India and the New Normal

After a long long time we have non-polluted fresh air outside our homes but unfortunately government has made masks mandatory.  And masks will be here for sometime to stay even after lockdown.  While we are getting used to the new normal of breathing fresh air through re-used masks, there are lots of other new normals (working from home, digital business, managing with less, etc) that excites the Indian middle and rich class.  One of them is dethroning China as the manufacturing hub of the world and take a substantial share of it to improve our economic power.

WhatsApp, Telegram and Facebook posts are rich with China bashing and are busy breathlessly discussing how this pandemic is an opportunity for India given the frustrations of International community with China.  Seems like there is no doubt that large international companies like to move out of China to de-risk their supply chains.  But the questions are - is it so easy, how soon and where will they go next if out of China?

No doubt this is an opportunity for India.  But also for Bangladesh, Vietnam, Malaysia, Thailand and many other similar countries across the globe that are equally hungry to pounce upon the same opportunity. What are India's chances of bagging a bigger share of the pie?

For CEO's of Samsung, Apple, Toyota and the like, the immediate challenge is to restore the broken supply chains.  De-risk is more of medium to long term priority. Reviving production lines and supply chain is "here and now" question.  Given the eco-system China has built, it provides immediate short term answers.  There is little choice.  True, expansion plans of either contract or own manufacture by these companies will be put on hold.  But in reality, it will anyway be put on hold given the demand contraction over the next 4-6 quarters.   With GDP likely to go negative for most countries except China and India, global CFO's will look at Capex proposals after may be 3 quarters from now. So any shift or creation of new capacity will happen only later than sooner.  Until then Chinese contract manufacturers will still rule just like in the case of masks and PPE even if defective.

If we have 6-9 months to attract new investment what should India do? For an answer one has to look at why did global companies chose China over India or any other country?  The answer is simple - Speed and Efficiency.   The speed at which you can get something up and running and cost at which you can produce stuff.  It also helped that China has a big market although over time it showed no respect to patents and copyrights by producing cheap copycats.  The lure of money was so strong that strength of other countries in terms of Democracy, human rights, English speaking skills, respect for international patents and copyrights all got buried.   In the business world what really matters is speed and efficiency with access to a huge market as icing on the cake.  I doubt if this pandemic is going to change such a fundamental aspect of business.

A whole ecosystem has to work in tandem to get speed and efficiency.  Efficient ports that clear goods in hours (not days or weeks), excellent road network (no potholes and doesn't get choked at check posts and tolls), skilled and cheap labor, easier labor laws, simpler Government regulations and controls (ruthless reduction of bureaucracy to start, operate and close business enterprises), decent public commute systems, stable and attractive tax regime (no retrospective amendments please), fast and fair legal dispute resolution mechanisms that work, (not the kind of lawyers delight and litigants nightmare systems), reciprocal access to a large market, so on and so forth.  It is clear that we are way behind, because if we had this already companies wouldn't have gone to China in the first place.  Are we ready to build this kind of ecosystem? And can we build something better than what other countries have to offer? How soon can we build this?

We were bold enough to start a war on two fronts simultaneously (1971), initiate breathtaking economic reforms in the nineties (agreed it was motivated by fear of nation going bankrupt), undertake demonetisation (agreed results were questionable), roll out GST (agreed we could given a better experience to all stakeholders), bring in Aadhar to check leakage of Government subsidies (agreed there are issues with privacy), carry out surgical strikes in response to senseless terror attacks (agreed some within India dispute if we really hit the targets) and go for a country wide lockdown with a population of 1.3 billion (agreed it was messy but other countries look at India with wonder).

Same boldness is needed to build an ecosystem that can guarantee speed and efficiency. It means make it possible to acquire land for infrastructure and Industrial projects in weeks (not years), ruthlessly cut the bureaucratic regulations and size of the government by 50% and divert the savings to increase spending on infrastructure (Ports, roads, railways, Public transport, Education) and healthcare by 10 to 100x, simplify labor laws (except minimum wages and protection of women employees repeal all other laws), reform legal systems (decisions in months not years or decades - we inherited the British systems but they decide their cases much faster whereas we take decades unless some political big shot is involved) and a tax system that is trustworthy.  If we can make it easy to build, operate and close a business why will foreign business not come here? All this is not new but we simply have not shown will power and sense of urgency to make it happen.

Assuming we build such an ecosystem don't expect to China to sit and meditate.  They will hit back strongly - cut access to their market, make it expensive to close the existing operations, make forex controls even more stricter, restrict their citizens from splurging money abroad, ruthlessly enforce debt obligations on countries that are already neck deep in Chinese debt, etc.  They are already buying up stocks in global companies and will soon demand seats on the board to influence corporate decisions.  Let's acknowledge that Chinese war chest is huge.

But first step is to build a strong ecosystem within India that can sustain global commerce.  Once we have global companies as part of that system we will have allies to fight the economic war with China.  Without the ecosystem there is simply no chance.

Each of the bold measures taken in the past (except the war in 1971 and the current lockdown) took years and years of debates, arguments, agitations and what not.  (There are plenty of examples of a reform being fought tooth and nail when in opposition and once the same party was elected to power the reform was just implemented.)  It is because none of our politicians have mastered the art of building political consensus.  Except during war, nation never comes first to our politicians.  But today's war is not just about defeating a virus.  It is about economic power.  Whoever wins this war wins all other wars.  In the current situation China has the edge over Europe and US.  If India has to matter then political consensus in speedy economic reforms is the need of the hour.  If we can demonstrate speed and efficiency in this space it will encourage foreign companies to set up and run their businesses out of India giving us much needed employment, GDP and some economic power.  Otherwise we will continue to enjoy the leftovers while new normal just passes by.