From China to New Delhi

From China to New Delhi

Authored by : Dr. Vinod Surana – Managing Partner, Anshul Rawat & R Soundararajan – Associates, Surana & Surana International Attorneys, and Soumya Shekhar – Advocate

With companies wanting to move supply chains from China to other countries, will India be one of them? Will New Delhi (NCT)/National Capital Region (NCR) be the forerunner?

Covid-19 has devastated countries around the world.  Anthony Fauci, the top US infectious disease specialist calls the coronavirus pandemic his “worst nightmare”.  It has torn things apart, forced new alliances and challenged the world order.  The Coronavirus has shaken the core foundation of industries – from airline to food and beverage, to retail and manufacturing.  What lies ahead for the world?  While countries lift lockdowns and gradually open up, how much decline China, the ‘factory of the world’, will see?  Will companies exit fully or partially to other countries?  Will India be one of them?  Will New Delhi / NCR be the forerunner?

CHINA AS THE WORLD’S ERSTWHILE “MANUFACTURING HUB”

That China has accounted for 12% of the world’s GDP growth rate is largely attributable to its manufacturing capacity.  Over the past two decades, China moved up the value ladder to become the world’s largest exporter, supplying one-third of the market of intermediate goods (components which go into the final products) globally and came to be known as the world’s ‘manufacturing capital’.

Multi National Companies such as Apple have their manufacturing plants in China.  Foxconn alone manufactures iPhones in 29 factories in the province of Zhengzhou and 50% of Apple’s suppliers are based in China.

Wuhan, the famous epicenter of the Covid-19 pandemic, and the most populous city in Central China, has been a manufacturing hub for decades and is home to auto majors such as General Motors, Honda, Nissan, Peugeot Group, Renault and their vendors.

However, the outbreak of COVID-19 disturbed this favorable position which China enjoyed.  The outbreak has brought home, for the rest of the world, the realization of an excessive dependence on China.  The breakdown of manufacturing in Wuhan due to blocked supply chains left industries world over in a lurch with little ability to substitute supply of intermediary goods/ components on an urgent basis.  Production was disrupted world over.

The sun was already setting on China

Even before the pandemic, with a tectonic shift in the policies involving mandatory rise in labor wages, implementation of tightening environmental protection regulations, and Lack of a robust IP protection, China was no longer the best place to manufacture.  The growing cold war between China and the USA which gathered steam in 2018 with President Trump imposing tariffs and other trade barriers on China citing reasons such as ‘unfair trade practices’, added stress.

The exit China slogan grows louder

China’s mishandling of the Covid-19 outbreak thereby causing avoidable deaths, which may touch a high half a million mark, and the resultant turmoil causing an ever deepening the trust deficit, was the last straw.  The new coronavirus outbreak in Beijing and consequent June 17th clampdown adds to the scare. The talk of “decoupling” with China, particularly for manufacturers of intermediary goods, gets louder.

No doubt, (i) the fact that China has world class infrastructure hasn’t changed, (ii) for brands as deeply invested as Apple, a partial exit only likely for now, and (iii) companies will still continue to produce and sell in China to its phenomenally huge middle class populace.  It does, however, mean that China’s days as the ultimate manufacturing hub are over.

CAN INDIA BECOME THE NEXT MANUFACTURING POWERHOUSE IN THE POST COVID-19 ERA?

The Indian manufacturing industry was stagnant for many years, and 2013 saw a negative growth.  Come 2014, the Indian Prime Minister launched the “Make in India” (MII) campaign with the aim to transform the country into a global design and manufacturing hub.  Other initiatives of Government of India (GoI) including Ease of Doing Business, Skill India, Digital India, tout India’s Manufacturing Gross Value Add (GVA) to reach USD 1 Trillion.  Additionally, 25 strategic sectors have been identified, under the MII initiative, as key opportunities for investments to initiate more policy reforms.  Thus, India is focusing on the development of infrastructure, increasing and tailoring its talent pool to the needs of industry, aggressive Foreign Direct Investment (FDI) initiatives, and increasing the ease of doing business through legal and tax reform.  The corporate tax rates for new companies in the manufacturing sector are now at an unprecedented low level of 15%.  For existing companies, the rate has been brought down to 22%.  As a result, India’s corporate tax rates are now amongst the lowest in the world.  This and the rollout of the Goods and Services Tax (GST) have put India on the path to become a much favored destination for inbound investments.

