Rajan is right, the world does not need another China

Dec 16, 2014

- By Vivek Kaul

Vivek Kaul
The index of industrial production (IIP) for the month of October 2014 fell by 4.2%, in comparison to October 2013. IIP is a measure of the industrial activity within the country.

The biggest fall within the IIP came from 'Telephone Instruments (including Mobile Phones & Accessories)' which fell by a massive 78.3%. Several analysts have linked this massive fall to the decision of Nokia to shut-down its mobile-phone manufactruing factory in Chennai.

The fall "reflects the impact of the shutdown of the Chennai-based Nokia mobile manufacturing plant," write Chetan Ahya and Upasana Chachra of Morgan Stanley in a research note dated December 13, 2014. Nokia shut-down the factory on November 1, 2014. Hence, production must have been falling through October and that is reflected in the IIP number.

If the shut-down of one factory manufacturing mobile phones has led to such a massive fall in telecom manufacturing in the country, what does that tell us? It tells us that Nokia was just about the only company manufacturing mobile phones in India. Even the home grown Indian brands (and there are many of them), which now have a significant presence in the mobile phone market, also don't manufacture mobile phones in the country. They simply import phones from China and put their own brand name on it.

--- Advertisement ---
Hidden High Potential Companies Revealed!

Are you aware of these Hidden Companies that are giving investors double-triple digit returns?

Some such companies in the past have delivered returns like 217% in 3 Years and 11 Months, 288% in 2 years and 5 months, and 100% in just 1 year 8 months.

And since they have such high potential, very soon every investor would want to invest in companies like them.

So act now and be the first to invest in them to get maximum returns!

Click here for full details...
---------------------------


In fact, mobile phones are a fairly complicated instrument, we don't even produce the rakhis, pitchkaris and ganeshas that we buy at different times of the year to celebrate different festivals. It is cheaper for businessmen to buy things over the counter in China or manufacture them there, and simply ship it to India.

India lacks competitiveness even in making the most basic products. So, everything from the most complicated electronic products to nail-cutters that we buy, are made in China. Keeping this in mind, where does the Make in India programme launched by the prime minister Narendra Modi stand. The website of the Make in India programme defines it as "a major new national program designed to transform India into a global manufacturing hub." There are a couple of questions that crop up here. The first is that when Indian companies are not manufacturing goods in India and sourcing them from China, why will the foreigners come to India and make it a global manufacturing hub?

The second and the more important question is can the world absorb another global manufacturing hub like China? This point was raised by Raghuram Rajan, governor of the

Reserve Bank of India (RBI) in a recent speech.

Rajan started his speech talking about slowdown of global growth. As he said: "The global economy is still weak, despite a strengthening recovery in the United States. The Euro area is veering close to recession, Japan has already experienced two quarters of negative growth after a tax hike."

Over and above this things in China are not looking good either. Albert Edwards of Société Général whose work I closely follow has been talking about things not being well in China for a while now. In his latest research note dated December 11, 2014, Edwards writes: "Chinese inflation data surprised to the downside this week with November's producer prices falling more deeply than expected at 2.7% - a record 33 consecutive months of yoy[year on year] declines."

Producers price index is essentially what we call the wholesale price index in India and its been falling for 33 consecutive months in China. What this means is that prices have been falling in China and China can end up exporting this deflation or fall in prices to other parts of the world.

Long story short: Global economy will not grow anywhere as fast as it was in the past or even currently is. This is a sentiment echoed by Niels C. Jensen, in The Absolute Return Letter for November 2014, where he writes: "I don't think GDP growth at an aggregate level will return to levels experienced in the past anytime soon." Jensen is another analyst whose newsletter I closely follow. The International Monetary Fund has also been downgrading its global growth forecasts.

In this scenario, how much sense does it make to build an export led growth strategy right from scratch. As Rajan put it in his speech: "Slow growing industrial countries will be much less likely to be able to absorb a substantial additional amount of imports in the foreseeable future. Other emerging markets certainly could absorb more, and a regional focus for exports will pay off. But the world as a whole is unlikely to be able to accommodate another export-led China."

Over and above this, developed countries are also trying to get their respective manufacturing sectors up and running again. The Make in India strategy will have to counter that as well. "Industrial countries themselves have been improving capital-intensive flexible manufacturing, so much so that some manufacturing activity is being "re-shored". Any emerging market wanting to export manufacturing goods will have to contend with this new phenomenon," Rajan said.

And last but not the least, China will not sit around doing nothing if India gets aggressive on the export front. "When India pushes into manufacturing exports, it will have China, which still has some surplus agricultural labour to draw on, to contend with. Export-led growth will not be as easy as it was for the Asian economies who took that path before us," Rajan pointed out.

Moral of the story: just because something has worked in the past, doesn't mean it will work now. This does not mean that India should stop banking on an export led strategy totally. What it means is that an export led strategy of "subsidizing exporters with cheap inputs as well as an undervalued exchange rate" that worked beautifully for Japan, South East Asia, South Korea and China, will not work at this point of time.

