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Global manufacturing competitiveness is true self-reliance

Prof Sunitha Raju, Indian Institute of Foreign Trade, argues that viewing Aatma Nirbhar Bharat from the perspective of import substitution is wrong and potentially dangerous. Instead, India should have a holistic approach towards attracting FDI in its areas of strength, develop skill sets to capture new emerging opportunities and also ensure that SMEs are an integral part of the transformation.

Aatma Nirbhar Bharat” or a Self-Reliant India is largely construed to mean reducing import dependence and shifting to domestic production, particularly in the wake of China’s border aggression recently. Combined with the Coronavirus pandemic, anti-China sentiments that have raged globally brought into focus the disruptions in supply chain processes and the need to find alternatives for supply chain bases away from China. Prior to the border aggression, India was looking at this as an opportunity to shift supply bases from China to India and promoting itself as a potential investment destination.

The debate that followed clearly highlighted the following:

(i) Shifting of supply bases from China to India is not feasible due to wide differences in the available infrastructure, i.e, roads, ports, industrial parks/clusters etc; and

(ii) As firm-level technological capability of Indian firms is limited, the diversification of supply bases would find favour in higher technology-oriented firms in Thailand, Philippines, Malaysia and Vietnam.

The higher level of technology orientation of the ASEAN countries is clearly evident in the high score accorded to these countries in the recent UNIDO report. The score for “technology deepening and upgrading” for Thailand is 12, Philippines is 11, Vietnam is 31 and India is 40. As such, the score for “produce and to export” is 46 for Thailand, 81 for Philippines, 72 for Vietnam and 108 for India (UNIDO, CIP, 2019).

The global debate on de-coupling from China and finding alternate supply bases has been there much before the current Coronavirus crisis. In 2017, an insightful article by Pankaj Ghemawat of Harvard has pointed out that the emergence of China as a leader and defender of globalisation has threatened the global position of US and UK, the traditional pillars of open markets. This had triggered the policies of inward looking or “localisation” largely due to performance problems, i.e., inability to compete in all markets. This anti-globalisation sentiment necessitates “domestic policy changes rather than closing of borders” (HBR, July-August, 2017).

In more recent times, the constraints to de-coupling were based on the arguments that major countries are entwined in digital networks, financial flows and supply chains. Furthermore, these linkages have stretched across the globe and are difficult to entwine without causing significant damage to other countries, commonly referred to as “chained globalisation”. Increasingly, countries are viewing globalisation as a new source of vulnerability, competition and control (Henry Farrell and Abraham Newman, February 2020).

A case in point is the recent restriction on supply of chips to Huawei!! In this regard, an interesting interpretation by Abhijit Roy on the trade war between USA and China is that it is more of an ”algorithmic war, controlling the semiconductor industry, trying to dominate Artificial intelligence that will power the next generation combat”. In other words, this is a war to gain supremacy.

In the context of these dimensions of this global debate on de-coupling, India’s policy tilt towards “localisation” needs a careful examination. With limited share in world trade (4%), can “localisation” be considered as an appropriate path for growth and development? How do we interpret “ localisation “ or self-reliance?

While addressing these issues, India’s past trajectory for growth should be kept in perspective. As a conscious policy approach, India adopted Import Substitution Industrialisation (ISI) in 1956 and continued till mid-80s. This was also focussed on self-reliance and imports to be substituted by domestic production. The adverse fall out of this policy was the development of a high cost industrial structure and uncompetitive manufacturers internationally in terms of quality and cost.

As this was unsustainable, we had to discard this policy in mid-80s and initiate more pronounced measures in 1991. Since then, we have looked up to promote competitiveness through exports and open borders, thereby exposing the domestic industry to global competition. A case in point is the drastic reduction in tariffs and conscious policies to integrate with global economy. A good exposition of the transition from ISI to export promotion strategies, based on the experience of India and other developing countries, is provided by Anne Krueger and Jagdish N Bhagwati.

Since we have already recognised that ISI is a failed policy, the current thrust on localisation would need a different interpretation, especially under the changing technology frontiers and fast catching up of Advanced Digital Production (ADP) in manufacturing. I would consider this as developing manufacturing competence of the domestic industry by making them technology resilient. This can be done by upgrading production processes and skills and through institutional support, thereby making them competitive in the global markets.

The necessary conditions, in this case, would be strong R&D orientation of the firms, import access to technology products and services and providing an ecosystem that encourages innovation at the firm level. The challenge for India is to integrate the SME sector into this development path in particular, as they account for 99% of the units, 86% of workers and 18% of output (Rajiv Kumar, 2008).

This has been successfully done by the ASEAN countries enabled by the technology driven fragmentation of production. The low productivity and output and high employment syndrome that categorises the SME sector has been successfully integrated into efficient manufacturing systems by supplying, sourcing and partnering with multinationals. Firm level data suggests that a significant share of inputs are sourced from local firms, particularly in Indonesia and Philippines.

Knowledge base for local firms is widespread in Thailand, Indonesia, Vietnam and Malaysia. International certifications, which are costly for SMEs, but are necessary for supplying to MNCs, have been facilitated by targeted policies (OECD, 2019). The ASEAN experience can provide a necessary guide for India in attaining an inclusive and sustainable development strategy.

In the above context, let us take a pragmatic view of the issues currently being argued under Aatma Nirbhar Bharat. Firstly, it would be a fallacy for India, like many other countries, to believe that they can replace China with other countries for sourcing. There are product categories where we cannot replace China like active pharmaceutical ingredients (APIs) immediately. There are still others where replacing China is possible, but will render your industry uncompetitive, or ultimately put the end customer at a disadvantage.

