“India must incentivise services that support manufacturing”

Dr Arpita Mukherjee, Professor, Indian Council for Research on International Economic Relations (ICRIER) observes that with increasing servification of manufacturing, a number of countries are giving subsidies to the services that are supporting manufacturing. This not only lower costs in areas like logistics, which are presently very high, but also makes the subsidy WTO compliant.

TPCI: What advantages does India have in comparison to its other competitors that can make it a lucrative destination for major companies across the world? What are the major industries that the government should concentrate on in order to make the most profitable business deals and international collaborations?

AM: India has strength in software services, and the country has one of the largest resource pools of engineers. The country has abundance of raw materials for sectors like agro-processing and has already established a global presence in exports in sectors like pharmaceutical, ready-made garments, gems and jewellery, leather products, to name a few. While the country needs to continue to focus on sectors of export interest, it has to move into high value manufacturing, digitalisation and technology implementation, which can be supported through right policies and incentives. India should encourage global e-commerce and retail giants to source for domestic and export markets. This will lead to growth of manufacturing. India had a vibrant automobile industry, but this industry should now be competitive and more integrated into global supply chain. Processes within certain industry will require changes. For example, social distancing will have to be maintained in gems and jewellery sector where workers sit in close proximity to one another.

TPCI: India has a strong startup ecosystem emerging in technology and services. How can this be a catalyst for manufacturing in your view, and can we breed a strong startup ecosystem in manufacturing? If so, how?

Prof. Arpita Mukherjee (AM): Start-ups with innovative ideas can help to improve the efficiency, productivity and competitiveness of manufacturing. However, the success will depend on the willingness of our manufacturing sector to invest in technology. Unlike many countries like Turkey and Vietnam where the garment sector is encouraged to adopt technology to improve productivity through right subsidies and tax incentives, the policy focus in India has not been on technology and services.

With increasing servification of manufacturing, a number of countries are giving subsidies to the services that are supporting manufacturing. This not only lower costs in areas like logistics, which are presently very high, but also makes the subsidy WTO compliant. There is no discipline on subsidies in services in the WTO. India does not have a strategy for its public sectors to partner with innovative start-ups. Nor does it have a start-up visa policy, which allows foreign start-ups easier entry into the market. India is one of the few countries, which have not aggressively promoted the start-up visa in trade forums, while it is lobbying hard for movement of high skilled professionals or Mode 4. This is the biggest gap in its Mode 4 trade strategy. India has also not looked at the concept of high technology zones which the South East Asian and East Asian countries are promoting. Indians are major investors in Silicon valley, USA, and other countries. Yet, we have not been able to capitalize on this strength.

TPCI: What is your take on India’s progress and potential as an R&D hub, since that is linked to manufacturing competitiveness?

AM: India ranks lower in Global Innovation Index and in number of patents filed and achieved, compared to China, East Asian and many South East Asian countries. Even Indian companies file their patents abroad as it is more fast-track. As we move into more technology-oriented high-value manufacturing, R&D is essential. I strongly believe that R&D is correlated with manufacturing competitiveness.

TPCI: All over the world, COVID-19 has instilled an understanding that there is a need to diversify supply chain and therefore, the plans of all the major investors to exit China are in full swing. How can India emerge as the world’s new factory and a global production hub?

AM: While a number of countries are encouraging their firms to withdraw from China, many of them already have trade agreements with China, and other countries, which has led to lower tariffs and non-tariff barriers. Therefore, even if they withdraw from China, India has to compete with countries like Vietnam to attract investment. Further, the lockdown has disrupted our own supply chains and exporters have not been able to meet export commitments.

We need to:

(a) Have an investor friendly policy and more importantly, policy certainty

(b) Provide assurance of a tariff certainty and lower tariffs for raw materials and intermediaries

(c) Ensure that firms can have smooth domestic and global supply chains

(d) Ensure that there is easier land acquisition process, project clearance process and

(d) Revisit our SEZ, industrial cluster and subsidy policies and make them WTO compliant and attractive for businesses.

With increase servification of manufacturing and development of complex value chains, we will not be able to attract investment in manufacturing, unless we liberalize services such as retail and e-commerce. Post-COVID, smooth B2B ecommerce and digital technology will be the focus of a number of firms, and India should have a conducive environment, which supports digitalization and competition.

TPCI: In a bid to capitalise on this opportunity, Japan has already started taking steps to become an attractive investment destination. Besides Japan, which other countries can give India a tough competition in this regard and why?

AM: Companies exiting China will first look at a country with which their country has a trade agreement or there are other benefits like lower taxes for foreign investors. A number of countries in South East and East Asia have trade agreements with major importing countries and among themselves. They are giving start-up visas and have created high technology zones to attract foreign investors. Some African countries are also coming up with attractive polices.

We face competition from neighbouring countries like Bangladesh in sectors like garments. We should be aware that in an era of fourth industrial revolution and digitalisation, abundance of labour is not a strength unless the labour is skilled. We, therefore, need to focus on skilling of our workforce and development of sector-specific competences.

TPCI: For decades, China became the world’s factory, manufacturing everything from stationery and toys to electronics and APIs. What are some of the things that India can imbibe from China’s experience in order to become its newest replacement?

AM: There is need for more detailed understanding of how at the sub-national level different provinces of China created policies to attract investment. For example, the Yunnan province has identified eight core industries. India needs to look at how, at sub-national level policies were designed to meet national objectives of attracting investment in manufacturing. We need to keep in mind that while India has walked out of RCEP, all the other members have reiterated their commitment to close the RCEP deal this year, amidst the pandemic. Under those circumstances, India may attract investment to reduce risks, but replacement seems difficult.

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Dr Arpita Mukherjee is a Professor at ICRIER. She has several years of experience in policy-oriented research, working closely with the Government of India and policymakers in the EU, US, ASEAN and in East Asian countries. She has conducted studies for international organizations such as ADB, ADBI, ASEAN Secretariat, FCO (UK), Italian Trade Commission, Konrad-Adenauer Stiftung (KAS), OECD, Taipei Economic and Cultural Centre (TECC), UNCTAD and the WTO and Indian industry associations such as NASSCOM, FICCI, IBA, IDSA and EICI. Her research is a key contributor to India’s negotiating strategies in the WTO and bilateral agreements. The views expressed here are her own.