. Similarly, India’s food processing sector could leapfrog by upgrading the agri supply chain and cold chain, while bringing prosperity to parts of the country which otherwise export seasonal labor.
2. Smart prioritisation can address disadvantage of logistics cost
a) Logistics cost and time has been a key hurdle in India’s competitiveness. On land, more cargo travels on road than on rail, which is inefficient. Our ports don’t provide sufficient scale for the largest ships to call, often requiring transshipment at another port, which further adds to cost and time. (India has only one port that handles over 100 mn tonnes per annum, and it does not feature in the world’s 20 largest ports. China has 11 in the 20).
b) Railways need to run time-tabled cargo trains. The reduction in passenger transport provides the opportunity to prioritise freight. This has to become permanent by proper scheduling of passenger and freight trains.
c) The drop in global demand could reshape global shipping norms, as liners re-optimise routes to maximise cargo, and re-visit pricing for ports which do not provide sufficient volumes. Indian logistics industry needs to evaluate whether the ability to aggregate cargo at certain prioritised ports to attract ships more often. More frequent ship calls at certain Indian ports can be a big advantage over smaller countries that do not have similar volumes. Success of this strategy would critically depend on prioritised rail services and coastal-shipping from other ports to feed cargo into these ports.
d) To further improve timeliness of delivery, Railways should also be able to move smaller parcel sizes (say 2 wagons only). Similarly, until global trade volumes pick up, India may also need to consider the state-owned shipping corporation to play a strategic role in ensuring timely delivery of Indian exports, by sailing even if it does not have full load. The benefits of this may exceed cost in several cases.
3. Role of private sector is critical in making Infrastructure concerns history
a) The slowdown in demand is an opportunity for infrastructure supply to rapidly catch up and become surplus. The National Infrastructure Pipeline underscores the shortage of shovel-ready-projects. More importantly, the manner in which the Govt deals with existing infrastructure investors impacted by the pandemic, will shape the sentiment of future infra investors. Infrastructure in India has come to be seen as a high risk asset class, thereby attracting investors / operators with higher return expectations. To attract institutional investors (who also bring higher levels of corporate governance), it is imperative now to demonstrate that critical infrastructure investments will be treated differently from investments in other sectors.
b) While large volume of infra has been built, its operations & maintenance is often inefficient. For example, in spite of having surplus power, the power supply quality often lags that in Vietnam (even as it meets the standards required by the regulator). Surely this can be easily fixed for A-grade industrial parks. Similarly, the roads connecting industrial parks are in poor condition in many cases. Performance based contracts with private sector operators is critical to fix this. Future PPPs (whether requiring investment or only O&M) need to significantly increase focus on service quality. Private industrial park operators like Ascendas, GMR, Mahindra, SriCity, etc need to be made partners in this program.
c) Third, the burden of cross subsidies (in power, railway, toll, etc) contributes to eroding competitiveness of Indian industry. The industry revival plan would do well to address this issue comprehensively. (In many countries, the power tariff for industry is lower than that for domestic consumers, because it costs lower to supply power at higher voltages).
d) The Central and State Governments have been planning and developing world-class industrial parks for several years (initially, DMIC, and then several more corridors). Large areas of land have been identified, globally reputed planners have designed the infrastructure. India has surplus power, high quality national highways, world class airports. Now is the time to offer a menu of high quality locations to investors, with a mindset of competing with other countries, instead of within States.
4. To build credibility in Ease of Doing Business, existing industries have to become spokespersons
a) Red tape, including tax terrorism, continues to be a big concern for investors. While India leapfrogging to 63rd rank on EODB is a big change, in private conversations, concerns are still raised. That the rankings capture only Delhi and Mumbai, is one key issue, even though the State wise ranking has spurred initiatives across the country.
b) An independent comparison of the menu of high quality locations (mentioned above), with competing locations, would give a better view to investors. (Competing locations could include Malaysia (currently 12th ranked), Taiwan (15), Thailand (21), Kenya (56), Mexico (60), Vietnam (70) and Indonesia (73)). As discussed above, private sector operators should be roped in to the priority industrial parks, with empowerment and accountability / incentives for exceeding service levels.
c) Existing industrialists (foreign, Indian; big, small) need to become genuine endorsers of India’s ease-of-doing business. This will require rapid improvement in factors like Contract Enforcement also.
5. Supporting the revival is necessary, but should not bring back inspector-raj.
a) Several businesses will face a challenge rarely seen before. Unit costs would increase due to higher cost of compliance with sanitisation requirements (including readiness for shutdowns and restarts, longer working hours), suboptimal utilisation due to social distancing and getting only part of the workforce to come in, and lower than normal demand. On the other hand, prices may need to be lower than normal to stimulate demand. Many businesses, particularly MSMEs, would not have the deep pockets to sustain this until proper equilibrium is reached. The manner of Government intervention will need to be carefully designed to avoid distortions, while protecting the needy.
b) Input linked interventions (like moratorium on debt servicing) impact different businesses to different extents (for example, depending on how much they rely on formal bank credit). However, there could be several steps that are not sector dependent such as (i) minimising the health-infra costs imposed on industry, by providing screening, sanitising and testing etc inputs, and reducing the productivity loss due to social distancing. (ii) giving flexibility to employers to negotiate with workers to achieve a balance in sharing of pain, while supporting workers through Direct Benefits Transfers. Limiting labor law reforms to new units may have a limited effect.
c) Sales linked interventions (like GST reductions) allow the demand-supply dynamics to play out, as the industry seeks its new equilibrium. The Govt’s role in WTO renegotiation (in whatever new avatar it may take), and sector specific and /or multilateral trade treaties, will be critical to success.
The above list perhaps looks familiar (improve infra; reduce red tape,etc). But the opportunity, and imperative, to make rapid progress on them, is perhaps better today than ever before. The crisis has shown that high impact decisions are possible; and that similar extreme measures are needed to pull out of the economic abyss. Problems that have not been solvable through the soft approach, may be more malleable in a crisis.
Manish Agarwal (Infrastructure specialist &AskHow volunteer)
All views are personal.
