SS: Companies want to shift out of China. How can India welcome them?
JA: Prior to Covid-19 and related to the US-China trade war, people also said that supply chains would shift from China because companies would want to diversify risk. As we know, the trade war wasn’t so much about trade as about technology — US concerns over intellectual property rights in China, Chinese subsidies to promote robotics and AI research, and 5G protocol. There was and still is bipartisan support to curb the way China has gone about acquiring technology. This prompted companies to think about moving supply chains away from China.
India was seen as a natural alternative. While there’s been a lot of talk about supply chains shifting, in reality nothing much has happened. Much of the FDI in India in the past two years have been investments by Chinese handset producers and online marketing companies. Ironically, instead of shifting their global supply chain from China these companies have invested in India to serve its domestic market. Thus far there is no evidence of a shift from China in any material way and these definitely have not been relocated in India.
SS: You mean India is simply not attractive?
JA: Look, India’s attractiveness as a place to relocate global supply chains has been based on the argument that India has cheap skilled labour, its infrastructure is clogged but improving, and that some effort has been made to reduce the high cost of doing business. But then Covid-19 came. In a post-Covid world, a critical new factor will be the ability of a country to handle emergencies of this kind. Today it’s a virus pandemic, tomorrow it could be a cyber attack.
The public health system in India even at best of times is seriously stretched. There are hardly any social safety nets such as unemployment benefits that can be easily rolled out despite all the efforts that went into creating Jan-Dhan accounts, Aadhar, or Mudra accounts for SMEs. Or at least the government seems very reluctant to use them. So what assurance can India offer to investors that if they do relocate they won’t get frozen because of another Black Swan event?
SS: So what can India do?
JA: If India is to have any chance in the post-Covid world to benefit from any relocation of supply chains, it urgently needs to improve the public health system. It’s now become critical – it’s no longer just liberal-economists’ argument. Taiwan, South Korea and Vietnam have shown they can do it. What India has shown is the only way it can handle such events is by shutting down the economy.
SS: Things can’t improve overnight.
JA: Supply chains don’t shift overnight either. Can you credibly commit to a plan to get a public health system in place that sounds reasonable? I think we can. I would have hoped that by now we would have a high-level committee to look into how the health system can be improved. Investors want a reasonable commitment. They are not asking for things to change overnight. Delhi started these mohalla clinics and it took a while but in the end these have been established. The ways in which Kerala has managed to flatten the curve with rapid testing is something that should be studied as an emergency response strategy.
SS: Besides the coffers are empty.
JA: Governments are supposed to recognise new challenges, prioritise spending, then build political consensus and redirect scarce resources. As an economist I can give technical answers to how to find resources. But the decision has to be the government’s and ultimately that of society. Past priorities need to change because reality has changed. Where India had previously committed to spending public money, including import commitments, will probably need to change.
SS: That creates a new set of problems. How can India tell France it won’t buy as many Rafales?
JA: No one is saying India will not import things from other countries. In fact, it will probably need to import even more. It’s just that it will need to import different things. It’s not such a hard argument. Look at the counterfactual — if India doesn’t get back to a high growth path, then demand for goods others produce will surely keep going down. It’s in the interest of India’s trading partners to help her return to its high-growth path.
SS: What are the main concerns of investors now?
JA: Cyber security was the No. 1 concern. But I am guessing the quality of public health will rise to the top now. The same thing goes for clean water, sewage systems, and waste management. There are no effective private solutions to public problems.