Rational Expectations: Preparing for a post-China world

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Published: April 13, 2020 3:15:58 AM

It is not clear if China will be held accountable for its role in the pandemic, but India won’t be a natural beneficiary.

President Trump may well call it a Chinese virus and, like others, may rail at the ‘Chinese Health Organisation’, but will he do anything more?

Most countries are understandably upset with China’s role in creating the corona pandemic, but how this will play out is far from clear. President Trump may well call it a Chinese virus and, like others, may rail at the ‘Chinese Health Organisation’, but will he do anything more? Japan has earmarked, according to a Bloomberg report, $2 billion of its record stimulus for firms that want to shift production back to Japan. And, while others, like Italy, which has been ravaged by the virus may also wish to do something more, a lot are very dependent upon Chinese aid and investments.

There will, of course, be some opportunities, but it is not clear how large these will be. Japan, for instance, has kept just a tenth of its $2 billion shifting package for firms that want to shift out of China to other countries. Also, with the world likely to become even more insular, India will have its hands full trying to find export opportunities; it is unlikely that India can ever sign a comprehensive trade deal with either the US or the EU since the political class is too afraid to take any big economic steps.

With the world getting more insular, and industry going to automate further to reduce its dependence on labour, prime minister Modi will have to jumpstart the reforms that he has not pushed for the last six years—and India, for the last 75. While the list of incomplete reforms is long and well-known, perhaps the prime minister needs to change the way he is measuring success.

Indeed, even the limited economic reforms he has undertaken have fallen flat for this very reason. Every time there is a problem, Modi’s ministers and bureaucrats convince him they will fix it, but so many caveats are put in place, the moves often don’t add up to much. Much was made of the need to change the Prevention of Corruption Act (PCA), to give PSUs and bankers the necessary confidence and freedom to work, but fixing this took three iterations over more than a year, and it is still not clear if it has been fixed. A recent example is the package that Sidbi has come up with to help startups that are facing a huge post-corona cash crunch. Instead of a straightforward cash-infusion, Sidbi has a convoluted plan that is to apply only to startups that have at least 50 employees, a minimum annual turnover of `20-60 crore in FY19 and FY20, are ebitda-positive in December 2019, and “have demonstrated innovative measures for ensuring business continuity during the Covid-19 period”! Few will ever get the promised relief.

Last December, the government cleared a package to buy Rs 1 lakh crore of stressed NBFC assets—to fulfil a FY20 budget promise—but, it appears just a small part of this has been utilised, once again making clear the yawning gap between what is to be fixed and what gets fixed. Indeed, as this column has pointed out almost ad nauseam, from Vodafone to Cairn to T Rowe Price to Monsanto to Amazon and Walmart and so many more, government policy has been very unfriendly, even hostile; if this is not fixed, it is difficult to see how India can make anything of the post-pandemic world.

And, as Mohandas Pai and Siddarth Pai have argued in this newspaper, while Indian startups get most of their funding from abroad—including China—government policy continues to discriminate against Indian capital (bit.ly/3eaCpYB). A great telecom industry, similarly, was brought to its knees by years of bad policy.

Perhaps, the way to ensure there is greater success this time around is to change the metric. One favorite metric of the government, for instance, is to use the World Bank Ease of Doing Business rankings. This, however, is easily gamed, and while India’s ranking has consistently improved, the investment climate has steadily worsened. So, instead of relying on such metrics, or the bureaucrats/ministers—or scared industrialists—saying things have improved, Modi should identify two to three sectors, like readymade garments and mining, and put in place a crack team to deliver.

In the case of readymade garments, the problem could lie with the labour laws, the small scale of production, or the high electricity costs—whatever the problem is, it is this team’s job to crack it, and to get the necessary legal changes made. Its success, though, won’t just be in getting the necessary legal changes made; if this were so, India’s policy to get mobile phone manufacturers in China to shift to India was successful the day it was announced some weeks ago. Every policy gets stuck somewhere—not getting land allotted, or some government clearance or payment getting delayed for months, for instance—and it has to be the job of this team to ensure these bottlenecks are fixed, and that enough investment comes into the readymade garments sector; that will be the criterion for judging success.

Similarly, there is no point announcing a policy that allows commercial coal mining, and touting that as a major reform. The policy can only be said to be successful once enough coal mines have been put to auction, when the commercial levies on this have been brought down to reasonable levels, and when the mine has all the necessary permissions to start operations. Maybe, the parameter that the PM should monitor is the amount produced by commercial miners. The short point is that if India hopes to benefit from a possible post-corona situation where China is sidelined, it simply has to get its act together—merely announcing policies or plans won’t work either, since India’s anti-investor stance has made most wary. Also, the post-corona strain on government finances will be huge, so unless sweeping reforms are done, it is unlikely the private sector will resume investing for a few years; this will have major implications for jobs.

Twitter:@thesuniljain

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