In this scenario, if the government should first encourage Indian companies to make products in India for the Indian market. Doing that would be a good starting point. This would mean trying to improve the ease of doing business in India. In the latest Ease of Doing Business rankings, India ranks 142 among the 189 countries that were considered for the ranking.

On the critical parameters of starting a new business, dealing with construction permits and enforcing contracts, the country ranked 158th, 184th and 186th, respectively. These rankings need to improve if Indian businesses are to be encouraged to invest in India.

There are a whole host of things that need to be done. As Rajan put it: "This means we have to work on creating the strongest sustainable unified market we can, which requires a reduction in the transactions costs of buying and selling throughout the country. Improvements in the physical transportation network I discussed earlier will help, but so will fewer, but more efficient and competitive intermediaries in the supply chain from producer to the consumer. A well designed GST bill, by reducing state border taxes, will have the important consequence of creating a truly national market for goods and services, which will be critical for our growth in years to come."

Over and above this, labour reforms need to be carried out as well. Unless these and many other steps are carried out, what seem like innovative policy proposals, will end up sounding like hollow marketing slogans.

While the government has made all the right noises on this front, no significant economic reform has happened until now. As Arun Shourie told The Indian Express in a recent interview quoting the legendary Urdu poet Akbar Allahabadi: "Plateon ke aane ki awaaz toh aa rahi hai, khaana nahin aa raha (The plates' sound can be heard but the food is not coming)."

To conclude, once Indians start making in India, the foreigners will automatically follow.

What are the steps that the government needs to take to encourage Indian companies to make in India? Post your comments or share your views in the Equitymaster Club.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Recent Articles

We Rode Out... Unarmed October 17, 2017
Money is the tape measure for the carpenter economy.
The Delusional Optimism of India's Real Estate Companies October 16, 2017
This is a sector which hasn't gone anywhere in nearly six years, but those who run it continue to remain optimistic.
The New Ranch House Is Ruined October 14, 2017
Bill talks, not about the markets falling today or the economy collapsing, but about his ranch house caving in...
Is Trump a Genius? October 13, 2017
No. He's probably not a moron either. But here's what he really is...

Equitymaster requests your view! Post a comment on "Rajan is right, the world does not need another China". Click here!

12 Responses to "Rajan is right, the world does not need another China"

jramtd

Dec 24, 2014

Well written article.Mr.Modimay beenlig htened after reading this article.

Like 

RAVI KATARI

Dec 16, 2014

By permitting easy imports, and a skewed import duty structure that killed local manufacture, it seemed like the govt deliberately did so. On top of that, the rapacious and unreasonable petty bureaucracy from centre and states make it impossible for the owner run small business to innovate, get quality conscious and develop ethical values. All these guys need to be made answerable and sackable - factory inspectors, fire safety, corporation, ESI, municipal, income tax, sales tax,customs, DGFT etc. They are leeches on the system who serve very little use. On top of it all, all these put together have clogged up the courts with unnecessary litigation which they know they will lose ten years later.

Like 

AB

Dec 16, 2014

Though your articles usually makes sense, you have lost me on this one!

Are you trying to say that just because there is competition (China, re-shoring and so on), India shouldnt try to create more manufacturing capacity? I agree that there may not be enough demand to absorb more from China as well as India. But they can compete with each other for market share, can't they? If you apply similar logic, countries like Phillipines shouldnt have tried to enter the IT services industry because India was already there!

I agree that there are practical hurdles - to say make in India is one thing and to implement relevant policies is completely different. But idea itself shouldnt be discarded.

Like 

Vipul Jasani

Dec 16, 2014

Hello,

steps to encourage "Make in India"

Let us first understand the issues and challenges that hinders production / make in India in India.

AS rightly mentioned in article, today we are buying even small things like battery that is made in China!!! Why?????

1. Beaurocracy
2. High prices of Land and Real estate. Every Biz. look for profit i.e. high or reasonable ROI. Today small shpkeeper is not earning the interest of cost of his shop!! How production cost can be lower?? This has created barrier for people to enter the biz. - Semi monopolistic situation.

3. Tax terrorism - Excise, Sales Tax, Octroi, LBT, Income Tax, Cess etc.
Person should do biz. but instead always busy in complying various norms and ammendments of these departments!!! Ignorance of law can not be an excuse!!!!. The height is the people working in the department are also many times not aware about all the laws!!!

the worst part is these departments have targets!!! In order to acheive target they harass more!! I do remember our ex finance minister used to threaten tax evaders like we are watching all transactions!!! Govt is like guardian of Indians and its job is to look after interest of every citizen particularly poor. In my opinion instead of threatening tax evaders, make such system that tax evasion is either not possible or negligible.

