The last week was eventful. While the Adani Group companies grappled with a short-seller’s report, we also had a Union budget with a huge outlay for infrastructure and manufacturing. India has lacked in this space for the last many years. But things are moving. Since April 2020, the BSE Manufacturing Index has given a return of 108% while the Sensex has returned 114% for the same period. While there is an underperformance, the movement is in the right direction.
The Adani Group has become one of the big business groups for building ports, airports, energy and even getting into agriculture and commodities. In a way, India is following a model that many South Asian countries have imbibed where they helped certain business groups by cutting imports and at the same time maintained healthy competition. While their focus was exports and manufacturing, India is concentrated on exports of services.
What can we learn from these countries?
The first export processing zone (EPZ) in India started in 1965 in Kandla -- same time as Kaohsiung EPZ in Taiwan. But while India had a good start, clearly China, Taiwan and South Korea decided to go for exports in a big way. Today, the world largest semi-conductor foundry is in Taiwan. China and South Korea are big exporters in hi-tech and automobiles.
They got their strategies, and more importantly, their scale right. For example, the Kandla SEZ and the Andheri SEEZ were 2.8 sq km and 0.4 sq km, respectively, in size. The Shenzen SEZ in China at the start had size of 327 sq km. As these countries built policies to protect their industries to some extent, they also maintained healthy competition. Their export profiles changed from textiles to hi-tech goods. However, while they kept improving on the export front, they were clearly focused on adult education and creation of female workforce.
All these countries had to face challenges. South Korea started with a disadvantage after they parted with North Korea as 90% of the electricity-generation capacity and most of the heavy industry was based in North Korea. Then Park Chung-hee came along and changed the country’s fortunes. During his regime banks were nationalised but exports got incentivised. Exporters got loans at lower interest rates. Chung-hee was also responsible for the rise of the Korean cheabols like Samsung and Hyundai. But South Korea also focused on results than simply making friends with large industrial groups. In the later part, the country focused heavily on education.
Similar is the case with China where the government gave freedom to enterprise and growth through exports was sought. Again, there was an EZP. In 1980s, China was exporting textile but by 2002 it had replaced Japan and Europe to become the largest hi-tech goods supplier. All these countries used tariffs to discourage foreign goods in their market.
India got its services right when it came to exports. Now, the country wants to be a manufacturing hub. What can we learn from Asian countries that have been successful in this area?
Let’s take a deep dive.
The pharma dependency
We do not want to experience a Covid-19-like situation again. Of the many remedies used, sometimes after much debate on efficacy, there was wide use of azithromycin to treat Covid-19. Without getting into that debate of whether it was useful or not, what would your reaction be if I said that India is dependent almost completely on China for the active pharmaceutical ingredient (API) for azithromycin, a common antibiotic that finds its way into many prescriptions? Not only this medicine but multiple others like digoxin for cardiovascular disease and metformin for diabetes have a high dependence on China.
Why so? The reasons can be traced to around 40 years ago in the case of China. You will probably be surprised to know that India’s GDP was very similar and the per-capita income levels in China were 25% lesser than those of India in 1980, around the time they executed reforms in 1978. As of 2021, China’s GDP and per-capita income are 5.5x of India’s. China leapfrogged past India. It planned for dominance in multiple areas and had good success too.
Why should we look at the past now?
India is going through its own push towards manufacturing. One reads about an announcement here and a policy change there. History rhymes even if it does not repeat. What is the big picture for India?
One of the government initiatives in the past few years is the production-linked incentive (PLI) scheme. There are various targeted sectors including medical devices, auto components and batteries for electric vehicles. India is attempting to claw back. One PLI scheme has also been rolled out for key starting materials (KSM), drug intermediates and API. The reasons are simple. India is a leading formulations supplier to the world but heavily dependent on China.
To understand the scale of China’s dominance and what India would like to wrest away bit by bit, see the graphic below.
Read More at https://economictimes.indiatimes.com/prime/money-and-markets/india-wants-to-become-the-manufacturing-hub-what-it-can-learn-from-china-taiwan-and-south-korea/primearticleshow/97742928.cms
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