‘Respond, Recover, Thrive’ captures the spirit of the Indian government’s reactions to the pandemic, the economy and building for the future. This was evident in the announcements in mid-May to revive and restructure India’s economy, with multiple policies that will find common cause due to possible reconfiguring of the global supply chain by multinationals. The two are linked and is likely to become more so. Simply put, it makes sense for India’s domestic market of 1.32 billion consumers to be viewed as an opportunity.
The COVID-19 pandemic has exposed the fault lines in global trade and its financial roadmap, dislocating global manufacturing value chains, almost irrevocably. This sudden disruption has raised a fervent clamour to diversify the existing global supply chain.
First, multinationals are looking at ‘China + 1’, effectively hedging against a primary location. Second, and less likely, is an alternative to China. Finally, companies want locations with big local markets and low cost so they can scale up and produce for both, the domestic market and exports.
To leverage this, India would have to accelerate its efforts to bolster its manufacturing capabilities – a weak spot for India’s economy in recent decades but a tremendous opportunity nonetheless. Equally, this is a market that global manufacturers need to target for their long-term viability in a riskier world.
“The most basic rule is to avoid manufacturing or sourcing everything from one location or from one company. This is not simply about reducing reliance on China or any other single country, but also evaluating the upstream sources to lessen the risk of disruption,” says Chandranath Dey, Head of Business Development, Industrial Operations and Consulting at JLL. “A shift from China to Southeast Asia, India or Mexico for example – often referred to ‘China + 1’ or ‘China + 2’ – will require companies to re-evaluate their domestic distribution networks to ensure they are aligned. In some cases, taking a regional approach may be appropriate, with goods sourced regionally to supply demand in the same region – ‘Regionalisation’ of the supply chain. India ranks very high on the list in the regionalisation battle and can come out winners in near to medium term given the following advantages.” (refer below)
Economy and Ease of Doing Business
- GDP of India has expanded by 2.57 times from 2004-05 to 2018-19
- India EoDB improvement: Jumped 79 positions to 63 in 2019 from 142 in 2015
- Starting a business: 28.4 days (in 2015) to 18 days (in 2019)
- IEM implemented/Actual implemented: USD $105 bn (Apr, 2015 – Oct, 2019) more than doubled from USD $39 Bn (2010 – 2014)
With 18% of world population, India is among the largest consumer market in the world. By 2030, India will be 3rd largest (currently 6th largest) consumers of the world with USD $6 tn consumption expenditure
- World’s 2nd Largest Network of Roads & 4th Largest Rail Network
- 7,500 kms of coastline with 200+ ports in India for EXIM Trade.
- USD $1.4 tn investment in infrastructure in the next 5 years which is equivalent to total GDP of Indonesia and Thailand combined (2018)
- One of the fastest growing in terms of ‘internet penetration’ in the world: 44X growth in last 5 years (2015-19)
Established Sectoral Dominance
- Natural Resources: India is home to world’s 3rd largest iron ore reserves and world’s largest copper and thorium reserves
- Electronics: 2nd largest mobile handset manufacturing nation in the world
- Start-up: Home to world’s 3rd largest start-up ecosystem
- R&D: Home to 1,140+ R&D centers for MNC (Brain capital of the world)
- Food-processing: Largest producer of milk, vegetables and fruits in the world. Potential to be the Food Processing Hub of the world.
- Chemical – India is 3rd largest producer of chemicals in Asia.
- Automobile – India is the largest manufactures (by volume) of tractors, three wheelers and two wheelers in the world. 4th largest car manufacturer in the world and 2nd largest bus manufacturer globally.
- Pharma: Largest vaccine producer and largest producers of generic medicines globally. 3rd largest pharma industry by volume in the world
For manufacturing industries, apart from acquisition of land and doing construction of building, now there are Flex-manufacturing spaces or built spaces on lease which can be used for light manufacturing and assembly lines.
Source: JLL Industrial Services
Of the total world exports worth $19 trillion in 2019, China contributes 13.3 per cent while India’s share is a minuscule 1.7 per cent. Depolarisation presents an opportunity for India to become a $1-trillion manufacturing gross value add (GVA) by 2025 by being an alternative to China in the world exports basket and indigenisation of supply chains for domestic consumption.
The clear differentiator for India, as it was for China two decades ago, is its large domestic market. It is a pathway to local scale, climbing the competitive value chain, as well as building an export base. This is the India that is on global companies’ radar as they consider de-risking their manufacturing in an evolving new world order. There appear to be three strategies, and India is central in each.
The outcome is long-term employment and opportunities that will, in turn, strengthen the economy qualitatively and commercially.
