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Second, all countries are in the fray to leverage such a possible opportunity and hence there is a lot of competition in this space. Any strategy will have to take into account what other countries are doing. Third, the USA will be a different entity that the world will be encountering as the new regime is going to be tough on all countries from where imports are sourced.
Hence, while China has been singled out specifically, others will have to protect their own interests to begin with.
Last, post pandemic, several countries are looking to do more within their geographies as dependence on other nations for goods did prove to be a major barrier when the pandemic struck. All this means that a concerted effort has to be put in by not just the Government but also industry. The Government can at best support with facilitative policies.
How can Budget make India benefit
In such a situation, how does India go about the act of being a part of China plus one? To begin with there is a need to segregate exports into those which are largely final goods and those that are major inputs which come under intermediates. This will actually make the task easier when it comes to becoming a part of global supply chains. Final goods include products like readymade garments, electronic goods like mobile phones, automobiles, processed foods, etc.
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Those that come as intermediates would be engineering parts, auto ancillaries, chemicals, etc. Here the options are either investing in other countries or becoming a major supplier to the world. Investing in other countries through the subsidiary or joint venture route is an option which several companies are exploring and this is borne out by the outward FDI data.
Given this distinction, what can the Government do? Such a task is actually work in progress as it needs a series of facilitative policies over a period of 2-3 years which makes goods more competitive. This is important because SMEs contribute to over 40% of exports which needs more concerted effort from the Government as they are not in a position to push forth their products on their own. In this context, the budget could possibly take up some issues both from the point of view of general exports as well as the concerns of MSMEs.
The budget has already announced an outlay of Rs 2 lakh crore in 2020 as the PLI scheme which was to not only make 15 odd industries more competitive but also boost exports. There would be need to study as to why this has had limited success in industries like renewables-related and mobile phones and not really caught on in others. While this would admittedly take time, it would be compelling to have a PLI exclusively for MSMEs which are targeting products that are part of the high export buoyancy items so that the China plus one strategy can be supported.
Second, in the field of credit there is room for more announcements. The ECLGS scheme worked very well during covid and there would be some justification for having similar guarantee programmes for MSMEs to enable cheaper flow of credit. To this can be added an interest subvention scheme so that a direct subsidy is given for the MSME-PLI based industries. This can be a direct support just as is done for agriculture. This is important because countries like Vietnam are known to provide a large bouquet of subsidies to the garment industry in the form of zero taxation, free power, transport etc. These steps will definitely go some distance in supporting their export efforts.
Third, the old model of export processing zones could be revisited and revived to specifically focus on products which can be spelled out. A model of providing end-to-end solutions for these industries based on a cluster approach will be useful for the firms that are dealing with these products. This will also include, among other incentives, a single window clearance which cuts off bureaucratic delays.
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Fourth, the structure of customs duties could also be reviewed and altered downwards as it can be helpful to exporters. Alternatively, further announcements in the field of replenishment can be considered.
Fifth, the budget can think of reviving the credit rating of MSME enterprises which were quite successful in the past on account of the subsidy element. A rating helps to lower the cost of borrowing. Considering that GST has formalised the economy to a large extent, data availability is less of a challenge for doing such ratings. In fact, having a rating also nudges units to keep improving to move up the ladder.
While this can be the push given by the Government, the initiative has to come from the companies where they need to innovate and drive forward the agenda. China plus one does provide an opportunity for sure. But the final push has to come from Indian enterprises in this competitive environment.
(The author Madan Sabnavis is the Chief Economist at Bank of Baroda)
