Shifting sands for Asian economies

INTERNATIONAL/ ECONOMY

Topic: General Studies 2, 3:

• Bilateral, regional and global groupings and agreements involving India and/or affecting India’s interests
• Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

Shifting sands for Asian economies

Context: Discussions on the post-pandemic global economy have often predicted that China’s appeal as a business destination would fade, losing favour as the global manufacturing hub.

What was the expectation about realigning global supply chains?

• Dispersing of Production locations away from China: Arguments have been made that production would be dispersed to other appealing locations mostly in Asia, and even to those outside. 
• Shift to labour Abundant economies: It was expected that this relocation of production would benefit emerging labour-abundant economies, as labour costs in China are increasing.
• China+1 Strategy: The combination of trade war and the 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.

Some labour-intensive industries, such as textiles and apparels, have been moving to Bangladesh and Sri Lanka but trends in other industries show that businesses have mostly remained in China.

Why China still retains dominance in Global Supply Chain?

There are three reasons for firms to remain in China but wants to purse China+1 Strategy:

• Ease of Business in China: First, starting an enterprise and maintaining operations in China are much easier than elsewhere. 
• Agility: Second, Chinese firms are nimble and fast, which is evident from the quick recovery of Chinese manufacturing after the lockdown. 
• Shifting production centres requires time: Third, many global companies have spent decades building supply chains in China. Hence, getting out would mean moving the entire ecosystem, which involves time and expenditure. 

This China+1 strategy of global firms has led to an intensification of competition among Asian economies to be that ‘plus one’ in the emerging manufacturing landscape. India faces three challenges in this race.

1. Task of increasing Domestic Public Investment

• According to the IMF, increasing public investment by 1% of GDP could boost GDP by 2.7%, private investment by 10%, and employment by 1.2%, if investments are of high quality and if existing public and private debt burdens do not weaken the response of the private sector.
•  In India, even before the pandemic, the growth in domestic investments had been weak, and 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, which underscores the need to undertake high-quality public investments.

2. India Needs Overhaul in Trade Policy

• Presently, 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 cognisance the possibility of two effects of the RCEP: the ‘Walmart effect’ and a ‘switching effect’. 
• Walmart Effect: This 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. 
• Switching effects 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. Need to increase women’s participation in the labour force. 

• While India’s GDP has grown by around 6% to 7% per year on an average in the recent years, educational levels of women have risen, and fertility rates have fallen, 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, for which the manufacturing sector should create labour-intensive jobs that rural and semi-urban women are qualified for.

Conclusion

• The intensity of competition is evident from the fact that after India passed three labour code Bills on September 23, Indonesian Parliament on October 5 passed a legislation that slashes regulations contained in more than 70 separate existing laws, to open up the country to more foreign investment. 
• India’s approach to the changed scenario needs to be well-calibrated. 

Connecting the dots:

• Supply Chain Resilience Initiative