Unless Atmanirbharta is defined properly, the BJP government will fail to effectively implement its economic philosophy
It is not protectionism. It is not inward looking. It is not just import substitution and it is not economic nationalism. This is how NDA government has chosen to explain and defend its Atmanirbhar Bharat policy. The Modi government’s latest and most passionate economic philosophy has been at best defined negatively. We all know what it is not but very few know what it actually means.
As a first step, the government has come out with performance-linked incentive (PLI) schemes for sectors that are extensively import dependent. This should help India build the supply-chain within the country for products that are critical in the future — electronic products (including mobile phones) and active ingredients for the pharmaceutical sectors, to name a few. It has also extended the scheme to top exporting sectors like textiles which lacks knowledge when it comes to man-made fibres. If economists are to be believed, the PLI scheme is expected to drive India’s manufacturing growth in the next few years.
That is a good start. But creating the necessary ecosystem for India Inc to dominate the world does not mean just plugging the gaps in supply chain. This is where a better understanding of what Atmanirbharta means will help. Indian companies are weighed down by multiple factors that put them in a clear disadvantage vis-a-vis their competitors elsewhere in the world, apart from dependence on imports. They need to be addressed too.
Manufacturing costs: India is not exactly a low cost production base. It may be cheaper than developed economies but other emerging countries fare better. Take the power cost. It costs 11 cents a unit in India compared to 8 cents in Vietnam and 9 in China. Labour cost, in real terms, is low but if one has to factor productivity, it falls way below China, Brazil or South Korea. That apart, when it comes to skillset India is ranked a distant 107 in the Global Competitiveness Index compared to China’s 64th rank and South Korea’s 27th rank. Vietnam and Brazil are ranked 93 and 96 respectively. Indian companies are forced to spend more on training its workforce.
Logistics costs: At 14 per cent of GDP, India’s logistics cost is way above its peers in the developed world (6-8 per cent). What is discomforting is that even this data is skewed. In India logistics cost typically means transportation costs whereas in advanced economies it includes planning, procurement and warehousing on account of very high level of outsourcing. India’s logistics cost is at least 3x compared to developed countries.
Compliance costs: Indian companies suffer from high regulatory and other compliance costs. Even though the government has been working to reduce this through digitalisation, it remains high and puts them at a disadvantage in the world stage.
Investment in R&D: Total investment in Research & Development and innovation has been on the decline over the years. It was 0.84 per cent of GDP in 2008 and in 2018 it was 0.6 per cent. Bulk of R&D spending happens in the defence and space sectors. In the private sector it is in auto and pharmaceutical industries. But here too, much of it is ‘catching-up’ with what others have already developed. Investment in cutting-edge technologies is clearly missing.
High interest rates: While India may be enjoying a period of low interest rates, what companies pay to borrow here is relatively much higher than say in US or Japan. Indian products can compete across the world only if interest costs drop.
Trade policies: Countries like Bangladesh and Vietnam are signing trade deals to become more competitive and attract investments. India’s record when it comes to such deals is pathetic. The India-EU Free Trade Agreement, after 16 rounds of talks, is stuck in a logjam for the last seven years. Comprehensive Economic Co-operation Agreement with Australia is going no where after nine rounds of talks over the last eight years.
No easy solutions
These issues have no easy solutions. Reducing power cost would mean forcing State governments to give up cross-subsiding power. It will also call for investment to evacuate coal from the mines quickly and economically. Skilling and re-skilling needs a renewed focus. There is a need to identify emerging skill sets and train people. Labour reforms have to be pushed forward to improve productivity.
The government should encourage and incentivise outsourcing to reduce logistics costs. Companies that outsource more than just transportation are seeing good results thanks to better visibility and better utilisation of assets. It must also invest in infrastructure. Turnaround time at Indian ports need to be reduce sharply from 2.62 days. It is less than a day in China.
To reduce interest costs, governments (both Centre and States) have to live within their means and more importantly, eschew populism. It should also ensure that strong companies have unfettered access to cheap funds across the globe. It must adopt a policy of ‘give & take’ to sign trade deals and not get bogged down by domestic lobbies.
Without tackling these issues, India will not be competitive in the global stage. In other words, Atamanirbharta will remain a pipe dream. If the government is serious in implementing this economic philosophy, it should clearly list out areas which need improvement to make Indian manufacturing competitive. It should also go a step further and announce the quantum of improvement and the time line to achieve it.
Only then will required policies get framed and executed to bring about the change. Also, such a statement will clear all confusion in the minds of trade partners, investors and others who have been finding it difficult to understand the policy.