Sustained business reforms helped India jump 14 places to move to 63rd position in this year’s global Ease of Doing Business rankings and earned a place in among the world’s top ten improvers for the third consecutive year.  Last year India was ranked at 77.  According to a study conducted by Deloitte, India is expected to jump six ranks to No. 5 in the 2020 Predicted Manufacturing Competitiveness.  India’s average entry level salary for workers ranges between US$ 157 and US$ 196.

Increased U S pressure on Beijing for its lack of accountability in its role in the coronavirus epidemic, led the Indian government to reach out to over 1,000 companies in USA urging them to move operations from China to India.  At least 300 of these companies are actively pursuing production plans in sectors such as mobiles, electronics, medical devices, textiles and synthetic fabric.  Japan has announced an economic stimulus for its companies to shift production out of China, back to Japan and elsewhere.  Countries like South Korea and USA are keen to follow Japan.  Other factors that support manufacturing in India are:

  • A stable government committed to continuing reforms;
  • India is today the third largest economy inAsia;
  • The economy is among the fastest growing (Fitch expects India’s economy to bounce back with a 9.5% growth in 2021 after a Covid-19 triggered 5% contraction and a negative sovereign rating in 2020);
  • The country enjoys a strong demographic advantage and, with GoI’s Skill India program, is poised to provide an assured pipeline of trained manpower for years.
  • Defence Industry: With a US$ 65.5 billion budget, India overtakes other major countries on military expenditure.  Having set for itself the goal to become a net exporter in coming years, the GoI, in its budget for Financial Year 2018-19, announced setting up of the country’s first two ambitious Defence Industrial Corridors – one in the state of Tamilnadu in south and the other in the state of Uttar Pradesh (UP) in North.  The idea was to ensure connectivity amongst the cities with existing defence ecosystem in these two states to boost India manufacture of defence equipment including intermediaries.
  • The country’s large and burgeoning domestic market, according to the World Economic Forum, is expected to make India the third largest consumer market by 2025, just behind the US and China.  India’s top 40 cities will form a USD 1.5 trillion opportunity by 2030.

Developing countries such as Vietnam are competing.  However, the potential is usually decided by the size of domestic consumption and pace economic growth.  India is more like China whereas Vietnam akin to South-Korea.  Undoubtedly, India is a much larger market and its growth rate, presently a bit higher than Vietnam, will be faster with its accelerating reforms pace.

India’s edge

  • India ranks 51st among 139 countries on the Quality of Ports Infrastructure Index, as per World Economic Forum.  Vietnam is 85th.
  • Apart from 100% FDI, India offers a 10 year tax holiday pertaining to construction & maintenance of ports and harbors.
  • Cost of shipping to Japan, South Korea and U S from Vietnam is 50 -100% higher than from India.
  • India ranks 18th and Vietnam 24th on the Automation Readiness Index.  GoI’s Udyog Bharat 4.0 program will boost adoption of Industry 4.0.  Although both countries are speeding up investments in technology, India takes a lead due to its aggressive support for innovation plus availability of skilled talent in IT and technology industry.
  • As a percentage to GDP, India’s gross expenditure on R & D is almost double of Vietnam’s.
  • Vietnam sources majority of raw materials from outside whereas India’s raw material production capacities are stronger.  India is the 2nd largest producer of steel and the largest for cotton.
  • India’s corporate tax rates are among the lowest.

