Yesterday, we took a look at how China makes it difficult for supply chains to move away from that country. That happens through a combination of mind-boggling scale and efficiency, coupled with astute moves up the ladder in terms of no longer dealing with just cheap manufacturing. Think robotics, app development, advanced and skilled manufacturing units. After that, the gravity model takes over, and well, good luck moving out of China.
Today, we ask the following question: let’s assume that all that is somehow put to the side, and a country is looking to move out of China. What are the chances this firm will come to India?
Again, we’ll use Gulzar Natarajan’s excellent article as the basis of our discussion, and foray into other parts of the internet. Let’s begin:
First, a quote from within Gulzar Natarajan’s post:
“Nomura Group Study found that in 2019, out of the fifty-six companies which shifted their production out of China, only three of these invested in India; while 26 went to Vietnam, 11 to Taiwan, and 08 to Thailand. In April 2020, Nikkei noted that out of the 1,000 firms which were planning to leave China and invest in Asian countries, only 300 of them were seriously thinking of investing in India.”
300 out of 1000 isn’t great, you might think, but it’s not bad, surely. Well, read again: it’s “seriously thinking”, not actually relocated. If you want to take a look at action, not thoughts, it is 3 out of 56. About 5%.
Why?
Let’s begin with this tweet:
And here’s (to my mind) the most interesting quote from within the editorial:
“The situation is far worse when it comes to comparisons with China in the EoDB. It takes double the time to start a business in India as compared to China, around six times as much to register property and double the time—and also in terms of the value of the contract—to enforce a contract. And, this is without even looking at the policy flip-flops that this newspaper catalogues diligently.”
The real measure of success when it comes to the Ease of Doing Business ranking is not how far we’ve come, but far we have to go. And it’s going to be a long haul.
This article, which I got from reading Gulzar Natarajan’s post, is instructive in this regard.
Sample this:
““Navigating labour laws is a total mine-field because interpretation is left to the courts and the officers and can be done in more than one way and removing an incompetent worker is not easy,” Gopal said. “I can get a divorce faster than removing a factory worker for non-performance.” In Karnataka, an employer would have to give three warning letters, a show-cause notice, have two inquiries — one external and one internal, and then terminate an employee only if the charges are proved to be serious. “Theft is considered serious but if an employee is lazy and doesn’t perform, that may not be taken as serious,” Gopal says. “In one’s own company, one cannot hire and fire.””
This article is just about furniture, but there are similar problems in every single sector in India.
To which, usually, there are two responses:
- Yes, but we have to start somewhere, don’t we?
- Yes, but we’re so much better than we were before!
Yes, sure, in response to both of these statements. But keep in mind that firms who are looking to move here are not going to ask if we’re better than we were before. They’re going to ask if we’re better than our competition today. Are we better than Vietnam, for example? What about Bangladesh? And if the answer is no, why should firms come here?
For our domestic market isn’t (yet) a good enough answer, unfortunately.
Our domestic consumption wasn’t large enough or lucrative enough for firms to locate themselves here before the pandemic – it’s obviously reduced since then.
And bureaucracy (not to mention bureaucracy-speak!) has gone up:
“On Sunday, for instance, the home ministry issued a clarification intended perhaps to limit the numbers of those who would be allowed to travel to their villages to a category called ‘genuine’ stranded migrants. The letter from the Centre to chief secretaries in the state administrations reads: “The facilitation envisaged in the aforesaid orders is meant for such distressed persons, but does not extend to those categories of persons, who are otherwise residing normally at places, other than the native places for purposes of work, etc. and who wish to visit their native places in normal course.”
I think I am reasonably good at English, but I still don’t know what this means. Even if I were to understand it, I do not know how I would go about implementing it! And that’s me, a guy who teaches using the English language for a living, and writes a blog in the English language. What chance does a manufacturer have? What chance does a non-Indian manufacturer have?
Government, in plain simple terms, has to get out of the way. Unfortunately, we seem to be heading in the opposite direction.
R Jagannathan writes in the Livemint:
“Companies compete, while governments can only enable. Governments cannot create global champions, though mercantilist countries like Japan, South Korea and China did do so at one point. What governments can do is create an enabling policy and regulatory environment that fosters economic growth and lets companies scale up. Airtel and Reliance Jio did not emerge as India’s two big telecom survivors because the government anointed them as winners. Nor did TCS, Infosys and Wipro become global outsourcing giants because of the government. They became global biggies because the policy environment for their growth was positive both in India and abroad.”
I might wish to disagree with parts of that excerpt (Studwell alert!), but I am in complete agreement with the broad message:
“The government holds the lock but not the keys to Atmanirbhar Bharat. As long as the lock is well oiled, companies will find the keys on their own.”
As of now, though, the lock is far too rusty, far too old and far too much like a pre-1991 model.
EconForEverybody 
Sir, a very well thought-out piece. However, I’m not sure if I agree with the idea that the labor laws in the country are harmful only to the businesses. If you follow Jan Bremen’s research it clearly shows that labor in India is quite footloose. And the stringency of the laws is disadvantageous mostly with white collar jobs. He calls it ‘footloose labor’ and contract work is on the rise too in the informal economy which makes up majority of workers.
I understand that labor costs are only a part of the business costs but considering this point of view, shouldn’t India have a comparative advantage in labor costs.
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Thanks for reading, Rohan, and the great question.
My response would be that given all of what you said in isolation, yes, indeed India should have a comparative advantage in labor costs. But when you take into account our management practices or lack thereof, we find ourselves unable to make use of what ought to be our greatest strength. Y is not just a function of L,K in other words – it is a function of L,K and it’s management.
See this, for example: https://www.povertyactionlab.org/evaluation/increasing-firm-productivity-through-management-consulting-services-india
I haven’t read Jan Breaman’s work in years! Thank you for reminding me, I’ll dip into it again 🙂
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