Prime Minister Narendra Modi in a recent meeting with the chief ministers asked them to be ready to woo companies that are quitting China due to the Covid-19 pandemic. Relevantly, American, Japanese, and South Korean companies are planning to leave China owing to the Covid-19 pandemic. But rehabilitating these large-scale companies in India may not be an easy affair.
Structural problems in the Indian economy
The Indian economy is already grappling with tribulations on the human and physical infrastructural front and its correction is not possible in a short span of time. The first and foremost difficulty in this regard is the unavailability of skilled labour. Estimates state that not more than 5% of India’s workforce is formally skilled vis-à-vis 52% in the US, 68% in UK, 75% in Germany, 80% in Japan and 96% in South Korea. Secondly, our physical infrastructure is in an equally wretched state. Standard and Poor in its report titled, “The Missing Piece in India’s Economic Growth Story: Robust Infrastructure” published in 2016 categorically mentioned that 5% of the Indian GDP is being lost due to the pitiable state of infrastructure. Besides, the predicaments emerging out from funding constraints, land acquisition issues, delays related to identification and award of projects and securing approvals are equally hindering in nature. Thirdly, poor management of public finances, incessant GST amendments, burdensome regulatory environment, tax terrorism and delayed clearances have proved to be daunting constraints - even for existing businesses. It’s because of these deterrents that a reputed company like Apple that began manufacturing in India in 2016 is still producing only four old models here while all new models are being produced in China.
Apart from these deep-rooted issues, the overall business environment is also not in favour of attracting large companies. Even before the emergence of the pandemic, the Indian government tried to uplift the business sentiment by offering fiscal as well as monetary stimulus to the existing corporates. In September 2019, a colossal (`1.45 lakh crore) stimulus package was extended to the corporate sector for reviving the wilting investment scenario. On the monetary side, to persuade additional borrowings by the corporate sector, the repo rate was reduced by 135 basis points from 6.50% to 5.15% in the year 2019. But these measures have ostensibly failed to fortify the business outlook in India. Amid all these eventualities, even if it is hypothetically assumed that ignoring all the existing tribulations, we succeed in attracting a few companies to India, the problem of subdued demand will circumvent their earnings. Needless to say, export prospects to other countries stand equally bleak at this stage.
Beating the tribulations
At this juncture, shortage of domestic demand (due to falling incomes and high unemployment) is what needs to be treated instantaneously. Most promising solutions hinge upon emphasising the small-scale and the unorganised sectors.
The department of Micro, Small and Medium Enterprises (MSME) in its annual report in 2018-19, highlighted that there are 63 million MSMEs employing nearly 60 million people and contributing to 40% of the total exports. Unimpeded stimulus to this sector can actually put the economy on an expedited and sustained recovery mode. Even the most advanced economies like the US, UK and China have either provided this sector with unrestricted loan payments at preferential rates or deferred their previous loans payments.
The prolonged lockdown has heavily affected the unorganised, self-employed and the MSME sectors in India. Though the Reserve Bank of India (RBI) and the central government have collectively tried to offer respite through moratorium on term loans and interest rates along with easy availability of working capital through commercial banks and the SIDBI, yet these measures are proving to be insufficient in nature. Few more initiatives are required to be taken in this direction such as reservation of few products or sectors, extended period of delay in loan payments, exemption in GST with immediate pay back of previously stuck payments, deferment of utility and social security payments, priority purchase of their produced products and subsequent compensation of their high labour cost element in total costs through payment subsidies.
Strengthening India’s unorganised sector in general and MSMEs in particular may be the shortest way out available to create employment opportunities. Once the consumption demand gets restored, it will be a matter of time that multinationals make a beeline for India, vying for a share of its colossal consumer market.
R. S Bawa is Pro-Chancellor, Chandigarh University and Rajiv Khosla is Associate Professor in Institute of Management, DAV College, Chandigarh.