The past few
days have seen reports from states like Madhya Pradesh, Uttar Pradesh, Gujarat
among others about the announcement of new reforms in labour laws and land
laws. Similarly some states have moved into reforming agricultural laws. Karnataka,
Haryana, Orissa are among few other states that are following suit. It is
expected that some more reforms might be announced in the next few days and
weeks. A similar push from the Centre cannot be ruled out. Though most of these
reforms were long overdue, apparently, the economic crisis induced by the Wuhan
pandemic driven shutdown and the possibility of firms relocating production
from China seem to drive these reforms.
Every crisis
generates an opportunity. There is a silver lining in the darkest of the
clouds. As the pandemic originating from Wuhan continues to create havoc, it is
time to think of the post pandemic world order. It is possible for a gated
globalization to emerge or a sort of economic NATO. Yet the first signs are
clear that organizations might depart from their optimization models in search of
lower prices thus accompanied by lower costs of production. This was what made
the firms relocate all their production to China. With China unapologetic about
the crisis and in fact bull dozing the countries to accept its line,
politically it has become costly to do business with China for at least the
time being. Therefore, firms would scan for plan B that allows them to function
without disruption and create redundancies.
The move towards
attracting foreign firms to relocate production in India is not new. PM Modi’s
Make In India is primarily a tool to attract foreign firms to manufacture in
India or even source from India. The spill overs would create jobs in the
Indian manufacturing industry while seeing advancements in technological tools.
The move however was a partial success or in other words something that has
begun well. However it was unable to generate the critical mass that is
necessary to propel the same to the next level of trajectory. There are many
reasons for scepticism in investing in India. They include the bureaucratic labyrinth,
the complex tax structures both direct and indirect, the high rates of
taxation, stiff labour laws, numerous regulations both at central and state
levels, the difficulties in registering the business, difficulties in getting
environmental and other health related clearances, the local bureaucratic hurdles
in cities and towns, the interference of local bodies in the smooth functioning,
maze of unwieldy land acquisition laws, hold outs in land purchase, political
one-upmanship and bricking affecting the firm’s operations, hostage to unionism
though much mellowed, license raj for numerous small things including electricity,
water etc. all contribute in no small measure to the problem facing the Indian
entrepreneurship story.
It is widely
presumed that India had missed the manufacturing story that catapulted China
and earlier the South East Asia to being the manufacturing hub of the world. It
was difficult compounded by the hurdles enumerated above for India to catch. Yet,
the Wuhan pandemic has given an opening that allows India to take advantage of
the fog of economic war that has gathered around. India doesn’t want to miss
the opportunity but the question arises on how to attract the same. India has
relatively unscathed in the havoc wreathed by the pandemic but the battle for
the pandemic is still not won, in fact only half way through. The uncertain
dynamics of the spread adds to the policy makers’ dilemma on whether to
announce radical reforms at present or wait till the pandemic subsides.
To any firm, the
decision to locate its production facilities will be contingent on the cost
benefit analysis. The firms have a basket of production facilities and a
product portfolio linked the production facilities. Each facility and layout
have a price and the corresponding benefits. The firm seeks to maximise its
benefits subject to the cost constraints it faces. In every decision there is
optimum bundle of factories and products that resemble a sort of producer
equilibrium akin to the economics concept of consumer equilibrium. To any
country that needs to woo the firms from China to their own country and state,
they need to change the dynamics. If the firm is rational, the firm would be
basing its decision on marginal costs and marginal benefits. To alter these
benefits, the countries seeking to woo the firms need to alter the incentives. The
firms or for that matter an economic agent responds to incentives and this is
what the countries will have to do. The analysis in the current context is
through the microeconomic principles and concepts. A different line of analysis
on the international economics and trade principles and concepts will be
undertaken differently.
In economics,
the optimal basket of goods gets altered when the price of the goods changes. India
among other countries now seek to reduce the ‘price’ of the production goods
for firms to relocate the production. The price is not just explicit price. Any
hurdle that has to be navigated or crossed over necessitates payment of prices
that might be explicit or implicit. Therefore, the indirect utility function accompanied
by the expenditure function has to be reframed to account for the implicit expenditure.
In fact these implicit elements do change the contours of the explicit
expenditure also. Therefore, India is seeking to reduce the implicit price by
eliminating the hurdles. the opportunity costs is sought to be reduced. Firms
had no incentive to relocate to India given the price differentials between
producing in India and China. The movement from China was towards Vietnam
rather than India. There was no incentive for relocation when it entails the
complete reworking of the supply chain dynamics. Adding the regulatory
complexities will only make the things more badly. Therefore, India is seeking
to build up the income and substitution effect to re-alter the producer
equilibrium.
It is the
relative prices that matter in the decision to relocate. The added dynamic in
the current context is the political nature of the problem. Apart from
President Trump’s call to create jobs in US, there has been increasing voices
being heard in the West, Australia, Japan among others to bring China to
accountability for the pandemic. The accountability can happen if the economic
activities relocate hurting the Communist Party capitalism that is prevalent in
China. The political nature of the problem complicates the decision making for
the firms. Despite the firms talking of the supremacy of the market and freedom
to produce, optimize etc., the state has an important role to play. It is not very
easy for the firms to wish away the state’s desires. Further there is a
pressing need of redundancies that makes the movement compelling. It is in this
context that the changing policies of the Indian states have to be observed.
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