In the first part of this conversation with Unravel, Priyanka Kishore, Head of India and South East Asia, Macro and Investor Services at Oxford Economics, spoke about the impacts of COVID-19 on the Indian economy and the factors pointing to a potentially impressive rebound for India in the near term as the vaccine becomes more widely available.
In this second part, she speaks about India’s recent economic policy choices. Ms Kishore shares her insights on India’s seemingly deepening inward economic stance, and whether or not multinational firms relocating from China will choose the country as a viable alternative. Meanwhile, India’s decision to exclude itself from the Regional Comprehensive Economic Treaty (RCEP) suggests the country’s closer focus on bilateral agreements. Of particular concern, however, is the autonomy of some of India’s key policy making institutions as suggested by the departure of two Reserve Bank of India (RBI) governors in quick succession, and that of several technocrats.
Unravel: As the pandemic spread across the country, India declared a focus on self-reliance. What is your assessment of the move to become more self-reliant? What is the economics behind it?
Priyanka Kishore: Atmanirbhar Bharat, first introduced by Prime Minister Narendra Modi in May 2020, attempts to redefine India’s manufacturing strategy and revive the Make in India programme (launched in September 2014) that has failed to deliver any meaningful results so far. The underlying sentiment is to reduce India’s import dependence by boosting domestic manufacturing, particularly in sectors like electronics and defence, and also position the country as a serious contender for supply chains potentially relocating out of China.
Two key schemes have been announced to realise this vision – the Production Linked Incentive Scheme (PLIS) and Scheme for Promotion of Manufacturing of Electronic Components and Semiconductors. The PLIS, while not a reform in itself, is an important fiscal incentive that could impart a significant boost to manufacturing and investment in principle. That said, prior manufacturing pushes have faltered due to supply bottlenecks, financing issues and local content regulations that boosted production costs. In general, the government’s poor track record of executing its plans raises implementation risks.
Unravel: For some time now, there has been talk of companies moving manufacturing out of China. India was expected to be one of the beneficiaries, but things haven’t panned out that way. Why do you think this is?
Ms Kishore: It is true that surveys on potential relocation of supply chains from China have repeatedly mentioned India as one of the likely destinations. India has a large domestic market, sizeable labour pool and still competitive manufacturing costs in its favour.
Yet, outside of one-off deals, FDI in manufacturing continues to languish. This is because India fares poorly on most non-cost parameters, such as factor market rigidities, the level and quality of infrastructure and regulatory certainty. These lower its appeal as an investment destination.
These are not new issues. India’s industrial malaise can be traced back to ill-judged policies of previous decades, aggravated by the persistent balance sheet stresses of the corporate and financial sectors since 2010. The Modi government has made some efforts to improve the situation, such as easing administrative bottlenecks, attempting to simplify the tax regime and lowering the corporate tax rate to globally competitive rates.
The government has made some important announcements with an eye on medium- to long-term growth prospects in 2020. It is encouraging to see the focus shift back to economic matters after prioritising social issues in 2019.
While these initiatives do help, they are not game changers. The government is yet to bite the bullet on big bang reforms, including crucial land and labour reforms, that were central to its 2014 election campaign. Despite the jump in the Ease of Doing Business rankings, contract enforcement remains a thorny issue for India. Additionally, the government needs to make its intentions regarding foreign investment clearer. While New Delhi’s self-reliance message seems more targeted towards trade rather than capital flows, investors will be hesitant to relocate their production lines to India if they perceived the industry to be turning more inefficient due to high import barriers and regulatory uncertainties.
Unravel: In the same vein, the RCEP has recently been concluded, without India. In your view, does India’s decision to withdraw from the trade pact have merit?
Ms Kishore: The common rules of origin under RCEP do boost the bloc’s attractiveness as a supply chain destination and that poses a challenge to India’s ambitions of attracting supply chains relocating out of China. Schemes like PLIS may provide temporary respite. But until India focuses on improving the manufacturing sector’s competitiveness, it remains at a disadvantage with regard to regional value chains.
Eventually, such concerns may lead to a rethink in favour of joining multilateral trade pacts. But I don’t see that happening anytime in the foreseeable future. The inclination is clearly towards bilateral trade agreements, where they have more flexibility in negotiating terms that they feel will not disadvantage domestic manufacturers.
Unravel: How would you assess India’s social infrastructure (health and education in particular) provision and delivery, and do you see these as an impediment to foreign investment into the country?
Ms Kishore: Improving human capital is imperative for raising productivity. It is no secret that India’s pupils are the least well educated of the main emerging economies, judged by average years of schooling. India needs to invest in its people through not only better and appropriate education, but also improved healthcare facilities and nutrition. Once adequately skilled, the vast rural labour force could provide a renewed cost advantage to Indian industries. Although India has not undertaken widespread agricultural reforms like China, a significant proportion of India’s rural population is employed in the non-farm sector, subsisting on seasonal or part-time jobs. Policymakers can focus on this segment to augment low-cost industrial labour supply, while grappling with the bigger question of reducing the share of agriculture in employment. Of course, this transition has to be accompanied by proper urban planning, to avoid the multiplying of urban slums.
Unravel: What should the Indian government focus on to arrest the decline in its growth forecasts?
Ms Kishore: The government has made some important announcements with an eye on medium- to long-term GDP growth prospects in 2020. It is encouraging to see the focus shift back to economic matters after prioritising social issues in 2019. However, they are a mixed bag in terms of their growth impact and are plagued by implementation risks.
Outside of one-off deals, FDI in manufacturing continues to languish. This is because India fares poorly on most non-cost parameters, such as factor market rigidities, the level and quality of infrastructure and regulatory certainty. These lower its appeal as an investment destination.
The government’s already mixed track record on this front is likely to have been weakened further by recent social and institutional developments. The Citizenship (Amendment) Act of 2019 sparked divisive protests last year as it was perceived as non-secular by some. Meanwhile the unexpected departure of a second RBI governor in 2018 alongside other senior technocrats from different government offices raised questions about the independence of key institutions, such as the central bank and the nodal statistical agency. Such matters detract from the state’s capacity to focus on economic policymaking and make it harder for authorities to effectively roll out policies.
Hence, the key is now to stay on track on economic reforms and equally importantly, use its resources effectively to improve its policy implementation performance.
* The first part of the conversation focused on the impacts of the pandemic on the Indian economy and the government’s economic response, and can be read here.
Priyanka Kishore has more than a decade’s experience in macroeconomic research and forecasting across emerging markets, with a special focus on India and ASEAN. She currently leads Oxford Economics’ Singapore Global Macro Services team and is responsible for overseeing the firm’s South and South East Asia research.