The COVID-19 pandemic has hit the entire world across all spheres — social and economic. Like other countries, India is also grappling with the repercussions of this pandemic. Currently, India has the 2nd highest number of COVID-19 cases across the world. With unemployment rates at 7.65% in August 2020[1], the Indian economy is expected to contract by 4.5% in the current fiscal year[2].
However, the pandemic might also present a window of opportunity for India to emerge as a significant player in world trade. Facebook’s USD 5.7 billion investment in Reliance Jio in the midst of COVID-19 pandemic is a reflection of the faith that foreign companies have in Indian economy’s potential and future growth. The crisis has offered India a window to attract foreign direct investment (FDI) and make a mark in the manufacturing sector. One area where India could seize the opportunity would be in terms of participation in Global Value Chains (GVCs) where in production processes are spread across countries and each country undertakes that process of production that it can produce at a relatively lower cost, compared to other competitor countries. Till now, China has been a dominant player in production sharing of this nature, however, major adjustments are expected as firms are now looking for alternative locations for their operations. Firms are looking to move out of China for essentially three reasons — rising cost of labour in China, companies wanting to diversify their production risk and international trade frictions, particularly the U.S.-China trade war.
Even though prior to the COVID-19 breakout, investors were contemplating to move their production bases away from China, outbreak of the pandemic has catalyzed the process further. It has been reported that “…following coronavirus, around 1,000 foreign companies are engaged in discussions at various levels with the Indian authorities [to start production in India]…”[3].
With COVID-19 having a greater impact on the elderly and the adolescent population, India’s youth bulge might become even more prominent in the coming years. With increasing wages in the China, India should move proactively to grab the position of a pioneer, particularly in labour-intensive production processes. Various studies have shown that India is abundant with the endowment of unskilled and semi-skilled labour providing it with a comparative advantage in production and export of labour-intensive. (Refer Veeramani and Dhir, 2016).
Despite this, it is not India that these investors might essentially be interested in. Other countries that offer a lucrative option for these investors include Thailand and Vietnam[4]. Currently, India’s ranks 68th in the ‘Global Competitiveness Index’, which is the lowest among the comparator countries. While China ranks 28th, Thailand and Vietnam are at the positions 40 and 67 respectively[5]. Therefore, for India to grab this opportunity and to ensure that this shift is sustained in the long-term, it would be imperative for the government to adopt a structured two-fold approach.
- On one side, policy reforms with respect to attracting investors should be adopted. These pertain to bringing down the import tariff rates for intermediates inputs in order to ensure that India can assemble products and export the final commodity at competitive rates. On a similar front, the government could explore avenues to assist foreign companies in navigating through the myriad of processes and procedures required for setting up their businesses in India. One such way would be to institute a dedicated organization/ wing for the purpose. It would also be prudent to undertake efforts in reducing costs of transportation, communication, shipments, and time taken for custom clearances to further improve the ease of doing business in India and re-align R&D investments in accordance with the sectors in which entry of investors is expected.
- On the other side, there is a dire need to invest in the India human resource. This would mean taking a futuristic look at the level of skill development and training required to meet the expected demand in the coming years if MNEs set up shop in India. An analysis of current infrastructure capability and the future demand would also be imperative. Newer funding models to attract private players could be explored. This would not only ensure that training which is imparted is in sync with the industry demand but would also ensure efficient and effective training is imparted as per industry standards and requirement.
Timely action on these fronts could help India in strengthening its manufacturing sector which also has the greatest potential for providing gainful employment to the population. (EXIM Bank, 2016). Hence proactive action and quick thinking might present India with another opportunity to revive the manufacturing sector.
References
EXIM Bank of India (2016) Inter-Linkages between Exports and Employment in India (EXIM Bank Occasional Paper 179): https://www.eximbankindia.in/Assets/Dynamic/PDF/Publication-Resources/ResearchPapers/Hindi/65file.pdf
Veeramani, C and Dhir, Garima. 2016. “India’s export of unskilled labor-intensive products: a comparative analysis” in C. Veeramani and R Nagaraj (ed) International Trade and Industrial Development in India: Emerging Trends, Patterns and Issues, Orient Blackswan.
[1] Source: CMIE Data (Refer https://unemploymentinindia.cmie.com/)
[2] Dave, Sachin (2020, August 11). India GDP to shrink by 4.5% in 2020 due to Covid-19 pandemic: Dun & Bradstreet report. Economic Times.
[3] Kumar, Nirbhay (2020, April 22). 1,000 foreign firms mull production in India, 300 actively pursue plan as ‘Exit China’ mantra grows. Business Today.
[4] Kharpal, Arjun (2020, March 4). Apple, Microsoft, Google look to move production away from China. That’s not going to be easy. CNBC.
[5] Source: Global Competitiveness Index, 2019 (Refer http://www.weforum.org/docs/WEF_TheGlobalCompetitivenessReport2019.pdf)
This post first appeared on Medium on 18 September 2020