India, with its current manufacturing scale, is perfectly poised to take on this gauntlet. The country has a sizeable manufacturing GVA contributing 15 per cent to the GDP. Its large productive workforce, competitive cost of operations and adapting to new technologies puts the country in a very good stead. It’s just that India further need to build its critical logistics infrastructure like highways, ports, airports, etc. in order to become the ideal alternate manufacturing destination for the world.
In India, the potential of the logistics sector is such that it can easily chart out the country’s success story, albeit if tapped in the right way. The cost of logistics accrued is high for the Indian economy even though labour costs are relatively cheaper. A look at logistic spends reveals that India’s logistics sector accounts for 13 per cent of the GDP – higher than that in markets like US (9 per cent) and Europe (10 per cent) but lower than that in China (18 per cent). It’s clear that a concerted effort to decrease logistics cost is an important aspect to increase the competitiveness of the Indian economy. According to industry estimates, India loses approximately $45 billion in terms of GDP every year due to inefficiencies of its logistics network. Moreover, the 2.5 times increase in freight traffic, which is expected in the next decade, is bound to further strain the country’s inadequate infrastructure.
Although hurdles exist before the country can scale up to international competitiveness and efficiency, the forecast for the future looks hopeful and bright. Increased investment in infrastructure, last-mile connectivity, and emerging technologies are streamlining the logistics landscape in India. It has been awarded infrastructure status which has made it easier for investment inflows and has become a major growth driver of the logistics industry. Setting up of a logistics division under Department of Commerce, GST implementation, introduction of E-way Bill, development of dedicated freight corridors and logistics parks, technology upgrades are also major moves to upgrade the logistics landscape.
Online platforms have increased competition and lowered freight costs with real-time data availability and a transparent value chain. Aggregators are on the rise in the Indian logistics market, given the need for low entry barriers and less capital investment compared to setting up of an asset-based business model. It has now become all the more important for logistics service providers to innovate and adapt to the transforming logistics landscape.
Further, manufacturing in India holds the potential to contribute up to 25–30 per cent of the GDP by 2025 which will drive the growth of the warehousing segment in India.
“With the rapidly evolving technology and increasing demand in e-commerce, manufacturing across sectors will boost eventually leading to an exponential growth in warehousing and logistics sector. The lockdown restriction will further propel the use of automation, robotics and digitised operations in warehouses and increase the use of e-commerce channels moving forward,” believes Anshuman Magazine, Chairman and CEO (ISMEA), CBRE.
“We are confident that once COVID-19 situation normalises, the market dynamics will change. The global impact could potentially result into delayed decision-making, curtailed capital expenditures, disrupted global supply chain, thereby slowing down portfolio decisions in the short term. From a long-term perspective, we expect the demand to remain stable, with manufacturers looking at expanding their footprint in the market, once the situation is contained,” says Anshuman.
Here and Now
Prime Minister Narendra Modi on May 12 while addressing the nation amid the ongoing third phase of lockdown said that the state of the world today teaches us that an ‘Atmanirbhar Bharat’ – ‘self-dependent India’ is the only path, as he announced a new economic scheme called ‘Aatmanirbhar Bharat Abhiyaan’ under which a Rs 20 lakh crore economic package was sanctioned to aid the country out of the coronavirus crisis by making it self-reliant.
The call for Aatmnirbharta is to ensure India’s position as a key participant in global supply chains. Through building domestic capacities at home, the country should intend to contribute to mitigating disruptions in global markets.
It is therefore important to identify products and commodities where India has the ability or potential to expand domestic production and enhance global availability. True, we cannot make everything – but we can certainly make many, many more things than we currently do.
Government Initiatives such as Make in India have already been aimed at boosting manufacturing capabilities, although experts predict that these initiatives will take a number of years to propel India to a leading position on the international manufacturing stage. However, India’s aspirations have been whetted by its improving EoDB rankings, but more needs to be done.
Private sector participation has been given a big push in many sectors including coal, minerals, defence production, civil aviation, power distribution, social infrastructure, space and atomic energy. New Public Sector Enterprise policy will be a significant step in enabling private participation in a greater number of sectors. Over the years, we may expect to see private players running trains on certain routes and modernising the country’s railway stations.
“The Indian government is making all-out attempt to attract foreign firms that are looking at shifting their manufacturing base to India. In a major push to domestic manufacturing, the government has slashed the corporate tax rates of new manufacturing companies to 15 per cent (excluding Cess and Surcharge), the lowest in South East Asia. It has also identified large sized land parcels across several states in the country that could potentially be offered to new manufacturing entrants,” says Srinivas Nanjundaswamy, Managing Director, Industrial and Logistics, Savills India.
Chandranath specially mentions reduction of corporate tax rates — for new manufacturing units operationalising before March 31, 2023 — as a vital step. “At 17.16%, India is now the most competitive tax structure for new manufacturing among MITI-V countries (Malaysia, Indonesia, Thailand, India and Vietnam).”
