Corona-virus has brought down wheels of economies to a stand still with almost all countries in lockdown or emergency mode. Some economies took the risk of continuing production, but ultimately resorted to Lockdown. There is no vaccine at the moment. If at all a vaccine is found, it will take months for its commercial production. Economics, Strategists, Governments are struggling with the damage caused by Pandemic. The immediate priority of the Governments is saving lives, lest Pandemic can be more deadlier as have been in past.
The impact of such pandemics is immense in terms of lives we lose. The impact is demotivating if not devastating on the Economies. The challenges to be faced next will be bringing back economies to normal, unemployment, NPAs, Growth. Historically, Mankind has faced several natural disasters, man made disasters since the start of the civilization.
World GDP has become 18 times (on nominal basis) while Population increased by 4.6 times. In simple terms, the need and life style of people has grown by 4 times in last 120 years. Table below depicts the journey of World GDP, and growth of Population. World output has been mounted by 5 times since start of 20th Century. The New world is no more local, it is inter-twinned, inter-woven. The extent of dependency of economies on each other is paramount.
Any slow down or change in improved lifestyle is demotivating to devastating. Stopping a wheel of 90 Trillions and starting it again will need lot of reshuffling, realignment, stimulus, and top of all TIME. Pandemics are not new to the civilization in past one hundred years at least on 2 occasions the world got devastated. While the countries recover psychologically, there will be change in Economic world order. As will be discussed later, the world’s input needs are highly concentrated to one country China. The Pandemic has caused economies to rethink to avoid recurrence of such havoc again.
The confidence of the world is eroding the way CCP, WHO handled the Pandemic. In order to diversify and mitigate the losses, big countries like US, Japan, Italy, UK have already expressed their willingness to shift manufacturing base from China to other countries. China’s exports close to 2.5 Trillion Dollars on yearly basis (2018). The number is close to the overall GDP of India on nominal basis. People look this event as an opportunity for shift of manufacturing base from China to India. Let us evaluate various factors in context of India in the event their is substantial or large chunk of manufacturing base to India. We are evaluating this scenario because next better available option to world is Vietnam and Indonesia lack availability of Manpower (a basic ingredient to manufacturing process).
First let us examine the kind of opportunity we are dealing with. China’s big trading partners are the big economies where labour is costlier. To domesticate their consumption, these economies don;t have kind of cheaper inputs of production. If at all these countries start to manufacture their own needs, the prices of outputs will be much higher. Let us evaluate the Chinese trade into type of goods being exported, imported and country wise transaction.
Exports of China of $2.5 Trillions mainly includes Capital goods of $ 1.15 Trillions such as Transportation, Machines and Electronics. Capital goods export is almost 46% of its total exports. Next highest category is Consumer Goods (Textiles, Footwears, Wood, Hides and Skins, Food Products, Vegetables, etc.). The exports to US were 20%, Hongkong 12%, Japan 6%, South Korea 4.5%, UK 2.3%, Australia 1.9% Vietnam, Malaysia, Singapore, Indonesia, Thailand put together 11%.
China’s Imports of $ 2.13 Trillion in 2018 included imports 10% from South Korea, 9.2% from Japan, 8% from USA, Germany 5.4%, Australia 5.4%, Brazil 3.9%, Vietnam, Malaysia and Thailand 8.8% and rest other countries. The major component imported were Electrical and electronic equipment 24%, fuels 16%. Rest of imports largely commodities such as metals, non-metals.
China’s top trading partners
China’s Export to its top trading partner US included 152 $B of electrical machinery, Machinery 117 $B, furniture and bedding B$, toys and sports equipment 27$B and Plastics were 19$B. China imported Aircraft 18 $B, machinery 14B$, Electrical Machinery 13$B, Medical instruments 10$$B, agricultural products 9.3 $B. US also exported 59 $B services to China.
China’s export to Japan 2nd largest trading partner were Electrical machinery of 52.4B$, machinery of 31.1 B$ clothing 18 B$, and chemicals worth 12 B$. China imported from Japan 52 B$ of machinery, 32 B$of Electrical machinery, chemicals worth 24B$, transport equipments 14.4B$ during 2018.
Hong Kong is China’s 3rd largest trading partner. It can be termed as China’s trading hub since almost all the goods exported by Hongkong to China are for re-export. China’s Export during 2018 to Hong Kong were Electrical machinery of 160 B$, machinery of 44 B$ medical equipments 10 B$. China imported from Hongkong 198 B$ of machinery, 19 B$ of Electrical machinery, and machinery of 39 B$ during 2018. Hongkong’s Import and Export were almost 44.2% and 46.3% respectively and exclusively with China
We see demonstrated above how big is the trade we are talking about. The total foreign trade of China is approxiately 4.5 Trillion $. Its 150% of India’s GDP alone. Shifting base from China to other countries would mean a retaliatory action by China to shift its import base as well. We saw it is not that simple. Another weighing evaluation for sustainable growth of Output is Cost of factor of production which includes Labour, Rent and Capital cost. The other qualitative factors are supply chain. Let us evaluate each parameter one by one.
Cost of wages
China’s average wage is 72000 CNY per year, the minimum wage is around 29800 CNY per year, this translates into 43000 CNY (assuming 30% white collar and 70% blue collar); Average of manpower cost is 495 $/P.M.. In India, minimum wage is around 5340 INR/P.M., wages of low skilled labour is 10900 INR/P.M. and wages of high skilled labour is 43200 INR/P.M. The average manpower cost is approximately 212 $/P.M. Personal Income tax rate in China is 45% and Social security tax rate is 48%. While Individual Personal Tax rate is 15-33%, Provident fund is also 24% on basic. Hence The Gap between Disposable Individual Income of two countries narrows down to 65% due to higher SST and IT.
