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Goodbye China, Hello India: Will Cos Really Shift To India?

Given the unprecedented circumstances, companies realise that while large supply chains in China may have been economical, there's no point in keeping all your eggs in one basket.

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The COVID-19 pandemic has engulfed over 100 countries round the world and for the lack of a cure, governments were compelled to largely depend on social vaccination measures, including lockdown, isolation and social distancing. This flu-like virus, with origins in China, has caused tremendous distress in terms of health, economic and social wellbeing of the international community. As a result, there are talks about large companies uprooting their manufacturing units out of China, with early winners being South Korea, Thailand, Vietnam, and Taiwan. However, this premise is not new.

In the wake of the pandemic, China's credibility has dipped and India is hopeful of skimming the cream out of milk from companies exiting China. Trade wars are inevitable with countries around the world imposing sanctions on Chinese goods, in response to which China has placed Apple and Boeing on "unreliable entities list," which implies heavy purchase restrictions on the said companies. In an attempt to silence the criticism, China also blocked few imports of Australian beef when Australian Prime Minister talked about "Robust inquiry about origin of outbreak."

As the India Inc. plans to attract companies seeking to relocate manufacturing from China, a question arises whether the second largest workforce in the world has the necessary skill set and infrastructure for providing the required goods and services? Some of the key factors that are relevant for companies contemplating a shift to India are discussed in this article:

Cheap Workforce 

Indian labor force numbers about 519 million second to China's humongous workforce and its percentage of young working population is among the highest in Asian countries. Moreso, India boasts of an educated, resourceful community with fluency in English, hence making it an adaptable workforce. Besides, China's labour costs have soared in the recent past with minimum wages ranging between $140 to $346 per month, whereas India's minimum wage is lies between $66 to $202, giving an immediate cost-benefit to companies.

According to World Economic Forum, India ranks 103rd in terms of human capital index while China stands at 34th position. Other competitors such as Thailand and Vietnam stand at 40th and 64th positions respectively. Studies show that a Chinese worker's productivity is 1.6 times the efficient productivity of a average Indian worker. Realizing this, India Inc. launched the National Skill Development Mission to buckle up for the long haul through elaborate training programs touching over 400 million youths across the country by 2022.

Infrastructure 

A grave bottleneck in India's growth story is the non-availability of robust infrastructure. For instance, India has the largest Railway network in the world but does not have sufficient high speed trains, whereas China boasts of about 2/3rd of world's total high speed railway line. Lack of transportation network increases the time of delivery of material hence slowing production as well as delivery. Timelines are a key component of production, and speedy transportation plays a vital role in the supply chain.

However, in the past decade, India has significantly improved its infrastructural facilities through well-connected road and rail transportation network, domestic and international airports across all major cities, several major ports across its large coastline and unabated availability of power. An effective implementation of projects such as Bharatmala and Sagarmala - geared towards enhancement of India's logistics sector through roadways and waterways will further optimize efficiencies. Moreover, five major industrial corridors are being set up across the country where infrastructural, logistical and educational facilities will be developed to support establishment of industries. The government should accelerate its efforts to expedite development of the industrial corridors.

Ease of Doing Business & Labour Laws

At the outset, the process for registering and incorporating companies in India is not cumbersome as it used to be some years ago. The current legislation mandates use of a simplified followed by an online process with nominal costs involved therein. The time taken for incorporation is around 3-5 working days, but this is the commencement of numerous regulatory hurdles, cumbersome licensing processes, and red-tapism while conducting business in India. It is imperative to provide comfort for trade to lure foreign investment. Unfortunately, India sits at 63rd position in World Bank's ease of doing business index, as opposed to China who is at 31st position. So to facilitate the ease of doing business, the government is well on its way to simplify and streamline the compliance processes through Shram Suvidha Portal, an online platform dedicated for filings and registrations. This simplifies the compliance process and reduces transaction cost for employers.

Moreover, India's existing labour laws are myriad and prescribe multiple compliances to regulate termination, lay-offs, payment of wages, and hiring in relation to workmen and employees. In light of the above, the government consolidated the existing labour legislations into four codes namely - Code on Industrial Relations, Occupational Safety, Health and Working Conditions Code, Code on Wages, and the Social Security Code. While the Code on Wages has already received Presidential assent and is awaiting notification, the other three codes are under advanced stages of consideration. The biggest take away from this cumbersome process is not only simplification of a legislative cobweb but a reduction in compliance burden on employers.
Even if India manages to surmount all hurdles in the way of becoming world's most reliable, and cost-effective manufacturing haven, a wholesale shift of supply chains from China is unlikely for the simple reason that it is the current factory of the world. China is at the forefront of manufacture of products ranging from apparel to smart phones to suitcases and boasts a dense supply chain network difficult to replicate by other countries. Therefore, India may attract the foreign companies to some extent which will boost Indian economy.

Apart from the benefits, India will be at a loss on account of sanctions placed on Chinese entities and trade. India is one of the biggest importers of Chinese products including branded smart phones, solar power equipments. Chinese phone brands are controlling more than 51% over 8 billion smart phone market.  In 2018-19, China exported well above 60% of electronic products and components and over 80 percent of antibiotics. Furthermore, employment rate will go down. In other words, thousands of jobs will be lost. More than half or the employees are depending on the Chinese industries and factories. There could be huge trade deficit and huge loss to economy. India will need to reduce the trade deficit and bolster the manufacturing and industrial sector before even actually boycotting the Chinese products. India needs to move with caution because china can make the direct or indirect harm to India's economy such as through using the friendship with Pakistan as a tool to pressurise the economy, India's pharmaceutical sector, which is fairly dependent on imports of active ingredients from China. Therefore, India is also maintaining the friendly relationship with the china.

Given the unprecedented circumstances, companies realise that while large supply chains in China may have been economical, there's no point in keeping all your eggs in one basket. Although from a realistic standpoint, moving production out of China may not feasible for most companies as they grapple with health, security and capital dipping risks. Thus, India's Inc. dream to lure companies to shift their pin-codes from China to India can see the finish line, if companies are accorded a robust infrastructure, cheap skilled workforce and simplified regulations to help them beat the pandemic's impact across sectors.

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.


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Sonam Chandwani

The author is the Managing Partner at KS Legal & Associates and heads the firm's Corporate Litigation Practice. She specializes in commercial structures, commercial litigation, mergers & acquisitions generally, with an emphasis on large scale and complex commercial litigation including contract law, trade practices, real estate disputes and finance issues across a range of industry sectors.

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