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Can India Capitalize on the COVID-19 Opportunity

By Mohit Oberoi, CFA - Published 3 months ago - Last Updated 3 months ago 0 Comment
Can India Capitalize on the COVID-19 Opportunity
  • There is a lot of anger against China given its initial laxity in alerting the global community about the coronavirus.
  • Several US companies were anyways contemplating diversifying their supply chains from China after the US-China trade war. The Indian government took some steps to attract US companies looking at alternate supply lines. But then, can India capitalize on the opportunity.

 

India and the COVID-19 opportunity

As the saying goes, you can spot an opportunity in every threat. COVID-19 health pandemic is a threat to the entire world. However, we could see a big overhaul in global supply chains. The process had already started with the outbreak of the US-China trade war. However, the pandemic has exposed the vulnerability of overreliance on China. Add the wave of anger against China in the general population and many top leaders across the globe, and we have a perfect recipe for an overhaul of global supply chains.

 

The Indian government took cognizance of US companies’ desire to wean away from China. It offered the typical carrot and stick approach. On the one hand, it increased duties on imports of several goods from China. On the other hand, it offered incentives including a tax cut to new manufacturing units. The Indian government has also been investing in infrastructure that can support logistics. India’s ranking on the ease of doing business has improved greatly due to supposedly business-friendly policies.

 

So far so good

But then, that’s possibly the end of the good story. You need not be an expert to understand that tax rates and lack of quality infrastructure haven’t been the biggest bottlenecks for India’s manufacturing sector. It’s the uncertainty over policies. The triangle of policy uncertainty from the government, judicial overreach, and hyperactive civil society groups have worked to the detriment of the sector. One may argue that civil society and the judiciary are key pillars of democracy. But then, the overreach has not been beneficial for the industry and as an extension for the employment sector.

 

The government cannot only blame the courts and civil groups. Over the last two years, change in state governments has meant an almost U-turn in policies, at times even going back on previous agreements. Despite efforts to lower bureaucratic red tape, the opposite is happening. At least that is the feedback from most industrial units.

 

What would it need?

India would need to welcome foreign companies, especially in the manufacturing sector with open hands. It would mean tax exemptions and several other so-called benefits and would attract the wrath of opposition. But then, you have to take strong decisions. The Indian Prime Minister has built his reputation as a strong leader. However, he also had to buckle under pressure on the Land Acquisition Bill amid strong opposition. Sadly, in India subsidies for poor are the proverbial holy cow. But then, any talk of support (not even subsidy) to the industrial sector is frowned upon.

 

Looking at China’s example, massive state support over the decades is now paying back in the form of employment and higher taxes. Can India achieve the same feat? I have my doubts since the economy hasn’t been the top of the mind priority for the current administration. Globally, good economics is good politics. But in India, good economics has mostly been bad politics.

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