The Old Normal Still Applies

Context: Labour-abundant India needs to grab big opportunities arising from rising wages in China and geopolitics (US-China trade tensions made worse by the Covid-19 pandemic).

Movement of Global Supply Chain (GSC) out of China

• Nomura report: companies relocated from China, went to Vietnam (26), Taiwan (11), Thailand (8), and India (3).
• India will not be able to attract GSCs automatically or just based on its false conception that countries like Vietnam and Thailand are too small to replace China, so they will come to a big country like India. 

Problems in Attracting GSCs in India 

• Less trained, uneducated, and unskilled labor: in comparison to Chinese and the ASEAN countries which have quality human capital.

• Reasons: rampant teacher absenteeism, low-quality teaching leading to poor learning outcomes.

• Infrastructure (power supply, transportation, and logistics) is far below the level that will attract multinational manufacturing firms.

• Geoffrey Garrett quoted ‘3 Reasons India isn’t the ‘Next China’:  Infrastructure, Investment, and Manufacturing.
• Vietnam: the network of trunk and feeder roads, sea and airports, power infrastructure with excellent transmission and distribution system.

• India’s resistance from signing Free Trade Agreements (FTA): unlike Vietnam which had signed many FTAs and is becoming part of various networks that facilitate moving into different GSCs.
• India’s poor labour laws: restrict reputation conscious multinationals to move to the places of poor labour laws fearing boycott of their products in their home countries.

• Labour reforms:  flexibility in adjusting labour input, protect worker safety and rights.

• Some GSCs may actually ‘go back’ to the west: based on the cost-benefit calculus for automation change in absence of Chinese substitutes in the rest of the developing world.

Conclusion: Attracting GSCs to India will require additional investment and effort into infrastructure and skill-building, tackling power bottlenecks, reforms in labour and land regulations, and keeping protectionist forces at bay.

Narendra Modi: ‘Hard work is more powerful than Harvard’.