India speeding up reforms to stay ahead

India’s measures that promote ease of business are now at a faster pace, for example:

  • On the 30th April 2020, the Prime Minister is said to have announced at a meeting with his ministers that the idea is to make India ‘a global manufacturing hub’ at a time when supply chains have broken down and the world is looking at China alternatives.
  • GOI has already identified 461,589 hectares land pool (twice the size of Luxemburg) to lure businesses moving out of China.
  • GOI, on 16th May 2020, announced structural reforms in coal (mining opened to private players – auction of coal blocks since started on 18th June), minerals, defence production (Foreign Direct Investment cap up from 49% to 74%), airports & civil aviation (further freeing up air space), power-distribution, space, and atomic energy.
  • On 18th May, 2020, the Finance Minister, Mrs. Nirmala Sitharaman, said that the GOI will soon announce a policy that will allow entry of private players even in strategic sectors, ending monopoly of state-run factories.  FDI limit at 74% it makes it much easier for the global companies to be confident of owning IPs.
  • As reported in the Financial Press on 25th May 2020, the GOI is weighing options to push labor reforms and is likely to supersede the temporary suspension of many labor laws by some states, to bring uniform regulations that offer lasting flexibility to businesses.
  • Under GoI’s Program “Turant Customs”, faceless assessment of cargo for speedy clearances at air and sea ports began at Chennai and Bengaluru from 8th June 2020 and will cover whole of India year-end.
  • Production Linked Incentive Scheme (PLI): Notified on April 1, 2020, it extends 4% to 6% incentive on incremental sales (over base year) of goods manufactured in India and covered under target segments, to eligible companies, for a period of five years subsequent to the base year as defined. Enthused, Apple is reportedly in talks with government to manufacture handsets worth $40 billion in India in the next 5 years.
  • GoI has now constituted a high level Group of Secretaries (EGOS), chaired by the Cabinet Secretary, which will also recommend incentive schemes to attract investments in at least eight sectors including mobile & electronics manufacturing, medical devices, and pharmaceutical drugs.

CAN NEW DELHI-NCR BE THE NEXT MANUFACTURING DESTINATION OF THE WORLD?

New Delhi is the capital of the Republic of India.  Also called the National Capital Territory (NCT), it is surrounded by number of large industrial clusters which, though under the legislative jurisdiction three adjoining States, form part of the National Capital Region (NCR).

New Delhi – the NCT:

New Delhi, one of the largest Indian metropolises, was ranked at top of the charts in the ‘Inclusive, Sustainable Industrialization, Foster Innovation’ by Niti Aayog, a policy think tank of the GoI, in its report released in December 30, 2019.  Some of the areas which are the focus of industrial development in New Delhi are:

  1. Promotion of skill based, high technology and non-polluting industries and cluster-based approach for MSMEs.
  1. Adoption of the Industry 4.0 standard for adopting latest technological advancements for inter-connecting products, value chains and business models.
  1. Last mile delivery and warehousing support.
  1. Specialized training programs to promote `smart manufacturing’ and augment the technical skills of the workforce.

The National Capital Region (NCR)

NCR, with New Delhi as its core, encompassing several surrounding districts of the states of Haryana, Uttar Pradesh (U P), and Rajasthan, is a unique example of inter-state regional planning and development.  In 1985, the Indian Parliament, constituted the National Capital Region Planning Board (NCRPD), with the following objectives: (i) Preparation of a plan for the development of the NCR; (ii) Coordinating and monitoring the implementation of the said Plan; and (iii) Evolving harmonized policies for control of land uses and developing infrastructure in the Region so as to drive a consistent development of the whole Region.

Figure 1: Map of National Capital Region. NCR consists of 23 districts – 8 from Uttar Pradesh (UP), 13 from Haryana, and 2 from Rajasthan apart from New Delhi- NCT.

