With significant effort and a strong will to initiate the necessary structural reforms, India has the potential to lead the world out of the upcoming recession.
Highlights:
There is the worry expressed by many that while the western world can afford to be more pragmatic, emerging markets such as India cannot.
A concerted effort by the Indian Government and the manufacturing industry to actively seize a rightful place in global supply chains is the need of the hour.
Delivery on a promise of consistent, high-quality infrastructure as well as incentives that can help catalyse the creation of manufacturing hubs will be important.
As we watch the flattening of the COVID-19 virus curve in many parts of the world, the attention is rightfully being shifted, in part, to the economic fallout from the pandemic. The estimates of the potential impact vary, some predicting a near $20-trillion impact, ie 25 per cent of the global GDP, with many emerging markets suffering along the way. That's unprecedented and scary. There continue to be calls on Governments to do more, especially for those who are impacted with the loss of employment income. There is also the worry expressed by many that while the western world can afford to be more pragmatic, emerging markets such as India cannot, given the lack of fiscal space and the potential adverse consequences of increasing public debt. These arguments are valid.
However, for countries such as India, there may be a very different theme, opportunity really, here. To quote Adam Smith, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” As highlighted in 'India's Renaissance Moment', and there is increasing evidence of it since that piece was written in early-April, the possibility of China facing isolation is very real. A combination of that, plus the growing realisation among the directors on the boards of global companies that excessive dependence on China for their supply chains is hardly appropriate, and will in fact reflect as poor risk management for the future, feeds further into this wave to look for alternatives.
China exports over $2.5 trillion annually, including $500 billion just to the US. This, of course, includes all sorts of exports, the largest being electronic equipment and machinery, down to slag and ash. Over the next five years, just a 25 per cent shift away from China is a $600+ billion annual opportunity. That's ~20 per cent of India's GDP, ~100 per cent of India's manufacturing sector output, and ~2x of India's annual export of goods. The real opportunity, over the next couple of decades, could be much larger. Yes, there will be competition for this business, especially from other countries in Asia, including Vietnam and Taiwan. But it is still a game-changing shift that India is particularly well-positioned to handle, given its large labour force, existential global linkages, and unparalleled entrepreneurial spirit.
The one constant narrative over the past decade has been that India lost the manufacturing battle, some say it wasn't even a competition, to China. This also gave fuel to the other valid discussions around the lack of job opportunities for tens of millions of Indians entering the employment arena every year, which itself feeds further into the possibility of social unrest that India can ill-afford. With India's creaky infrastructure, slow approval process, unpredictable tax and regulatory policy regimes, and infamous bureaucracy, this cause was all but given up. This could well be India's moment to address these head-on.
A concerted effort by the Indian Government and the Industry to actively seize a rightful place in global supply chains is the need of the hour. At the outset, this will require a mapping of the global customer universe, several of whom are likely waiting for an approach, to hone-in on a few “showcase” opportunities. This should be followed by a listening tour to pull-up a set of requirements that if delivered can make the shift into India even more compelling. We then need a way to get local resources to deliver on the key asks - possible that energising the old Special Economic Zones policy is a good place to start. Delivery on a promise of consistent, high-quality infrastructure will help clinch this move.
There are two other aspects to this discussion. The first is about the ongoing relief and stimulus asks on the Indian Government, to address the economic fallout from COVID-19. A way to address these is for the Government to consider pivoting into incentives that can help catalyse the creation of manufacturing hubs that can cater to these global sourcing opportunities. That way, it helps positively access newer business that make the incentives more than pay for themselves, and the resultant fiscal impact becomes very sustainable. Further, it also squarely addresses the job creation issue, which will get otherwise exacerbated in today's times.
The second is about capital. As highlighted in 'Nationalization of Capital', there is a real risk that capital allocation decisions of large savings institutions of the West will see a change in the medium-term, driven by the requirement for domestic investments in health infrastructure, to defease the fiscal deficit asks, and to aid domestic corporates. We have seen a start with the Australian Government last week permitting citizens to draw on their pensions, ahead of time, which in a way is an alternative to the Government providing the relief and monetising its debt, but essentially reflects the start of this trend. A cohesive case for Indian manufacturing can help make capital allocation decisions in India more strategic and commercially attractive. This will go a long way in fulfilling India's need for capital, which is and will remain a structural requirement.
Indian manufacturing has been looking for a fork in the road that it has been trudging on for years. The turn ahead seems to be one that India should utilise, to change the ongoing narrative decisively from one of gloom to one that talks of this game-changing opportunity. However, it will require serious effort and strong will to initiate the necessary structural reforms, as at the end of the day India will need to be competitive. Can India be the light this time, to lead the world out from the upcoming recession
B.V. Krishnan is the former CEO of KKR India Financial Services.
