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Never Waste a Crisis


“ Never waste a good crisis “Winston Churchill. 

There is no doubt that we are in the middle of unprecedented crisis globally. With almost 3 million people infected and over 200,000 people dead due to the corona virus. 

Look at the headlines; 
·      German newspaper sends China USD 130 billion invoice against Corona Virus damage
·      Japan to offer billions to firms shifting production out of China
·      Trump warns China of consequences as Republicans and democrats fight over who is cozier with Beijing.

It is evident to all but the most perma China bulls that global supply chains will now need a backup if not an alternative to China. The days of running a global factory with slave labour, financial repression (and therefore cheap capital), scant respect to the environment and a bully mercantilist mentality are now numbered. The world is truly unipolar now with China on one side and the rest of the world on the other.

Look at the exports and imports of China vis a vis the world just to get a sense of the opportunity embedded in this crisis. In 2019 (in spite of a trade war with the US), China’s trade volume was USD 4.6 Trillion with a trade surplus of USD 422 billion. China had a 14.6% global share of all exports of USD 20.8 trillion. Compared to that, India’s TOTAL exports were USD 323 billion. Just absorb the statistic; China’s trade surplus alone is 30% more than India’s total exports and total exports are more than 8X of India. 
If one were to look at the crystal ball, in the case of a backup, if we are to assume that 25% of the global trade with China will shift to backup locations, the numbers are USD 675 Billion and if an alternative is created and 50% shifts, we are talking about USD 1.35 trillion over the next 5 years. That’s between 2X to 4X of India’s total exports. However, we have to remember that the home countries in EU and the US, Mexico, Vietnam and other SE Asian countries will be vying for the same prize. Capital and jobs will flow to those countries where its easiest to do business and where it is most welcome. 

We do not have a God ordained right to get this and will have to fight for it with many contenders including China fighting tooth and nail to retain this. I had visited China for a due diligence a few years ago. We went to a cluster where one of our supplier factories was based. We let it be known that we wanted to set up manufacturing. The local party chief came and met us, took us to a pre-build workers hostel and a pre fabricated factory shed and told us we could start from the next day. There is no question of labour trouble and there would be no taxes and no line of inspectors. We don’t have to go that far but I am assuming the reader is getting a picture of what is the competition!

India has a young population and a great entrepreneurial culture going for us. We have democracy, which works. We are the anti-thesis of China.  With India being seen as a reliable, democratic  partner, capital and jobs will flow if we do not create roadblocks for them.   

However what we lack is the inability to get out of our statist, socialist, protectionist mindset in spite of years of proof to the contrary. 
In challenging times, the instinct of the Indian bureaucracy and the myriad Delhi “industry” advisors is to raise the drawbridges and go into a shell, which is precisely the wrong response. Yesterday’s paper by a group of bureaucrats, who would want to drag India back to the Indira Gandhi socialist days of usurious taxes, stiffling bureaucracy and 2% growth, in spite of clear proof that is does not work is a manifestation of that. As Shekhar Gupta says in his excellent analysis of this hare brained set of ideas " bad ideas just don't die , they are just made worse by vested interests". For his excellent analysis - see the link below:

The first set of reforms undertaken in 1991 have run their course and minor tinkering around the edges stopped yielding the desired outcomes a long time ago. Even before the global pandemic, our growth had plummeted to 4%. The time for bold action is now.  

There are some steps which need to be taken immediately and some over the longer term.
The most critical 2 things that need to be done immediately are: Labour and permissions reforms. The latter should be Single window time bound (7-30 days) clearance for all businesses and factories.  Land to be made available for factories and infrastructure and Labour reforms to allow full flexibility of hiring and firing. More than 70% of our workforce is in informal jobs. More than half of the balance 30% are in government jobs. To protect 10% (the organized private labour), from market forces, we have created a huge labour inflexibility which is a disservice to the 70% which we can ill afford. In today’s environment, anyone who creates even a temporary 3 month job and fires the person when not needed is still to be feted because the alternative is no job! What is needed is an ordinance saying that anyone who is creating new jobs is exempt from all rules on hiring / firing. 

In the medium term, Judicial reforms to ensure that the justice system has the capacity for quick justice is key. This has to be done to ensure India is a place where there is rule of law and contracts can be easily and quickly enforced. Bureaucratic reforms (including hiring from outside at each level) to ensure that it’s not an ossified and self perpetuating hydra forever trying to increase their discretionary powers, privatization of ALL PSU’s including banks and railways so as to improve system efficiency and Vouchers for ensuring universal primary education and universal health care to ensure a healthy and educated workforce are the other longer term agendas. 

There is no doubt that there will be short term resistance from vested interests but if we need to avoid social strife and distress, this is the bitter pill that needs to be swallowed and it would require true leadership and vision to do that. There have been some very good steps such as banking reforms, GST, bankruptcy code, aadhar and using digital tech for direct benefits and focus on hard infra but paraphrasing Walt Whitman  - "there are miles to go before we sleep" .   

India is standing at a crossroad. India needs a minimum of 7-8% growth to ensure adequate jobs for the millions of young joining the workforce. With the current huge slowdown, we are staring at a demographic disaster which will hit us like an avalanche leading to social strife, increasing crime and increasing inequality, specially if exacerbated by bad anti business policies . On the other hand, if we bite the bullet on some long pending reforms and focus on becoming an alternative to China, India could fulfill its destiny of again becoming the Soney ki chiriya. 

For a detailed analysis on what needs to be done, you could go to the first part of my series I wrote a few months ago. Link below. 


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