Our recent study has shown that about 30% of the imports from China are low priced compared to other suppliers. For the remaining 70% of imports, China is not the low-cost supplier and yet our dependence on China is almost 90%, covering industries like Chemicals, Iron and Steel, Pharmaceuticals and Electronic components. This would only imply that China is exporting specialised components that are not easily substitutable. As such, ‘over-reliance on China’ is not an overnight development or the result of a sudden disruptive event like COVID-19.

Secondly, we should not forget that in the 1970s, China’s GDP growth was slower than that of India. Today, China has emerged as a global manufacturing hub and challenged global players like USA, Germany, Japan. In recent times, ASEAN countries have been able to adapt to the challenges of open markets. Under these new global developments, the true spirit of Aatma Nirbhar Bharat, for me, is not to relegate to the failed policy of protectionist regime and shun imports. Instead, the vision should be for Indian industry to be in a position of strength to compete with multinationals. The choice is not between supplying to domestic market vis a vis exports. Instead, it is realising that developing export competitiveness will automatically make the Indian manufacturing industry an efficient domestic supplier.

And thirdly, strategic alliances with partner countries should align with our developmental objectives. Considering that the R&D spend of firms is less than 1% of sales, encouraging productivity enhancing innovations at the firm level requires policy support (incentives), institutions and compatibility between industrial, trade and technology policies. In this regard, FTAs should provide the necessary channels for technology spillovers and enhancing technological capability of domestic firms.

The strategic reorientation of FTA partners and provisions need immediate attention. The CEPA with Japan, South Korea and FTA with ASEAN did not lead to these stated objectives and require a review with an emphasis on sourcing from domestic firms. In this regard, leveraging FDI would be crucial and the success of the ASEAN countries can provide the necessary framework and guide us to upgrade our manufacturing systems particularly in the context of new technologies covering additive manufacturing (3D printing), IoT, Machine learning and AI.

Face reality to change it

To better or even duplicate the rise of Asian countries in manufacturing over a similar span of time, India has to acknowledge some harsh truths. Since the 12th Plan targets were laid out by the Planning Commission, India has been targeting that manufacturing should account for 25% of GDP. But even after 10 years, manufacturing is still at around 16% of GDP.

When you look at the employment, agriculture is at 49%, services are at 26% and manufacturing is about 20-21%. Whatever services we are exporting or developing will not absorb employment. The only possible way to generate employment is to effectively absorb excess labour from agriculture to manufacturing, which can address issues like poverty and joblessness.

Unless manufacturing is competitive and our focus is on exports, we cannot achieve self-reliance in manufacturing. Technology is changing so fast that if we are unable to keep abreast, we are out of the global race. In terms of competitiveness for manufacturing, countries like Vietnam and Thailand are far ahead of India, because they have been able to enhance their technological capability.

In contrast, India’s approach has been mixed. Consciously, we have engaged into capital-intensive industry in sectors like automobiles, pharmaceutical, electronics without developing a strong technological base. On the other hand, our competitiveness in sectors like leather and textiles has been weakened due to an overall lack of focus. Countries like Bangladesh have gained market share in textiles while importing cotton from India. When we export cotton to Bangladesh, and they in turn export yarn to India for textiles, where will our competitiveness be? Only last year, we put restrictions on cotton exports. Earlier we were exporting cotton to China, now to Bangladesh, which is making yarn. Considering this, what will be India’s status in the world market? Who will gain – Bangladesh or India?

Choose your battles carefully

If we are talking about development, we have to ensure that there are employment opportunities. For productive employment to sustain our development goals, there is a need to reskill and upskill for manufacture to absorb labour. For this, we have to provide education and vocational training opportunities. Without this intervention, the effectiveness of Digital India and Skill India would be minimal.

Some estimates show that following the lockdown of the last 4 months, manufacturing value added is likely to fall down by 27%. Even if we were to revive the 27%, we will still be where you were last year. Obviously, India has to look well beyond that. Shifting supply chain bases from China or other ASEAN countries is not a viable proposition. India has to identify the new areas where we can develop, covering both labour intensive and capital intensive manufacturing. And of course this will not happen overnight.

For example in pharmaceuticals, we have contract research & manufacturing (CRAMS). India is doing well in this research-intensive area. Biocon has developed expertise in biotechnology and has emerged as a successful innovator with industrial application. Similarly, in IC (integrated circuits), India has developed expertise, but mainly in R&D of multinationals with no manufacturing linkages.

If we are able to garner this expertise, we can focus on customising high value business in electronics. India would be able to successfully migrate to the new business model of  “low-volume-high-value”. It is here that the role of multinationals and engagement with them would be crucial. This has the potential to serve both our critical objectives of manufacturing competence and integrating SMEs into production systems.

Integrating SMEs would necessitate improving their production efficiencies. This would mean less reliance on reservations, subsidies, etc and more on improving the production efficiencies. What is required is support in technology upgradation, upskilling and acquiring international certifications. Unless this dynamism is instilled into SME sector, the objectives of employment and self-reliance will remain a distant dream.

In conclusion, Aatma Nirbhar Bharat is a laudable objective in itself. But if the industry views this as an opportunity to push for import substitution and higher tariffs, it would defeat the core vision behind Aatma Nirbhar Bharat. It would not only be counter-productive, but also dangerous, as it threatens to take us back to the pre-1991 era of Import Substitution Industrialization (ISI). And we all know how that panned out for India.

Dr. Sunitha Raju is a Professor at IIFT. She has 30 years of extensive experience in Education, Research, Policy formulation and Evaluation and held the positions of Chairperson (ICCD), Chairperson (Research) and Chairperson (GSD). Her areas of expertise include Trade Policy Formulation & Evaluation, Trade modelling, Agricultural Policy Analysis, WTO rules & Regulatory framework, Free Trade Agreements, Survey Research, Performance Reviews, Training & Management Development Programmes.

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