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Reshaping supply chains: Vietnam takes the lead, but India positioned well for a larger role: Kearney’s Viswanathan Rajendran


India can play a significant role in reshaping supply chains and could contribute more than $500 billion annually to the global economy by 2030, according to a report put out recently by global consulting firm Kearney, together with the World Economic Forum (WEF).

Observing that the pandemic had led to a colossal shift within the manufacturing and supply chain sector globally, the report said the situation has paved the way for India to potentially become a global manufacturing hub. The country has three key assets to capitalise on this unique opportunity: a significant domestic demand potential, the government’s drive to encourage manufacturing, and a distinct demographic edge with a large working-age population. These factors will position India well for a larger role in global value chains (GVCs), it added.

The white paper aims to serve as a framework for deliberations and action in the manufacturing ecosystem. It presents five ways India can realise its manufacturing potential and build a thriving manufacturing sector. These five solutions are coordinated action between the government and the private sector; shifting focus from cost advantage to building capabilities; reducing trade barriers and enabling competitive global market access; reducing the cost of compliances and ease of doing business, and environmental sustainability driving the transition in GVCs.

Releasing the report, Viswanathan Rajendran, Partner, Kearney, said: “A thriving manufacturing sector could potentially be the most critical building block for India’s economic growth and prosperity in the coming decade. The Covid-19 pandemic prompted global corporations to rethink their supply chains. This rebalancing of global value chains presents India’s government and business leaders with a unique opportunity to transform and accelerate the trajectory of the manufacturing sector and transform India into a global manufacturing hub.”

In an interaction on the findings of the report, Viswanathan Rajendran spoke to ET Online about the key obstacles India needs to address soon. Edited excerpts:

Economic Times (ET): After Covid, as GVCs and global markets are increasingly showing interest in investing in the China-plus-1 strategy, do you think India’s manufacturing ecosystem is geared up to rise to the occasion?
Viswanathan Rajendran (VR):
The US-China trade wars led to a decline in China’s manufacturing exports to the US. In 2018, China held a 65% share of US imports from Asian low-cost countries (LCCs). By Q4 2019, China’s share had dropped to 56%–a significant drop within the course of a year. Of the $31 billion that shifted from China to other Asian LCCs in 2019, almost half (46%) was absorbed by Vietnam, a fourth (27%) by Malaysia, and only 10% moved to India.

The Covid-19 crisis is potentially a catalyst to further accelerate this trend. One outcome of the crisis has been an accelerated rebalancing of supply chains, with organisations looking to build a resilient and diversified manufacturing footprint. Japan has already earmarked $2.2 billion to help its manufacturers shift production out of China. Companies across the US, Europe and South Korea are looking to diversify their footprint as well.

It would be fair to say that India mostly missed the benefits of the 2018-2019 shift out of China–with Vietnam capturing most of those flows. However, from a long-term view, India has an excellent window of opportunity to better capitalise on the ongoing shift.

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Viswanathan Rajendran, Partner, Kearney.

When analysed by sector, the Indian manufacturing ecosystem’s competitiveness could be viewed in four distinct clusters: sectors where our manufacturing ecosystem is already globally competitive, and well geared up to rise to the occasion, such as pharma, specialty chemicals, agrochemicals, gems & jewellery; sectors where the PLI (production-linked incentive) schemes are now creating an advantageous position for Indian manufacturers, such as mobile phones, electronics, technical textiles; sectors where underlying structural issues (infrastructure, regulation, cost of compliance, etc.) will need to be resolved for our industry to emerge as globally competitive, such as apparel, defence, industrial equipment; and sunrise sectors where India can compete for an early mover advantage, such as green technologies, new mobility.

ET: In terms of reducing the cost of compliances and ease of doing business on the ground, do you think India is now doing a satisfactory job vis-à-vis its peers?
VR:
In an absolute sense, we have improved considerably in recent years. Between 2016 and 2020, India jumped from 130th to 63rd position on the World Bank’s Ease of Doing Business Index. The country has been one of the top 10 improvers for three consecutive years and has made notable progress in four of the index’s 10 parameters: dealing with construction permits (from a ranking of 183 in 2016 to 27 in 2020), trading across borders (from 133 to 68), resolving insolvency (from 136 to 52) and getting electricity (from 70 to 22).

However, the journey is far from over. In some ways, the path forward is tougher than the journey of the past five years. A lot of the action in recent years has been top down and driven by a very well-coordinated set of actions by the central government.

However, for us to gain a meaningful competitive edge in the global marketplace, we need a continued push to further reduce the cost of compliance and improve ease of doing business. Recent estimates suggest that between central and state regulations, as many as 1,536 acts apply to companies, generating 69,233 compliances and around 6,000 filings.

For labour alone, companies often maintain 42 different registers, with another five or six for wages. A mid-sized company will potentially deal with between 5,000 and 10,000 compliances each year, while a small firm — with one factory and up to 500 employees – must have approximately 23 licences, must abide by over 750 compliances and must submit roughly 120 filings a year. This administrative maze comes with a heavy cost burden, with last-mile inspections being a significant source of unpredictability and disillusionment for businesses.

Along with the simplification of the compliance framework itself, India will also need a change in attitudes and mindsets at the ground level — especially regarding last-mile inspections and approvals by the on-ground bureaucracy.

ET: The Kearney-WEF study calls for formalising MSME firms. Among MSMEs, micro firms account for over 99% of the total, said the Annual Report of the Ministry of MSME 2018-19. Micro enterprises also generate 97% of the employment in the MSME sector. This means micro firms have failed to grow into smaller and medium firms over time. Do you think India is on solid footing now to change that?
VR:
MSMEs are the backbone of the Indian economy. India has traditionally placed substantial emphasis on a strong and thriving micro, small and medium enterprise (MSME) sector. Given India’s substantial population, MSMEs are a critical priority and should continue to be a focus for future policymaking.

However, India’s next wave of manufacturing growth will increasingly need to be driven by large and mid-sized companies. To date, India has lacked global magnitude, indicated by its showing in the Fortune 500 list. Despite having the sixth largest manufacturing output in the world (at about 3%), India lags several other nations, including smaller countries such as the Netherlands and Switzerland, on the Fortune 500 listing, with only seven large global-scale companies. This is particularly true for private-sector manufacturing. Of the seven Fortune 500 companies in India, four are oil and gas enterprises, one is a public-sector bank and only two are manufacturers (Tata Motors and Rajesh Exports).

Large, global-scale corporations can help India compete better on the global stage, with a better ability to innovate, automate and maintain quality standards. Large corporations can be engines of economic growth and job creation and can provide an umbrella for the scaling of thousands of MSMEs. The auto industry in India is a classic example where select large OEMs have helped catalyse a vibrant MSME ecosystem.

With this context, India really needs dedicated policy attention to grow large companies. As an extreme example, China leads the Fortune 500 listing with 124 companies, with 82 of these being state-owned enterprises that enjoy considerable policy and administrative support. While the China model of state ownership is an outlier, the learning for India could potentially be that focused government support can help larger companies grow faster, gain competitive advantage, create jobs and kick-start a positive economic cycle.

In summary, the government should continue its current focus on helping the MSME sector formalise, scale and evolve. However, what we really need as a new pillar in Indian policymaking is a dedicated focus on supporting our large corporations. The PLI schemes mark a welcome step in this direction and are already delivering substantial results in sectors like mobile phone manufacturing. A continued portfolio of initiatives to further support our large corporations could definitely provide a direct — and, so far, under-explored — boost to the MSME sector.



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