Covid-19 and Economic Opportunity for India

Opportunity for Indian Economy

•  American politician Rahm Emanuel has said: “You never let a serious crisis go to waste. And what I mean by that it's an opportunity to do things you think you could not do before.” India seems to learning its lesson fast and adapting it’s economy and leadership to respond to the global changes. Amidst the biggest lockdown in the history of mankind, there is an equivalent proportion of opportunity standing for India.

• In late April, Indian Prime Minister, Narendra Modi held a ‘Comprehensive Meeting” for discussing various strategies to attract foreign direct investments and also to promote local entrepreneurships inorder to boost the economy as being hardhit by the Covid-19 pandemic.

Why waste a Crisis? India taking advantage.

Coronavirus Opportunity: Companies moving from China to India

• Due to this pandemic, the emergency needs demand that the government can take fiscal deficit too high and respond to the changes. This freedom of ‘fiscal deficit’ is not available to the government in normal circumstances. A fiscal deficit touching 5% or a little higher will be tolerable to a larger extent.
•  Due to reduced demand, there is a high risk of deflation and recession instead of inflation. Also as the oil prices have came down, thus the import bill of the government has also provided some liberty to raise fiscal deficit. This would have been a taboo in normal situations. The lower oil prices has provided the unexpected benefit of $ 50 Bn, which can allow a higher and more focussed stimulus plan. Though our stimulus plan is much smaller than that of US which is more than $ 2 tn, but it will be unfair to compare India with already industrialised advanced nations.
• United States has a lot of experience of handling depression and economic crisis and successfully converting them to success stories. The US sub-prime crisis has its roots in the liquidity crunch and bank defaults caused by unsubstantiated lending. U.S. unprecedented measures and bounced back strongly increasing its domestic demand, robust financial system and rise in wealth of over all America. It has this success story being continued for more than a decade.
• As the lockdown in India has reduced the demand for oil due to restrictions in transportation, the sharp decline in oil prices has save almost $45 bn in the current financial year of 2020-21. India normally imports approximately $140 bn worth of crude oil and other petroleum raw material which forms the largest pie of our import bill.

 

The Exodus

• China or no China, who is to be held accountable for the pandemic? As the world is busy in fixing the responsibility, the corporations have already calling board meeting to shift the manufacturing bases out of China. Their hunt of alternate investment destinations has started. It is the opportunity, that India cannot afford to miss.
• There has been ongoing talks between many international players and Indian companies to shift the production lines to India and to safeguard their supply chains. Covid outbreak has force them to diversify geographically too.
• As the Covid crises has wreaked the supply chains, many MNCs has incurred huge losses and ideal plant times. As there has been strict implementation of lockdown in Wuhan, which is the starting point of the Coronavirus, the automotive industry was the first to feel the punch. This is because Wuhan in China is amongst its few automobile cities producing many kinds of automotive spare parts.
• As Wuhan way the material source for many of the Original Equipment Manufacturers (OEM), the supply chain snapped instantly as the lockdown got implemented. OEMs feel the need to diversify their bases and nations like India and Vietnam seems to be one of the favourable destinations. This is the growth story that the shifting of supply chains will get of India.
• Union Cabinet in March came out with production-linked incentive (PLI) scheme for the electronics sector with an outlay of over ₹40,000 crore.
• The domestic market for electronic products in India is around $120 Bn, but India’s export in electronic products every year is estimated to be $9 Bn.
• Many Korean and Japanese companies have expressed their inclination to setup supply chains in India.
• Similarly, Teledyne and Amphenol, which are global giants in making medical electronic products have also shown their affinity for India. Both are US-based companies. Surprisingly medical equipment makers Johnson and Johnson is also thinking to shift its base in India.
• Meanwhile Japan has come up with a $2 billion financial aid for its corporates to shift production out of Chinese territories. Other nations could follow Japan, which is seems to benefit India.

US Nudging Firms towards India

 

• As China is loosing the favour and trust of the world due to Coronavirus outbreak, many industrial economies are nudging their corporates to relocate their manufacturing bases out of China. India has this opportunity, it can emerge as an alternative viable investment destination for industrial economies. U.S. government’s Department of State is heavily focussing on India as the other destination of its manufacturing bases.

 

Why India?

• Due to its market size and geographical location over the Indian Ocean, India is seen as an attractive global destination for investment. It is for this reason that the FDI inflows to the country has been constantly rising from past several years. But a major factor hampering the marketing of brand India, is the high cost of production as compared to other South East Asian nations. The difference is as high as 10 to 12 per cent.

• But many analysts feel that the large market size can  provide a major advantage even covering up for the difference in cost of production. In other South Asian countries, there is not local market or local demand. But incase of India, you can produce here and sell some part of the produce to Indian markets too.
• Take example of mobile phones. India has a large market of mobile phones that are less than Rs 50,000. For those smartphones costing above 1 lakh or more, there is a huge export opportunity, So while a company is producing in India, some of the demand from Indian markets will off set the difference in cost of production by almost 6-7 per cent. For other remaining difference, there can be other kinds of state subsidies.

 

Pro-Active Steps

• India has been in the process of developing huge land pool which has a total area of around 461,589 hectares across the country. This is almost twice the size of Luxembourg. It is to lure the companies which will be moving out of China. Since land acquisition in India is the toughest part, so the government has already completed that process. This land pool has about 115,131 hectares land which is from the existing industrial land marked by Andhra Pradesh, Maharashtra, Tamil Nadu and Gujarat. This will solve the land acquisition problem and the delays in negotiating the land deals with numerous small plot owners escalates the time and cost of setting up units in India.
• Government schemes providing power, water and motorable roads along with land will surely lure new investments. The infrastructure for the industry is most essential.
  
  
• 10 Sectors - electrical, pharmaceuticals, medical devices, electronics, heavy engineering, solar equipment, food processing, chemicals and textiles has been the focus are for the government. Infact Indian embassies in foreign lands will keep an eye for the companies who are looking for investment destinations. “Invest India” is Indian government’s agency has been over burdened by enquiries from U.S, Japan, South Korea etc to relocate their bases to the fifth largest economy of the world.
• Government is also examining if it can make available all the unused land in the SEZs (Special Economic Zones) which already have all the infrastructure present.
• There has been provisions for fast-tracking all the permissions which are required to set up units in India. All the ministries such as Road and Transport, Environment, MSME has been up for providing single window clearences.
•  A committee of joint secretaries has set up by Department for Promotion of Industry and Internal Trade (DPIIT) to consult industries.
• State Chief Ministers has been asked by Prime Minister Narendra Modi to come up with plans and expand the incentives to attract the companies existing China.

Way Forward

• India seems to be at junction where the crisis has been accompanied by equal opportunity. The world is looking for alternative to China and India with its size in terms of land, market, labour and resources is being more suitable and attractive.
• The need of the hour is to attract as much FDI as possible into both greenfield and brownfield investments. It will salvage the country from the recession and will also help to rebuild the economy in a better and robust manner.

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