Government of India has been very pro-active in understanding the requirement of policy support in boosting the manufacturing and supply chain advantage of India, says Chandranath. “More importantly, the policy changes that are being brought in now are industry-friendly as these are being discussed with industry players and various stakeholders to understand the lacunae and bridging the gaps.”
Deeper look into some of the policy changes brought in only since March, 2020, will give a fair idea. (Refer Image II)
|Name of Policy
|Sector / Department
|Major Port Authorities Bill, 2020
|Ministry of State for Shipping
|Scheme for Promotion of Manufacturing of Components and Semiconductors
|Electronics System Design and Manufacturing
|Modified Electronics Manufacturing Clusters Scheme
|Electronics System Design and Manufacturing
|Production Linked Incentive Scheme for Large Scale Electronics Manufacturing
|Electronics System Design and Manufacturing
|Production Linked Incentive Scheme for promoting Domestic Manufacturing of Medical Devices
|Department of Pharmaceuticals
|Scheme for Promotion of Medical Device Parks
|Department of Pharmaceuticals
|Micro, Small and Medium Enterprises definition
|Ministry of MSME
Source: JLL Industrial Services Research
“The recently launched Garib Kalyan Rojgar Abhiyaan by our honorable Prime Minister is a welcome step for the industry,” says Anshuman. “This will not just generate jobs in the country’s rural areas,but would also give infrastructure development and manufacturing a big boost. The mega employment scheme for migrant workers will go a long way in boosting the initiative to build a ‘self-reliant’ India.”
Also critical would be for India’s private sector to identify, on priority, winnable business segments where the scope of localisation and new export opportunities exists. They will also need to develop a local supplier ecosystem and build in-house capabilities. Additionally, the ecosystem to support these manufacturing needs will also have to be expedited urgently.
The manufacturing sector will need to attract investment, and foster innovation. Policies pertaining to land acquisition to avoid delays, further reforms on taxes, financial incentives to ease liquidity headaches for entrepreneurs are crucial at this stage.
The government needs to immediately bring in the right policies that will move manufacturing to India. This is once in a lifetime opportunity for the country to look at import substitution in terms of what China is contributing to global exports and how much of that market could be brought to India.
“Though several incentives have been announced in the recent past to encourage manufacturing of bulk drugs, medical devices and electronic goods, the government needs to introduce policies from a long-term perspective to further improve India’s competitiveness,” explains Srinivas. “For instance, the government should look at further relaxing FDI norms and bring investor-friendly land reforms to boost manufacturing in the country. In the next few months, the government should focus on upgradation of infrastructure, reduction in approval timelines and providing financial incentives/benefits for companies relocating to India.”
However, Chandranath was hopeful that the government is further delving into the policy subject to further relax bureaucratic red tapes and overhaul the EoDB hurdles by bringing in several initiatives including and not limited to fair assessment on a competitive environment of state’s performance in attracting investments within stipulated time frame.
Focus sector – MSME
In the short term, the focus remains should remain on containing the crisis, and protecting the most vulnerable segments in the country such as micro, small and medium enterprises (MSMEs), start-ups, agriculture, education, farmers, migrant workers and labourers, and small businesses.
Naturally, the focus is always be to look at the domestic market and what needs to be done – build capability, fix the supply chain and logistics processes, etc. and then look in terms of what can be exported that would bring the mega business. But certain sectors that the industry focuses on should also as part of the supply chain bring back MSMEs into the system.
“At present, MSMEs are facing challenges to get back to business due to the impact of prolonged lockdown. Under such a situation, MSMEs need liquidity support in form of providing fresh loans or interest waivers scheme,” says Srinivas.
MSMEs are the backbone of the Indian economy, and considering that, of the 16 measures under the Prime Minister’s Atmanirbhar Bharat Abhiyaan, six were targeted at them, including providing more funding to small businesses, amending definition, and timely payment of dues by government enterprises.
The measures for MSMEs through guarantees, equity infusion and debt support will incentivise bank lending to MSMEs as well as providing crucial support to stressed entities in the current situation.
“Collateral-free automatic loans worth Rs 3 lakh crore will be provided to these enterprises with a time frame of four years and a 12-month moratorium. Combined with the Rs 20,000 crore subordinate debt, these measures will go a long way in providing liquidity to stressed MSMEs and enable them to retain employees as well as kick-start production. The government has also provided MSMEs Rs 50,000 crore through ‘mother fund-daughter fund’ to enable them to expand capacity,” informs Anshuman.
Although the extended moratorium will simply help small enterprises get their business back to normal, industry experts point out that the measures do little to change the outlook for the MSME sector. There are also concerns on the execution of the government guarantee-backed lending scheme, given that it involves a supply push at a time of subdued demand.
“Some of the other ways that government can support MSMEs could be reducing their power tariffs or making buy back arrangement of the products,” says Srinivas.
