Coronavirus – Economic Issues

India’s challenges in maintaining its viability against competitive economies

Note4Students

From UPSC perspective, the following things are important :

Prelims level : Not much

Mains level : Paper 3- Relocation of supply chains and challenges India faces

The article deals with the challenges India faces in attracting the relocating supply chains in the wake of the pandemic.

Is China losing its appeal

  • Some labour-intensive industries, such as textiles and apparels, have been moving to Bangladesh and Sri Lanka as labour costs in China are increasing.
  • But trends in other industries show that businesses have mostly remained in China.
  • COVID-19 crisis has resulted in firms establishing relatively small-scale operations elsewhere.
  • This is perceived as a buffer against being completely dependent on China, referred to as the ‘China +1’ strategy.

3 Reason for firms to remain in China

  •  1) Starting an enterprise and maintaining operations in China are much easier than elsewhere.
  • 2) Chinese firms are nimble and fast, which is evident from the quick recovery of Chinese manufacturing after the lockdown.
  • 3) Many global companies have spent decades building supply chains in China, getting out would mean moving the entire ecosystem.

3 Challenges facing India

  • This has led to intensification of competition among Asian countries to be ‘plus one’  in the emerging manufacturing landscape.
  • India faces three challenges in this race.

1) Increasing domestic public investment

  • First is the task of increasing domestic public investments, which have implications for both demand and supply sides.
  • In India, even before the pandemic, the growth in domestic investments had been weak,
  • This seems to be the opportune time to bolster public investments as interest rates are low globally and savings are available.
  • Private investments would continue to be depressed, due to the uncertainty on the future economic outlook.

2) Reforms in trade policy

  • India needs a major overhaul in her trade policy world trade had been rattled by tendencies of rising economic nationalism and unilateralism leading to the return of protectionist policies.
  • A revamped trade policy needs to take into account the possibility of two effects of the RCEP:
  • 1) Walmart effect: It would sustain demand for basic products and help in keeping employee productivity at an optimum level, but may also reduce wages and competition due to sourcing from multiple vendors at competitive rates.
  • 2) Switching effects: It would be an outcome of developed economies scouting for new sources to fulfil import demands, which requires firms to be nimble and competitive.
  • Trade policy has to recognise the pitfalls of the present two-track mode, one for firms operating in the ‘free trade enclaves’ and another for the rest.
  • A major fallout of this ‘policy dualism’ is the dampening of export diversification.
  • The challenge is to make exporting activity more attractive for all firms in the economy.

3) Increasing women’s participation in labour force

  • While India’s GDP has grown by around 6% to 7% per year women’s labour force participation rate has fallen from 42.7% in 2004–05 to 23.3% in 2017–18.
  • This means that three out of four Indian women are neither working nor seeking paid work.
  • Globally, India ranks among the bottom ten countries in terms of women’s workforce participation.
  • When Bangladesh’s GDP grew at an average rate of 5.5% during 1991 and 2017, women’s participation in the labour force increased from 24% to 36%.
  • India could gain hugely if barriers to women’s participation in the workforce are removed.
  • The manufacturing sector should create labour-intensive jobs that rural and semi-urban women are qualified for.

Consider the question “Relocation of supply chains offers an opportunity for India. However, it faces several challenges in attracting these relocating supply chains. What are these challenges? Suggest measures to deal with these challenges.”

Conclusion

India’s approach to the changed scenario needs to be well-calibrated. The stage is set for a new ‘Asian Drama’. What will be India’s role in it? Well, it will not be on the basis of past accolades, for sure.

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