The global value chains (GVCs) are being reshaped as a result of the Covid-19 outbreak. Multinational corporations (MNCs) are attempting to develop alternative supply chains to mitigate future production shocks. In this environment, India has emerged as an appealing alternative to the traditional GVCs. When growing labour costs in China produced a similar situation in 2007-08, Vietnam emerged as the most attractive site for corporations looking to build factories.

This time, though, India appears to be well-equipped to attract corporations that are revamping their GVCs. The structural reforms done by various State governments, the Central Government’s sectoral incentive schemes, and India’s liberal FDI environment will all aid India’s effective integration into GVCs and, ultimately, industrialisation.

In the last two centuries, the rise of industrial sector in the global North (Europe and the US) led to new industrial towns and cities and laid the foundation for modern democracies in the industrialised world. Since then, industrialisation became synonymous with economic prosperity and growth. This growth model has evolved over three centuries, spreading globally. Allowing free flow of capital and housing a large pool of labour allowed countries to attract firms to establish factories in their geographies.

Industrialisation model

However, this model of industrialisation changed in late 1980s. Focussing on specific product categories or components, countries were able to ultra-specialise their knowledge and actively participate in global trade, thanks to technology-led wide dispersion of processes. This meant that nations with the lowest labour costs would attract labour-intensive production processes (assembly), and countries with high-end research capabilities would attract designing/R&D-related value-chain activities. However, China’s meteoric rise during this period effectively stopped the rise of any country relying on cheap labour.

Covid-19 outbreak, rising labour costs in China and geopolitical considerations have now opened up a unique opportunity for India. The government has taken steps to attract companies into its geography. The legacy concerns linked with labour and land were among the most significant hurdles to the manufacturing sector’s expansion.

Most State governments recently reduced these two significant barriers to investment. Madhya Pradesh, Uttar Pradesh and Gujarat have announced major reforms to their labour laws. Reforming this crucial production element will send favourable signals to investors all across the world for managing labour.

Furthermore, the government is establishing a land pool with a total area of 461,589 hectares. This land pool is available for investment, lowering the transaction costs for investors who find land acquisition to be a nightmare. These two changes are long-standing roadblocks that have stifled industry and deterred foreign investors. A comprehensive makeover of these two primary production elements has created several investment opportunities for international investors in India.

Incentive system

Rome was not built in a day, and in order for India’s manufacturing sector to thrive, high-quality investments must be made over a long period of time. A robust incentive system should be established to promote fresh investments. The government has recognised this and has introduced a slew of incentives for investors looking to set up shop in the country. A good example is the flagship production-linked incentive (PLI) scheme, which covers 14 industries. Such schemes are intended to increase the scope and size of the Indian manufacturing industry.

The absence of vertically integrated businesses and a lack of scale are the two biggest issues facing the manufacturing sector. The government’s incentive schemes are aimed squarely at addressing this issue. These will encourage foreign investors to seriously consider India as a manufacturing base, in addition to offering a boost to the Indian manufacturing sector.

In most sectors of the economy, India has one of the most liberalised FDI laws in the world, allowing foreign investments of up to 100 per cent through the automatic method. Only a few sectors of the economy are subject to foreign investment limitations, such as approval procedures or foreign investment caps. The number of sectors that are closed to FDI is small, and there are only a few sectors, such as agriculture, where foreign investment is confined to a specific range of activities.

In its FDI policy, India has taken a negative list approach, stating only those sectors and activities where foreign investment is regulated, whereas sectors not named in the document are open to obtaining 100 per cent FDI under the automatic method. India has received benefits from this liberalised FDI policy framework over the years in terms of higher inflows of foreign capital that rose at a quicker rate than the country’s GDP growth rate.

India’s GDP, which stood at $479 billion in 2001, is now at $2.72 trillion ( a 5.6x growth, approximately). During the same period, FDI inflows in India grew from $4.03 billion to $80.6 billion ( a 20x growth). Higher FDI inflows have been possible due to the liberal and attractive policy regime for the investors, a good business climate and reduced regulatory framework.

The introduction of the PLI scheme, the liberalisation of the FDI regime, and the resolution of India’s legacy challenges have all contributed to the creation of an enabling environment for private sector-led growth.

Further, the massive boost given to infrastructure development is projected to benefit India’s manufacturing sector. All of these policies will assist India in effectively integrating into the GVCs, emerging as an industrial powerhouse, and reclaiming its former glory as the world’s most industrialised country.

Kumar is Consultant, and Gopalakrishnan is Lead (Adviser) and Head, Trade and Commerce, NITI Aayog

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