View: With the global supply chain being reconfigured, India must intelligently restructure its economy

India’s aspirations have been whetted by its improving ease of doing business, though more needs to be done.

By N Venkatram

Covid-19 has changed our collective calculus of uncertainty. It is more global in scope, more profoundly impactful, and much more complex than any crisis that countries and companies have ever experienced. The next normal requires confronting uncertainty head-on and building it into decision-making.

To my mind, ‘Respond, Recover, Thrive’ captures the spirit of the Indian government’s reactions to the pandemic, the economy and building for the future. That was evident in the announcements last week to revive and restructure India’s economy, with multiple policies that will find common cause with another fallout of the contagion — possible reconfiguring of the global supply chain by multinationals.

The two are linked and is likely to become more so. Plainly, it makes sense for India’s domestic market of 1.32 billion consumers to be viewed as an opportunity.

Equally, this is a market that global manufacturers need to target for their long-term viability in a riskier world. That is the real measure of the moment and the government is right to pursue a restructuring of India anchored by the following strategic objectives:

*Unifying India with economic development that is plural and rural.

*Balancing the approach to regional development.
*Strengthening and leveraging India’s domestic market to attract FDI.

*Modernising agriculture, to create value-addition and advance rural aspirations.

The outcome is long-term employment and opportunities that will, in turn, strengthen the economy qualitatively and commercially. The clear differentiator for India, as it was for China two decades ago, is its large domestic market. It is a pathway to local scale, climbing the competitive value chain, as well as building an export base. This is the India that is on global companies’ radar as they consider de-risking their manufacturing in an evolving new world order. There appear to be three strategies, and India is central in each.

Make it Here, Make it Now

First, multinationals are looking at ‘China Plus One’, effectively hedging against a primary location. Second, and less likely, is an alternative to China. Finally, companies want locationswith big local markets and low cost so they can scale up and produce for both, the domestic market and exports.

Consider this. I see exports from China in several sectors, including pharmaceuticals, mechanical equipment, textiles and auto parts, totalling $1 trillion, which present an opportunity for India. These cover activities where China has no advantage (less than 30% of China exports), is sizeable (more than $5 billion), and where India can substitute (where India exports at least 1% of global trade). Part of India’s ‘pull’ is its engineering, computing and science workplace talent, from a higher educational network that graduates millions each year. That has been a competitive advantage for years, a global franchise.

Foreign investor orthodoxy is that such systemic transition is fanciful, without a heroic unwinding of regulations, for instance, to buy land, let go surplus workers, or bid for contracts where procurement processes remain baroque.

However, India’s aspirations have been whetted by its improving ease of doing business, though more needs to be done. There is also an accelerating network of clusters, boosting infrastructure in farming economies with large populations. Second, sectors such as auto manufacturing (India is the world’s fifth largest market) and a components ecosystem, are typical of industries incubated in an earlier phase of reform that have grown to world-class scale and quality, and today are a plug-and-play for incoming foreign manufacturers.

In a world where supply chain security, and not just costs, could determine location, India feels like a good long position. Our information technology industry has demonstrated this during the pandemic. On this reasoning, five sectors, all big employers, as well as a force for rebalancing regional development disparities, were singled out in last week’s announcements by finance minister Nirmala Sitharaman. They are food processing, pharma, defence, textiles and electronics.

Take food processing. At $500 billion in annual economic activity, this is the fifth-biggest industry in India by production, exports and consumption. We are among the leaders in producing milk, coffee, wheat, rice, sugar, fruit and vegetables. Yet, only one-tenth of produce is processed, yielding little value creation in either incomes or productivity. Food processing is potentially a big employer, from small units at the farm gate to industrial size in tertiary processing. Announcements on pricing deregulation and financing processing infrastructure at the farm gate should help producer organisations and micro enterprises.

Handholding, Each Other’s

That is brave, but there is scope for more. The answer, I believe, is a strategy of food diplomacy, consumer awareness and import substitution, and anchor investments that generate growth, scale and value. One quick accelerator would be to incentivise partnerships between food companies, machinery manufacturers, research and academic institutions and startups to develop processing and packaging technology. Food processing can become for this government what car and auto-components were to its predecessors two decades ago.

In this past week’s announcements, the thread for me was empathy and prudence: the first in its attention to employment; the second in fiscal responsibility and a recognition of the value proposition at India’s core. Equally commendable has been the honest admission that we are in uncharted waters, and are willing to experiment and invest in what the future may hold.

The writer is CEO, Deloitte India