Finance minister Nirmala Sitharaman last week spelt out a policy idea which government proposes to implement. It has three parts. First, it plans to identify multinational corporations which are shifting out of China, or intend to. Second, it will prepare a blueprint to woo them. Third, India will be sold as a preferable investment destination. As a statement of intent, it is important and welcome. The last couple of years have seen an intensification of trade friction between US and China. This throws up opportunities India must capture.
Multinational companies split production lines across national borders. This phenomenon, referred to as global value chains, has allowed some developing countries to leapfrog in the manufacture of some products. To illustrate, Vietnam is today the second largest smartphone exporter and produces about 40% of Samsung’s global mobile phone products. If India could, say, persuade Apple to make a significant number of its phones in this country, including for export, it is made as a manufacturing power. In this context, the Indian government needs to smartly direct its efforts to attract multinational companies as the potential benefits are huge.
There are two steps which need to be carried out simultaneously. From a long term standpoint India needs to carry out reforms to improve its competitiveness. However, as the window of opportunity is limited, government needs to have a policy to offset market failures to attract companies it is targeting. Much of East Asian success is on account of smart government strategy to deal with short term problems without losing focus on the need to relentlessly enhance long term competitiveness. The blueprint which government hopes to prepare should make it attractive for companies to ignore traditional challenges in India such as relatively poor infrastructure.
If India is to be marketed as preferable investment destination, there is no substitute for embarking on big reforms aimed at imparting flexibility to the factors of production. It is not easy for either Indian entrepreneurs or overseas companies to acquire land to set up large assembly lines. This needs to change. Further, Bangladesh’s success in footwear and apparel exports demonstrate the impact of labour market flexibility. Finally, India needs to lift caps on direct foreign investment limits in all sectors and also reverse the policy of tariff increases to protect domestic industry. These are strategies which have no place in the contemporary world, where the race is to capture a larger share of value addition in complex products.
Source: Times of India | TOI