India's window of opportunity for attracting companies is closing

The window of opportunity for attracting companies looking to divert investments from the Asian manufacturing giant is closing

Prime Minister Narendra Modi's emphasis on local manufacturing and supply chain may be a response to the Covid-19 crisis but much before the disease-struck China, India wanted to emulate the Asian manufacturing giant’s industrial prowess. In January 2018, when a trade war broke out between the US and China, the NDA government saw in it an opportunity to push its Make in India programme.

Through extensive data mining and discussions with industry, the commerce ministry tried to get exporters to tap the China market and persuade US importers to look at India as a sourcing centre. By December 2019, however, the trade war subsided with the two countries reaching a settlement but the Covid-19 outbreak in China disrupted supply chains again — no surprise, since China accounts for about 30 per cent of global manufacturing capacity, according to the United Nations Statistics division.

In response, the Union government upped the ante on the India opportunity and calls for strengthening Indian manufacturing came from within industry too. Sajjan Jindal, chairman of JSW Group, a major steel producer, issued a media statement in February after news of a raw material shortage for antibiotics did the rounds, stating, “India should not become a victim to the Chinese strategy of incapacitating the critical sectors of our economy. It is high time the government acts on strengthening and expanding the manufacturing sector.” China accounts for about 14 per cent of Indian imports, domestic steel, electronics and solar equipment being major victims.

That window of opportunity seems be closing, however. Two surveys, jointly conducted by AmCham China, AmCham Shanghai, and PwC China, to study the supply chain impact on American companies offer an idea of why big manufacturers are unlikely to give up on China.

Over 70 per cent of respondents to a March 2020 survey said they had no plans yet to relocate production and supply chain operations or sourcing outside of China. Nevertheless, 24 per cent  against 12 per cent reported in a survey conducted before the pandemic threat, planned to shift sourcing activities as well as production. Concerns were shifting away from factory closures to logistics-related challenges. Approximately, 96 per cent respondents anticipated a return to normal activities within the next three to six months.

Another survey, conducted during March 6-13, was a supplement to one done in September-October 2019 to gauge the impact of bilateral trade tensions on US businesses  in China. Twenty five American companies, dealing in industrial products, consumer business, healthcare and information technology sectors, with more than 10 years of experience in China (most for over 20 years) were surveyed.

Around 40 per cent of respondents said their long-term supply chain strategy for China would remain the same regardless of the impact of Covid-19, while the 52 per cent of companies believed it was too soon to tell. The main heartening factor for the surveyed companies was the Chinese government’s “return to work” approvals. All respondents said the government policies are available to foreign businesses to help relieve their supply chain pressure.

The challenge for India is to compete with a host of smaller Asian nations. “Most of them find it easier to operate in Vietnam or Thailand. One of the reasons is that they are smaller countries in area and logistics is easier but India does offer the advantage of a bigger market,” said an official. According to Aruna Sharma, former steel secretary, industrial units that moved out of China have looked at Bangladesh, Vietnam and Indonesia. “We need to trigger our own system. If our own banks have no confidence to lend to our own MSMEs or bigger plants or for infrastructure, why will an outsider put in money?” she says.

Policy consistency is crucial, she says. She cites the example of bidding for steel companies under the insolvency process. “Even when very good steel plants were available for sale, there was no good response from bidders outside except from the Mittal-Nippon group. And even this player went through a convoluted legal process. All this scares foreign investors.”

Given that all governments are competing for foreign investment, Sharma added, the focus should be on removing irritants that the domestic players face by providing liquidity to banks. “Interest from outside will automatically come once global players see that domestic industry in various sectors is working smoothly.”

Domestic industry, however, finds itself in trouble because of cheap imports. Solar manufacturing is a case in point. Saibaba Vutukuri, chief executive, Vikram Solar, says 33 GW capacity of solar power deployment so far has been attained using imported solar cells and solar panels from China though India had sufficient module manufacturing capacity. “This has led to the closure of some of the manufacturing units due to very low capacity utilisation. While India has been focusing on creating a market for solar power, now is the time to focus on domestic manufacturing,” he pointed out.

To reduce dependence on imported cells and modules and promote indigenous manufacturing, the government had introduced safeguard duty in 2018 for two years. There is now a proposal for a basic customs duty in August 2020 once the safeguard duty lapses on July 29, 2020. But under the SEZ Act and Customs Tariff Act any goods sold in the domestic tariff area (that is, it is not exported) were liable to pay customs including safeguard duty. Around 63 per cent of cell manufacturing and 43 per cent of module manufacturing capacity is located in SEZs.

“Manufacturing units in SEZs will be adversely affected compared to their counterparts in domestic tariff area as they will be subject to basic customs duty on the value addition from the SEZ — irrespective of the fact that they manufacture modules using indigenously manufactured PV cells,” Vutukuri pointed out. “This measure would be counterproductive and harm the very industry for whose protection the measure is intended to be imposed."

For steel, China’s share of imports gradually fell following the imposition of anti- dumping duty in 2018 which replaced the minimum import price introduced 2016. China’s share in finished steel imports of six million tonne halved to 17 per cent between April-February FY20 from 34 per cent in February 2016.

Meanwhile, individual companies are also trying to attract foreign investment. On May 4, state-owned BHEL invited foreign companies to use its currently idle factories for manufacturing from India. If this approach succeeds, it could solve the chronic problem of land availability that hamstrings investment. For now, however, foreign companies will first look at getting back to normal rather than going in for fresh investment — even if the government offers them fiscal incentives.