4. Normally common businessman is so busy with so many non productive work that innovation is impossible.
Talking about swimming for hours is easy than swim for 5 minutes!!! When I hear about technical innovation from our leaders, the frist question comes in my mind is that what is the value of technical people in this country??? Some one should do survey on their income and commercial person income.

5. I heard and not sure or not having any proof that big biz. harasses the small biz. through Govt. officials such as Excise, sales tax etc. as big biz. have better connections.

6. Credit terms - Big biz. are getting very high credit term from their suppliers and they can in turn pass on to their customers. where as small biz. can not do as they do not get high credit term from their suppliers!! same applies to small biz. who gets finance at much higher rate than big companies like Kingfisher!!! Owner of small biz. is under tension where as owner of big company like kingfisher enjoys high salary and perks even if it makes losses.

There are number of reasons and may be one can write a small book on various challenges that Indian business man is facing and no wonder why India is at 142nd rank.

Steps to encourage MAKE IN INDIA

1. No one should be able to buy land and speculate the price. The owner should be only GOVT. and every businessman has to take on lease and compulsorily do activity.

2. Remove beaurocracy and tax terrorism. Simplify tax structure in such a way that businessman has to work on tax only one day in year and rest of the time he can focus on his business and innovation in technical projects.

3. Fix credit term for every one so that commercial people can not play with this and ruin small businesses.

4. Make bouncing of cheque as very serious crime so that no one can issue false cheque. (Pl. do not allow bank to charge heavily for bounced cheque)

5. Train Customs officials how to ascertain the cost of each item that is geeting imported to see how any goods can come cheaper than its cost i.e. prevent dumping of goods from any country and apply anti dumping very quickly (India is very poor on this. By the time it acts, lot of materials already get dumped)

6. Remove targets for tax collections.

7. Every business house has to keep man power, huge paper work, maintain old records, keep space to store all records due to inefficiency of tax dept as tax dept can send any enquiry any time may be after 3 years or 10 years!!!! The height is that dept. will only send query and it is now business house responsibility to prove that they have done every thing right 10 years back!!! This is frustrating and humiliating!!! This happens only in India.
Cap of 2 years should be made that no one can send enquiry for any matter that is older than 2 years.

Many practical implemntable suggestions are there if Govt realy want to act upon and remove corruption and black money.

This will bring down the fiscal deficit as well. But unfortunately all are busy in making money for themselves.

These are personal views and not intend to hurt anyone.

Thanks,

Like 

Aniket Shah

Dec 16, 2014

Read first post Article titled "Rajan has got it mostly wrong: 'Make in India' is largely about 'Make for India'" -

Make in India is Make for India. No where is the government trying to emulate China

Like 

AB Pereira

Dec 16, 2014

Make In India will forever remain as a wonderful content of a great speech of our PM. The fact that the new govt is indulging in Elocution contest was seen even in such simple things like Swachch Bharath Abhiyaan, where the PM and his team of ministers and his party men just posed with brooms to clean those clean places (laid with some artificial 'garbage')! One of the ministers even went to the extent claiming it was not for her to clean it, but make others do it. There is absolutely no intent behind all the verbosity, and people have realised it already.

So, it is not surprising, like many other 'Gyaan-Dena Abhiyaans', Make in India also suffers from the same malady - govt expects people listening to the speeches to start acting without any further steps from the govt. Just imagine this - central govt wants industries to be set up, but giving of land is in the State govt territory! If big 'capitalists' want land, they get it readily, but a SME has to buy from his own money, at 3-4 times higher price than the market rates.
So, it is impossible to do honest business in India - even if the entrepreneur succeeds in launching his entity against all odds, he has to then grapple with the numerous tax compliances and harassment from the authorities.
So, isnt it better to import with less hassles and at lower cost, when it is available across the border?

Like 

R V Iyengar

Dec 16, 2014

The strategy of "Make FOR India" seems to be a good thing for sure. Only one has to make things which match the others in quality, so that an average Indian goes in for locally made stuff rather than the imported one. The reduced imports will bring the trade deficit down anyway.

Like 

Chander Sharma

Dec 16, 2014

A nice read. Vivek Kaul is always interesting.

Like 

Arun Galgali

Dec 16, 2014

Right environment to be created for commencement & or enterprunial business.

Like 

Narasimha Prakash

Dec 16, 2014

I partly agree with the reasoning not to push export led growth. But I strongly believe that we can do away with a lot of waste and unwanted imports from China by start manufacturing in India and generate more employment opportunities. For example electronic goods, consumer durables, toys, construction materials, electrical items etc etc and the list can be long. Simple example can be Korean giants who are already having footprint in India like Samsung and LG, can be induced to expand their capacity to substitute those items which are currently imported from China and elsewhere. Many of the commoditised products can be made in India to meet the local needs and if the costs can be brought down, explore exports as well. I believe the opportunities are plentry and the government should think of various actions to make the environment conducive for doing business.

Like 
   Next>>
Equitymaster requests your view! Post a comment on "Rajan is right, the world does not need another China". Click here!