We can certainly address the low-hanging fruit. There’s no need to import coal or any product that is labor-intensive which we have it in abundance, said Amar Ambani for Yes Securities
Being ‘Atma Nirbhar’ is certainly desirable to provide fresh legs to the slowing economic engine, which now needs manufacturing and exports to step-up. Self-reliance is also required to preserve our capital reserves, maintain rupee stability and guard against global supply disruptions like seen in COVID.
The opportunity has once again presented itself with the world wanting an alternative to China. But we’ve missed many opportunities in the past, so one shouldn’t be counting their chickens yet.
While the government looks determined this time, a complete shift to local manufacturing seems highly improbable. There are many constraints, some natural, others technological and some pertaining to scale.
In the case of crude oil, for instance, nature is a constraint. Oil and its derivatives are key raw materials in most production processes, but we must import them because we aren’t blessed with this resource.
Technology is another constraint. High-tech knowledge is built over decades and cannot be replicated overnight. India will have to continue to rely on imports for chip technology, nuclear reactors, TV and mobile display panels, high-end defence equipment, and so on.
Another constraint is from scale elsewhere, which carries the advantage of the lower cost of production – China’s scale achieved due to cheap credit, tax concession, subsidies in power, and lower operational barriers for the manufacture of solar panels, compressors, chemicals, among others gives it a supreme advantage.
Elaborating on the chemical industry as a case in point, India depends on key starting materials from China to make its API. Take Dengue API, for instance - the key starting material comes from a corn crop extract, which China has in abundance.
The cost of this input is quite low in the final product for anyone to consider backward integration. India can raise import duty but that creates its own challenges. If India, say, raises duty on solar panels, it will slowdown pace of solar power Capex, and government’s ambitious renewables target will not be met.
Not all is lost though. Firstly, we can certainly address the low-hanging fruit. There’s no need to import coal or any product that is labor-intensive which we have it in abundance.
The government has rightly allowed commercial coal mining. Then, there are niche areas like spices, ayurveda, where India has an advantage, and that have been outlined in the Finance Minister’s stimulus announcement.
Finally, there are low-to-mid end products and assembly of goods like electronics, where India does have a considerable scope. The scale constraint can be addressed over-time.
Identification of certain products for localization, followed by offering land and clearances, subsidies, etc., are steps to go local in the medium to long term. These cannot be achieved any sooner due to India’s budgetary constraints.
India can be successful in getting global facilities to relocate here. But for this, it must offer a plug-and-play ecosystem.
This would mean assigning land upfront, pre-clearances, linkage to raw material, infra development around the area, and tax-concessions like an SEZ. The government must also comfort on policy stability.
For now, manufacturers prefer countries like Cambodia, Vietnam, Indonesia that provide a red-carpet welcome. At least on the corporate tax front, India has plugged the gap but there’s still a long way to go.
Amendment made to electricity act to enforce contracts, higher duties and labour relaxations are a decent start. It will be a 5-year plan, but it’s worth the effort.
(The author is Senior President and Head of Research – Institutional Equities, YES Securities)Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.