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Does COVID Help India To Become The Next Manufacturing Hub?

by Tavaga Invest

By: Tavaga Research

The unprecedented situation created by COVID-19 has disrupted the supply chains globally. Many countries were taken aback by the potency of the virus. Nations were caught by surprise with healthcare systems falling short and broken in some countries. What started as a regional epidemic in China is now a global pandemic in a matter of a few months.

Currently, China is the largest manufacturer in the world with total exports of $2.5 trillion and producing almost one-third of all goods manufactured. As the distrust for China continues to grow, many global firms are now looking forward to diversifying their supply chains and this is where India must present itself as a strong alternative.

With the removal of lockdown in June, factory production in most parts of the country has started, however, the two big factory hubs, namely Maharashtra and Tamil Nadu, are still not up the curve.

What If The Manufacturing Activity Fails To Pick Up?

Although the manufacturing PMI rose to 47.2 in June (India began its unlock mission in June), as compared to 30.8 in May and 27.4 in April, it is the third continuous instance where the PMI failed to cross the 50 marks and India thus witnessed a contraction in the overall manufacturing activity for the third time. With a rise in positive cases and case fatality rates, many states and respective municipal corporations have once again resorted to strict lockdowns which can lead to a lack of demand. Until and unless there is confidence in the real economy that the pandemic is brought under control, demand and supply-side issues will exist. 

India Manufacturing PMI
Source: Trading Economics

What Role Has The Government Played To Spur Manufacturing In India?

  1. Schemes for the Electronics Industry: In April 2020, Rs. 50,000 crores were allocated by the Indian government for boosting domestic manufacturing of electronics under the PLI (Production Linked Incentive) Scheme, SPECS (Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors) and EMC 2.0 (Modified Electronics Manufacturing Clusters). The major objective of the PLI scheme is to boost local (domestic) manufacturing with the help of lump sum investments in the mobile device and components industry. Incentives kept aside for the scheme amounted to 41,000 crores out of the total 50,000 crores.
  2. Looking at the incentives offered, the manufactures of Apple products, namely Foxconn and Wistron along with Indian manufacturers Karbonn, Lava, and Dixon Technologies have already applied for the PLI scheme. SPECS, as the name suggests, aimed at manufacturing electronic parts and components including semiconductors. A whopping financial incentive of 25% on the total capital expenditure will be provided under the scheme. Modified Electronics Manufacturing Clusters (EMC 2.0) focuses upon developing robust infrastructure for the manufacturers with special attention towards the supply chains and lower transport costs.
  3. Personal Protective Equipment (PPE) – India’s Success Story during the Pandemic: With the spread of coronavirus and the earlier discussed supply chain disruptions, India sensed an opportunity in manufacturing the PPE kits. Earlier, India was fully dependent on China for almost all the medical textile units including the PPE kits, but the pandemic changed the entire equation. In the early days of March, there was no manufacturing unit of PPE kits in India, however by mid-May, India became the 2nd largest manufacturer of PPE kits with a total production of 4.5 lakh units per day. A country which never manufactured this utility product until 4 months back, emerged as an exporter of the same product within 4 months. Truly, a success story during the pandemic!
  4. Fiscal Stimulus: Recently, the Indian government announced a slew of stimulus and reform measures in a bid to seize the crisis as an opportunity and fight from a position of strength in the changed world order. Overall, it prioritized structural supply-side reforms over near term demand boost. MSMEs (Micro, Small and Medium Enterprises), who contributed to almost 50% of India’s total exports during FY19, got their share of stimulus in the very first tranche. An allocation of Rs. 3 lakh crores towards collateral-free loans, a subordinate debt provision of 20,000 crores for stressed MSMEs, and an equity infusion of Rs. 50,000 crores for MSMEs facing immense liquidity crunch was announced. With a whopping Rs. 3.7 trillion liquidity support to MSMEs, the 50% contributors to total exports of India can go well beyond the halfway mark and help India become the world’s factory with the support of other players in the industry.

On Friday (24th July), Minister of Commerce and Industry Piyush Goyal announced on Twitter that iPhone developer Apple has started manufacturing the iPhone 11, making it the first top model to be manufactured in India. The much-awaited iPhone SE 2020 may also be manufactured in India in the latter half of the year.

While the government needs to announce and implement the reforms and stimulus to boost the sentiment as well as revive the economy, the immediate steps must be to contain the virus and ensure the wellbeing of the vulnerable class of citizens. Also, allocation to healthcare through an increased contribution from GDP which will result in ‘care’ as well as an economic activity resulting in increased employment. 

What Challenges Can India Face in Becoming the Manufacturing Hub?

In the past, India has attempted to boost the manufacturing sector by way of ‘’Make In India’’ (government program encouraging domestic manufacturing) and various export promotion schemes but with far little success achieved. While cheap labor and a young workforce will surely help India, a lot of tweaks are needed in the policy.

  1. Taxation: Policymakers must focus on production maximization and generating jobs and treat tax revenue as its byproduct.
  2. Connectivity: With the government making available huge land banks for industries, proper attention must also be given on the connectivity. For a populated country like India, the land must be available near ports or the industries must have proper connectivity to ports.
  3. The threat of other countries: The COVID 19 crisis will not only make room for India but also for other emerging economies. Singapore, Thailand, United Arab Emirates (UAE) and Hong Kong have earmarked resources for their domestic manufacturing players. Vietnam, which only took 20 years to shift from the poor income to the middle-income category, has already started manufacturing for the world.
  4. Input costs: For years, the cost of 2 inputs has been unfair to businesses and industries. Power is made available to consumers and farmers at subsidized rates while the tariff applied to the industry is comparatively high. The same is the case with transport and logistics (railways). Huge subsidies are provided to passenger fares while the freight cost is high. 
  5. Labor: The rigidity around labor laws disincentivizes investments in manufacturing as the flexibility of employment is not available. Secondly, requisite skills for manufacturing efficiency need to be developed through non-conventional means like apprenticeships which are not common to the industry. 

Apart from the crisis caused by the coronavirus pandemic, the prolonged trade war between US-China and rising production costs in China can help India achieve at least half of what China has been exporting to the world in the medium term. While India has economically suffered a lot due to the pandemic, the usage of a young workforce and technological improvements can drive the supply chains, making India the manufacturing hub.

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