“States must identify & communicate with specific large firms to boost FDI”

Prof Ashima Goyal, Indira Gandhi Institute of Development Research, opines that India should ensure strategic use of FDI, build on its advantages, focus on training & education and move up the value chain to become a manufacturing hub..

TPCI: All over the world, Coronavirus 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?

Prof Ashima Goyal (AG): The move to diversify supply chains is intensifying the shift of many firms away from China, which was occurring anyway due to wages rising there. This natural movement of foreign direct investment (FDI) across countries is known as the flying geese pattern.

The world has also become aware of India’s migrant labour. The mass movement of such migrant labour after the lockdown gives us an idea of their size and origin-states—largely UP and Bihar. These areas far from metros are likely to be safer as well as cheaper to set up large production facilities. These states must give training, good health facilities, encourage quality standards, and offer sops for FDI to set up large factories creating jobs for such labour closer to home.

UP has already relaxed complex antiquated labour laws for 3 years. They must be replaced over time by non-intrusive laws that protect the welfare of workers, yet give the flexibility necessary to encourage industry. Short-term industry specific training can be organized using consultants in conjunction with industry. Land, often underutilized in industrial parks, can be identified for industry, clearances fast tracked, and infrastructure improved. The pressure of returning migrant labour, and the small window of opportunity, can force states to undertake long-delayed reform and move quickly. Senior officials should be given specific responsibility and core teams set up to drive the process.

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?

AG: India has the advantage of size compared to its competitors. Its wage rates are much lower. Average labour manufacturing costs per hour were US$ 0.92 in India compared to US$ 3.52 for China in 2014. India also has a large supply of skilled labour required such as engineers and managers. There is steady improvement in roads and other infrastructure, and business processes, while GST has reduced blocks to and delays in internal goods movement. The recent focus on sanitation has improved health and nutrition.

We need to start with labour intensive products such as textiles, shoes and toys that can absorb more relatively unskilled labour. Second, also attract supply-chains industries in more sophisticated products such as electronics, telecommunication, industrial and office automation products. Third, build on our base in pharmaceuticals, working towards integrated competitive ecosystems that bring API back to India.  Fourth would be new age industries such as solar panels, green vehicles and batteries. Industry clusters need to be identified and built on.

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?

AG: Some of the things that India can learn from its neighbour, China include strategic use of FDI, building on its own advantages such as cheap labour, focusing on training and education and moving up the value chain.

TPCI: What are the crucial roadblocks that could come in the way of India becoming a global production hub? How can these be overcome?

AG: Roadblocks include antiquated complex laws and procedures that harass industry, poor infrastructure, and poor labour quality—including skills, training, nutrition and health. Also, firms’ perceptions on all these remains a challenge. Since the window of opportunity to attract migrating firms is small, states need to prioritize areas that can be improved quickly, such as laws and governmental processes, identify specific large firms, communicate and negotiate with them, highlighting advantages and offering select incentives.

In the longer-run they should work to improve infrastructure, education, health and other living facilities. The Centre has already reduced corporate tax and can further reduce tax on intermediate goods, and offer limited tax holidays. In the longer-run, it must continue to work towards reducing the communication, transport and logistics costs important for supply chains, and to improving infrastructure. GST as well as working together on COVID-19 has improved coordination between the Centre and states, and this should be further built on to take the necessary steps.

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Prof Ashima Goyal is widely published in institutional and open economy macroeconomics, international finance and governance, with more than a hundred articles in national and international journals. She has also authored and edited a number of books including Macroeconomics and Markets in Developing and Emerging Economies (Routledge: UK. 2017) and A Concise Handbook of the Indian Economy in the 21st Century (OUP: India, 2019). She edits the Routledge journal Macroeconomics and Finance in Emerging Market Economies; has provided consultancy to ADB, DEA, GDN, UNDP, RBI, UN ESCAP and WB; is active in the Indian policy debate; and has served on several government committees, boards of educational and of financial institutions, including the RBI technical advisory committee for monetary policy. Currently she is a Member of Economic Advisory Council to the Prime Minister, an independent director at Edelweiss Financial Services, IDBI bank and SBI General Insurance. She has been a visiting fellow at the Economic Growth Centre, Yale University, USA, and a Fulbright Senior Research Fellow at Claremont Graduate University, USA.

Her research has received national and international awards. She won two best research awards at GDN meetings at Tokyo (2000) and Rio de Janeiro (2001), was selected as one of the four most powerful women in economics, a thought leader, by Business Today (2008); was the first Professor P.R. Brahmananda Memorial Research Grant Awardee for a study on History of Monetary Policy in India since Independence (2011), which was published by Springer in 2014; received the SKOCH Challenger Award for Economic Policy (2017); Hindu College OSA Distinguished Alumni Award and 20th FLO FICCI GR8 Beti Award for Excellence in Economics (2018).