Where New Delhi–NCR stands

Apart from being at just about 2,700 Kms from China, the NCR has India’s oldest and one of the most important production and R & D automobile clusters hosting Suzuki, Honda, Hero Moto Corp, Yahama and many other established players in automobile industry.  The Japanese investor zone at Neemrana, 120 Kms from New Delhi on the New Delhi-Jaipur highway, housing leading automobile ancillaries mostly from Japan, is a great success story.  Several multinational companies are headquartered in Gurugram, a district of the State of Haryana on the outskirts of New Delhi.  The district is also among top five IT hubs in Asia Pacific.  Let us see what the New Delhi- NCR zone has:

  • Industrial ecosystem: New Delhi alone has 29 approved industrial areas , where industrial plants can be set up.  Development of new industrial areas such as the Multi-level manufacturing hub is also in the pipeline.  NCR has a number of industrial destinations including Manesar & Dharuhera in Haryana, Gaziabad & Gautam Buddha Nagar (Noida) in UP, and Neemrana & Bhiwadi in Rajasthan.

The Eco-friendly industrial hub at Ranikhera, coming up by 2021, in the western side of New Delhi, with 10-12 segmental clusters, will cater to specific needs of IT, ITeS (Information Technology-Enabled Services) industry, including R & D.

  • Special Economic Zones (SEZs):  There are nine SEZs in NCR – two in New Delhi alone – out of which seven are classified as ITES/IT sector units.  Within these zones, units may be set-up for manufacture of goods, providing of services, and carrying out other activities including processing, assembling, trading, repairing, reconditioning, production of gold/silver/platinum, etc.
  • Ports: Indira Gandhi International Airport, located about 20 kms from New Delhi city center, is India’s largest.  A second international airport for New Delhi-NCR is coming up at Greater Noida’s Jewar region in Uttar Pradesh.

New Delhi has 2 dry ports – the Inland Container Depots at Tughlakabad and Patparganj where containers come via sea ports such as Nahva-sheva, Mundra & Pipava.  Additionally, of the first two Dedicated Freight Corridors (DFCs) under construction by the Indian Railways, the Western DFC connecting New Delhi with the above mentioned and Mumbai sea ports, is expected to be operational by 2021.

Figure 2: Upcoming International Airport in Jewar, Greater Noida

  • Energy: New Delhi and Haryana have surplus power; U P also is achieving a surplus status though marginally.

New Delhi-NCR has more than 50% of its population in the age group 20-49; hence, there would be no dearth of labor.

The UP state which has 8 districts in NCR froze most of the labor laws except the basic ones to give the industries more hire & fire flexibility to recover from the Covid-19 blow.  GoI is now considering options to push labor reforms to replace such temporary suspensions.

  • Export Promotion: The State Level Export Promotion Committees (SLEPCs) – high level empowered groups of secretaries, generally headed by Principal Secretaries have been in place for New Delhi and the bordering states.  These committees chalk out investment plans to promote ‘make in India, for the world’, and also approve infrastructure projects for financial assistance under GoI’s ‘Assistance to States for Developing Export Infrastructure and Allied Activities (ASIDE) program.
  • Facilitating setting up of industrial enterprises: The New Delhi Government’s Business Facilitation Council (BFC) facilitates single-window clearances from various departments for establishing industrial enterprises in a time-bound manner.

Governments of U P and Haryana, with substantial stakes in the NCR region, have been quite proactive in chalking out strategies for capturing investments coming out of China and the GoI’s high level Empowered Group of Secretaries referred to above will also supervise opening-up challenge route for the state governments to compete for marquee investments and projects from abroad.

  • Defence Industrial Corridor of Uttar Pradesh (UP): While the originally proposed six nodes (cities) are all out side the NCR; the interest the Defence Corridor evoked saw the UP government add additional three nodes for investments: Meerut, Ghaziabad and Gautam Buddha Nagar (Noida), all part of the NCR.

Yes, for companies wanting to move supply chains from China to other countries, India has be one of them, and New Delhi-NCR a forerunner.


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