Magnets for manufacturing

Paper:

Mains: General Studies-III: Technology, Economic Development, Bio diversity, Environment, Security and Disaster Management

Context:

  • Many American, Japanese, and South Korean companies based in China have initiated discussions with the Indian government to relocate their plants to India. Companies are expected to exit China due to three primary reasons.
  • The first is the realization that relying heavily on China for building capacities and sourcing manufacturing goods is not an ideal business strategy due to supply chain disruptions in the country caused by COVID-19.
  • The second is the fear of Chinese dominance over the supply of essential industrial goods.
  • The third is the growing risk and uncertainty involved in operating from or dealing with China in the light of geopolitical and trade conflicts between China and other countries.

Why are companies exiting China?

  • Countries have come to realise that relying heavily on China for building capacities and sourcing manufacturing goods is not an ideal business strategy due to supply chain disruptions in the country caused by COVID-19.
  • Fear of Chinese dominance over the supply of essential industrial goods persists.
  • There is a growing risk and uncertainty involved in operating from or dealing with China in the light of geopolitical and trade conflicts between China and other countries, particularly the U.S.

Can India succeed in attracting manufacturing firms and jobs from China?

  • While China ranks first in contribution to world manufacturing output, India ranks sixth.
  • India’s share of manufacturing in Gross Domestic Product (GDP) stood at 15% in 2018. This is only half of China’s figure.
  • Industry value added grew at an average annual rate of 10.68% since China opened up its economy in 1978. In contrast, the manufacturing sector has grown at 7% after India opened up its economy.
  • In 2018, with the world share of 18%, China was the largest exporter of manufactured goods next to the European Union. India is not part of the top 10 exporters that accounted for 83% of world manufacturing exports in 2018.
  • Compared to China, India faces numerous constraints in promoting the manufacturing sector.
  • There are infrastructure constraints, a disadvantageous tax policy environment, a non-conducive regulatory environment, high cost of industrial credit, poor quality of the workforce, rigid labour laws, restrictive trade policies, low R&D expenditure, delays and constraints in land acquisition, and the inability to attract large-scale foreign direct investment into the manufacturing sector.

Way forward:

  • Unless the challenges are effectively addressed, the dream of making India a manufacturing powerhouse rivalling China would be difficult to realise.
  • An important requirement for the development of the manufacturing sector is the availability of land area.
  • Andhra Pradesh, Bihar, Chhattisgarh, Madhya Pradesh, Odisha, Rajasthan, Telangana, and West Bengal – the States that have large land area but contribute disproportionately little in manufacturing GSDP must be encouraged to scale up manufacturing activities.
  • Strong and carefully designed policy actions on the part of individual States would improve India’s overall investment climate, thereby boosting investments, jobs, and economic growth.
  • In addition to its initiatives aimed at attracting manufacturing companies looking to relocate their plants to India from China, the Centre has urged the States to evolve their plans.
  • Since India follows a federal government system, a lasting solution to these constraints cannot be possible without the active participation of State governments.
  • Effective policy coordination between the Centre and the States is essential.
  • The need of the hour is to instil teamwork and leverage ideas through sharing the best practices of the Centre and States, across the manufacturing sector.