China’s weighted average manpower cost is costlier by 134% as compare to India. Hence this is advantageous not only in terms of Cost but the availability of Manpower is not an immediate constraint.
Capacity and Capability building will emerge as a challenge going forward!!
Availability of Power
Cost of Electricity a major component in production. China’s Electricity cost is 0.52 RMB/KWH while the same in India is 5.94 INR/KWH. In Dollar both country’s cost of electricity comes out to be 0.078 USD. Availability of uninterrupted power supply for Industrial production is at present a challenge for India. Although, NDA-II Government under the leadership of PM Shri Narendra Modi has geared up for this future need. The All India installed capacity As on 31.03.2020 is 370 GW, a jump of impressive 50% in NDA’s regime. However, the consumption grew by 36% in same period. Currently in 2019 the total consumption of electricity stands at 277 GW (1196309 GWh). A surplus of 107 GW at the moment. Transmission and Distribution Losses (T&D) were appx 20% in India very high as against averages of world average of 8%. China’s T&D losses reported 5.91% in 2012. The current consumption of electricity by Industrial segment is 41%. We can cater the additional demand for electricity by cutting down T&D losses and utilizing unutilised capacity. But will that be enough if we need to cater increased demand from the world post Pandemic sentiments. This will need a short term as well as long term planning.
China’s 2018, Industrial power consumption sore to 4.72 Trillion GWh (1.1 Trillion Watts) on ~40% of Manufacturing share in GDP. The proportional use of electricity consumed for export is around 341 MW. This is around the total output of India’s all production capacity. For Each increase in Production by 100 $ Billion 14 MW Power needed.
If we can bring down India’s T&D losses to world average of 6%, the balance 14% equivalent to 50 GW would only be sufficient to increase production by $ 300-350 Billion.
Availability of Power is ceiling on aspiration of availing opportunity.
Logistics and infrastructure of India and China
Next crucial parameter to compare is Supply Chain Management (SCM) this includes movement of goods (Raw material, Finished goods) from and to ports. The big countries are very particular about quality and turn around time (TAT). We will need to evaluate how we can improve various parameters vital to improve our response time and quality of logistics. India ranks at 44th out of 160 countries, while China stands at 12th Rank in terms of Logistical Performance Index (LPI) published by World Bank in 2018. Smaller countries like Indonesia, Hongkong, Taiwan fares better in terms of LPI. Some of the criterion, which need an evaluation are
- Customs clearing process
- Quality of infrastructure in terms of accessibility of inputs and deliverability of outputs
- Shipments at competitive prices
- Competitive logical services
- Ability to track and trace shipments and
- Timeliness of deliverable
While other parameters can be matched in short run, Timeliness and quality of Infrastructure the are two parameters which India legs behind as compared to China.
Capital Cost in a country is driven by Prime Lending Rate (PLR). Sovereign Banks always use PLR as a tool to incentivize infra and business projects. Current PLR of both the countries China and India are at PAR. So this is not an issue in the evaluation of criterion
Rent is the yield of Investment in Property. This is another factor cost for manufacturing industries. The Rental yield rate is 3.5% in Delhi as compared to 1.8% in Shanghai or 2.5 in Beijing. The Property rates are 2-4 times costlier in Chinese metro cities as compared to India’s metropolitan cities. This way the Rental cost should be lesser in China by almost 40-60%. The State Governments can provide Land at subsidized rate in order to decentralize already choking metro cities. This can be combined with Modi Government’s existing policy of Smart City Project.
FM, Ms N Seetharaman, announced Corporate tax rate for Domestic companies of 25.17% not claiming tax exemptions and 26.0%-29.12% for the companies intend to claim exemptions and incentives. The Corporate Tax rate of 17.16% is a boon for New Domestic Manufacturing set up on or after 1st October 2019. Foreign entrepreneurs will like to setup their manufacturing units as Domestic company to avoid a higher tax rate of 41.60%-43.68%. New tax slabs will make Indian products more competitive vs Chinese output as Chinese Corporate tax rate of 25% is higher by 8% in case of New manufacturing units.
Availability of technology or rights to manufacture are assumed to be provided by Import countries at a royalty. Normal royalty rates are 2-5%. This loss can be compensated from the savings in Manpower, Rentals and Income tax.
Bottom Line
Manpower, Corporate tax rate is a plus point to India in the current scenario of availing opportunity. Power Generation, Supply chain Infra will be a challenge. Our Visionary PM Modi ji has already announced a spent of INR 100 Lakh Crores (appx $ 1.35 Trillion in next 5 years) but this opportunity came too early.
- References
- https://tradingeconomics.com
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- https://www.nationmaster.com/country-info/compare/China/India/Energy
- https://www.economist.com/news/2020/01/15/the-big-mac-index
- https://www.indexmundi.com/factbook/compare/india.china/energy
- https://wits.worldbank.org/CountryProfile/en/Country/CHN/Year/LTST/Summary
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- https://www.worldometers.info/
- https://tradingeconomics.com/china/
- https://www.nationmaster.com/country-info/compare/China/India/Cost-of-living
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- https://economictimes.indiatimes.com/news/economy/infrastructure/over-rs-100-lakh-cr-to-be-spent-in-next-5-yrs-on-building-modern-infrastructure-president/articleshow/73798512.cms?from=mdr
