Pursuit of competitive balance

“Warfare is now escaping from the boundaries of bloody massacre, and exhibiting a trend towards low casualties or even none at all and yet high intensity. This is information warfare, financial warfare, trade warfare…”

— Unrestricted Warfare, PLA Cols. Qiao Liang and Wang Xiangsui

“India’s imports from China reach record high in 2022, trade deficit surges beyond USD 100 billion.” This news item based on Chinese Customs data also pointed out that compared to 2021, the trade deficit was up by 45 per cent. This trade deficit, which is almost one third of the country’s total trade, is attributable not only to electronic components, computer hardware peripherals, telecom instruments, organic chemicals, industrial and electrical machinery, auto components, active pharmaceutical ingredients (API), and medical supplies, but also to low-technology manufactured items.

Deepak Nayyar’s article in a periodical dated January 13, 2023 provides an explanation for this. To quote: “Between 1990 and 2019, India’s share in manufacturing value added (in current prices at market exchange rates) increased from 1.3 per cent to 3.1 per cent, while that of China jumped from 1.3 per cent to 28.7 per cent.”

The share of manufacturing in the Gross Domestic Product (GDP) of India has remained around 15-16 per cent for more than three decades. The corresponding figure for China is 27 per cent. And China’s GDP is more than 4 times that of India.

The plateauing of manufacturing share has a direct impact on the trade deficit. Outside the oil exporting countries, the maximum trade surpluses are enjoyed by manufacturing giants like China, Japan, Germany, South Korea, and Taiwan. A high trade deficit impacts the currency of a country adversely. This often results in importing inflation. For countries like India, this could also lead to a higher fiscal deficit, mainly on account of raising the bill for fertiliser subsidy and, to a lesser extent, for fuel subsidy.

Cheap imports from China have created an unfavourable environment for boosting India’s domestic manufacturing base. This has also raised the cost of economic growth. The manufacturing sector is not only well-placed, but also the only sector which has the potential to provide gainful employment to the surplus labour from the overburdened agriculture sector; which supports almost 50 per cent of the workforce on 14 per cent of the nation’s GDP. Agrarian distress is reality.

Dependence on China for critical raw materials, intermediates and finished products, is a serious risk. The list is long. Some examples will give an idea about the magnitude of the problem.

About 80 per cent of India’s API requirements are met by imports from China. As Devi Shetty had pointed out in a daily on November 22, 2021, without heparin, a drug used to prevent blood clotting cardiac surgery, kidney dialysis, vascular surgery, angioplasty and adequate management of heart attack and brain stroke cannot be done. China produces 80 per cent of the world’s requirement of heparin.

India’s critical minerals policy (expected to be finalised soon) is a recognition of the problem posed by the dependence on China for supply of critical minerals and rare earth elements — an essential requirement for new-age manufacturing items like electric vehicle batteries, wind turbines and solar photovoltaic cells.

Security concerns pose the biggest threat. Chinese Internet of Things (IOT) modules in critical infrastructure and key industries can be used for surveillance, and also sabotage them. Asian International reported that “China is watching you via laptops, smart bulbs, fridges, cars, and credit cards by weaponising microchips embedded in them. More specifically, the threat revolves around four areas: national security, economic prosperity, privacy, and values and human rights.”

The border stand-off with China has brought into focus the imperatives of reducing the dependence on China for supply of strategic goods. The Production Linked Incentive Scheme, announced for 14 sectors, is a step in the right direction. It has to be supplemented by a package of measures to make domestic manufacturing stand up to competition from imported goods, particularly from China.

Manufacturing is an outcome. It is an upshot of state action, the most important of which are:

(i) Support in areas of competitive advantage;

(ii)Fostering a climate of innovation which leads to depth in manufacturing;

(iii) Focus on providing public goods, especially law and order;

(iv) Effective and timely enforcement of contracts;

(v) High factor productivity — land, labour, and capital;

(vi) Reasonably priced electricity;

(vii) Low logistics costs;

(viii) Sensible regulatory burden;

(ix) A level playing field, which discourages rent seeking behaviour; and

(x) A change in the Indian entrepreneurial mindset — from buyers and licensors of technology to developers of technology

The state governments have an important role to play in this sector, in line with the Constitutional scheme of the country. As per Schedule 7, Entry 24 in the State List deals with “Industries subject to the provisions of Entries 7 and 52 of List 1.”

In List 1, i.e., the Union List, Entry 7 mentions “Industries declared by Parliament by law to be necessary for the purpose of defence or for prosecution of war” whereas Entry 52 specifies “Industries, the control of which by the Union is declared by Parliament by law to be expedient in the public interest.”

De-licensing, initiated in 1991 by reducing the number of industries in the Entry 52, has made state governments equally responsible for promoting industrialisation. States lagging in industrialisation have to follow the example of states like Gujarat where manufacturing contributes almost 40 per cent of the State GDP.

Investor confidence is a necessary condition for investment to flow into any sector. Manufacturing is typically a long-term play. This casts a duty on the state governments to provide a secure and safe environment, where investors believe that their investment would yield reasonable returns. Competitiveness of manufacturing can be sustained only on an assured and stable grid electricity availability. The state governments have to ensure reliable electricity supply by their discoms. The onus of ensuring availability of land at reasonable prices and labour laws which enhance labour productivity is also on the State governments.

The Union government has to put in place policy measures to incentivise investment in areas where domestic manufacturing enjoys a competitive advantage. The policy regime has to be stable and predictable. This entails ensuring availability and access to cheap capital, speedy disposal of litigation pertaining to contractual disputes and a widely accepted perception that a level playing field exists.

There are several areas where the Union and the States have to supplement each other’s efforts. Reducing logistics costs through high-class infrastructure and reducing expenditure on compliance by lowering the regulatory burden are two such areas.

The biggest dilemma is to change the mindset to bring about innovation-led manufacturing, as opposed to licensing and/or buying technology and assembly-based manufacturing. This is an adaptive challenge. It requires industry-academia collaboration, as exemplified in the Silicon Valley, with the government stepping in to fund research in areas of national importance. Leadership at both the Union and State governments have to strive to bring about the transformation in attitudes to ensure domestic presence at points of high value addition in the manufacturing chain.

Success in manufacturing is the true test of cooperative federalism. The mantra is that it has to be driven by infrastructure and innovation. The strategic concerns arising out of supply disruptions due to the Covid pandemic and geo-political tensions have brought to fore the imperatives of urgently enhancing the domestic manufacturing base. Time is of essence. The Indian lion has to come out of the grip of the Chinese dragon.

The writer is former Petroleum Secretary; and co-founder of thinktank Deepstrat. Views expressed are personal