Taking a cue from the same, Chandranath suggests, the following policy changes, according to JLL, can ensure that MSMEs are seamlessly brought back into the system:
- Offering rent free periods/rental holidays to MSMEs working out of government lands or Industrial Development Corporation (IDC) premises.
- Offering capital influx or soft loans (0% interest) to MSMEs with at least 6-9 months of moratorium period.
- Offering tax holidays wherever possible
- Increasing percentage of sourcing of government essential and non-essential commodities from MSMEs to provide them immediate opportunities
Re-engineering skills and talent
The idea of promoting ‘Atmanirbhar Bharat’ is to ensure our demographic dividend finds meaningful employment, but our labour conundrum has ensured that in labour-intensive manufacturing, China, Vietnam and other East Asian countries have a massive lead. Our past track record is very uninspiring.
World Bank’s Logistics Performance Index observes that the logistics and supply chain sector in emerging economies such as India has a considerable skill gap, especially at the managerial level.
As Indian logistics industry is now adopting the digital technologies and harnessing its potential, clearly evident from the digitalisation of export and import transactions and popular use of electronic tagging technology, there is a recurrent demand of skilled talents. Every business today is in need of well-trained and qualified professionals who can manage their inventory and warehouses, keep tracks of accounts, and handle the customs and regulatory compliance, and other processes depending on the skills availability.
This makes it imperative for the government, training institutions, logistics companies and sectoral skill council to build training capacity and offer industry-relevant skills to candidates. Apprenticeship is one of the proven models of training that ensures skilled workforce as per the demands of the industry and emerging job roles. A notable step in this direction was the launch of the ‘First Apprentice’ programme under the National Apprenticeship Promotion Scheme (NAPS) by the Logistics Sector Skill Council in 2017 to boost apprenticeships in the logistics sector; this aims to train 3 lakh youths by 2020.
Similarly, at the industry level, CII has also set up a Centre of Excellence in logistics and supply chain management, with enhancing the competitiveness of the Indian Industry through supply-chain and logistics excellence being the objective.
Even the government is keen to equip the youths with the optimal skill-set and empower the existing employees in the logistics and supply chain management sector through the specialised training centers. NITI Ayog, the policy think tank of Government of India, has established skill development and training centres all across the country to up-skill the job candidates.
While all these initiatives are steps in the right direction, more concerted effort is required of industry, academia, policy-makers and trade-bodies if the supply of skilled logistics resources is to be enhanced.
“Re-skilling plays an important role in bridging the skill gap and paving the wave for next phase of development and manufacturing. In the current situation, re-training and re-skilling will enable the workforce to understand the new ways of doing things that will emerge in the post-COVID era,” considers Anshuman.
Chandranath says over the last few years, the Indian job market has changed in several aspects. “Thus, it becomes important to reap the demographic divided to increase manufacturing competitiveness.”
- With the median age of 29 in 2020, India entered the 37-year period of demographic dividend in 2018. India’s working age population is anticipated to expand to almost 1/5th of the global labour force within the next 10 years.
- Future Ready Skill Force: 14,602 Industrial Training Institutes (ITI) in India.
- Highest Science and Engineering Graduates in the world: 8 mn students enrolled in Science, Technology and Engineering
“India has no dearth of white and blue collared workforce which are mostly English speaking and also available at very competitive wages when compared to many developing and developed nations of the world,” states Chandranath.
Srinivas is hopeful that large output of technical graduates and Skill India programmes are likely to further fulfil the growing needs of skilled labour, although he does not see availability of skilled labour as a constraint to improve the manufacturing competitiveness. “Low labour costs and sustained availability of high skilled workers have continued to provide competitive advantage to India’s manufacturing industry as compared to the rest of the world.”
What’s on the other side?
India has followed a peculiar growth story over the years. While China focussed on cheap, high volume commodity production, India has seen high growth in the services sector. The present government is hitting the right notes with the Prime Minister personally putting his weight behind the ‘Make in India’ campaign.
Right from creating a single window facility for addressing investor concerns, identifying key manufacturing sectors, to creating a common platform to unite state governments, bureaucracy and corporate leaders; the government seems serious in its intent to elevate India’s EoDB rank internationally.
In a world where supply chain security, and not just costs, could determine location, India feels like a good long position. Our information technology industry has demonstrated this during the pandemic.
The country is blessed with a large labour pool and admirable levels of judicial transparency. It can leverage its territorial position to play a critical role in the global supply chains. Doubling up as a potential high consumption market can keep demand fluctuations in check as well as save up on the logistics costs. Thus, in the post-COVID era, if we can internally strengthen on three fronts: reducing process friction points for inward investment, empowering the workforce with essential knowledge and skills, and developing a supply chain network robust to disasters, India can rightly call itself the next global factory in future.