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Modi's supply chain fantasies will not save India's failing economy

Delhi ill-prepared for Japan's Supply Chain Resilience Initiative to rival China

| India
Modi would have to undertake major regulatory reform as well the coterie of business cronies he has proved so willing to protect. (Handout photo from India's Press Information Bureau)

, Ritesh Kumar Singh is chief economist of Indonomics Consulting and a former assistant director of the Finance Commission of India.

Prime Minister Narendra Modi has been busy reminding the world, again, that he remains clueless when it comes to securing India's long-term economic future.

The issue this time is trying to reduce India's dependence on China by teaming up with Australia to join Japan's proposed Supply Chain Resilience Initiative, or SCRI.

It's not a bad idea, in theory. Supply chain disruptions caused by COVID-19 have underscored the risks associated with excessively relying on China, and provided the perfect opportunity for India to present itself as the world's next best manufacturing hub as more and more countries and corporations seek to limit their China exposure.

Given this backdrop, Japan's SCRI proposal offers a way to counter China's dominance of global manufacturing. Plans to invite the 10 members of the Association of Southeast Asian Nations and probably the U.S., which is engaged in an intensifying trade and tech war with Beijing, would further strengthen the initiative.

But joining Japan's SCRI is not just a matter of flicking a switch. Integrating with the Japanese or Australian economies will be no easy task, not to mention the U.S. and ASEAN. Overcoming the challenges required will involve a deep commitment not only from India, but Japan and Australia as well.

Has Modi forgotten India's recent experience, where freer trade with Japan, South Korea and the ASEAN bloc has resulted in more imports than exports? Despite a full-fledged free-trade agreement with Japan, India's apparel exporters say they are still effectively denied preferential access to Japan's market. Pharmaceutical companies complain that slow regulatory approvals are acting as non-tariff barriers.

India has had a similar experience in Southeast Asia, where its trade deficit with ASEAN has risen from $5 billion in 2011 to $24 billion last year. And despite India signing a free-trade agreement on services with ASEAN, it doesn't benefit Indian services companies all that much, especially those in software development and information technology.

Farmers ride bull-carts loaded with sugarcane crop on their way to sell it at the Gandavi sugar factory, 165 km south of Ahmedabad,   © Reuters

India has its own protection problems too. After raising import duties on 3,600 tariff lines since 2014, more and more goods are being added to its restricted import list. India's excessive cane and sugar subsidies have made it difficult for Australia to compete in international markets, forcing it to take India to the World Trade Organization. Japan, along with Taiwan, has already filed a separate WTO case after India raised its import duties on information and communications technology products.

Trying to involve the U.S. -- the world's largest economy and top importer -- in any alternative supply chain initiative makes sense because it will expand the size of the market needed to help manufacturers reap the benefits of economies of scale. But that's easier said than done.

After nearly four years of President Donald Trump complaining about the size of the U.S. trade deficit, Washington is clearly not in the mood to join an alternative alliance that would lead to it importing even more goods and services. Even a limited India-U. S. trade deal has proved elusive, with Trump demanding improved access for American merchandise, agriculture, and dairy products that no Indian politician can afford to give. Besides, if the U.S. joined the SCRI, it would likely insist on tighter rules on intellectual property, extensive labor law reform, and a range of environment and investment protections that would be difficult for India to comply with.

International supply chain cooperation requires open trade regimes -- a point that Australia, India, and Japan agree on -- that allow inputs, intermediates, and finished merchandise to cross borders efficiently and seamlessly. That's a huge hurdle for India, with its increasingly protectionist stance, to jump.

Yes, increased Japanese investment in India can play a major role in boosting India's manufacturing credentials. But before that can happen, Modi would have to undertake a major overhaul of the country's regulatory regime, and junk the trade protectionism that has proved so popular with crony businesses.

Modi says that trust and stability, and not just cost advantages, should guide supply chains. Good point, but private corporations can't afford to neglect cost when they're already so strapped for cash. Besides, relocation involves huge expenditures, and Japan's $2 billion in relocation subsidies may not be fit for purpose. Moreover, the whole point for Japan -- and the U.S. for that matter -- is to bring manufacturing back home, not send jobs to Bangalore or Melbourne.

Another Modi pipe dream is that India presents as an ideal locale for companies looking for stability and reliability. The reality could not be more different. Regulatory risk is a major disincentive at both the national and subnational levels, where Indian states are openly reneging on contractual obligations. Modi's plans to raise the minimum wage, and introduce a national wage floor with no link to productivity, adds another layer of uncertainty.

The barriers to India successfully participating in any alternative supply chain to rival China are so high that even Modi must be able to see them. Which calls into question his motive for toying with the idea in the first place.

If India really wants to be considered a serious contender to replace China as the world's factory, it will take the one thing that has most eluded Modi since he first became prime minister in 2014: economic leadership.

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