SBI Ecowrap - Production linked incentive scheme, imports from China and global value chain: The possible trinity!

16 Feb 2022 , 10:18 AM

After witnessing pandemic waves in the last two years, we are witnessing a positive trend across various parameters of corporate health. Whether its deleveraging, preserving cash, mobilizing funds through equity market or increasing promoters holding, corporates are leaving no stone unturned to keep the balance sheet in shape and preparing themselves for a future ready organization. While private participation in the investment announcements increased to 70% from around 50% a year ago, indicating revival of the capex in the economy, improvement in credit ratios across sectors in 9MFY22 as compared to 9MFY21 suggest improving balance sheet strength and outlook.

During the pandemic, more than 1000 listed corporates, in NSE have increased their promoter’s shareholding, particularly in sectors including Finance, Textiles, Trading, Chemicals, Pharmaceuticals, IT -Software, Steel, Capital Goods — Non Electrical Equipment, Auto Ancillary etc. 

Despite FY21 being overshadowed by the pandemic, Indian corporates have raised an all-time high amount of Rs1.89 lakh crore through public equity markets, more than double of Rs91,670 crore raised in FY20. In current year also, in first nine months i.e., up to Dec’2021, corporates raised equity of more than Rs1.50 lakh crore through public equity market.

Against this backdrop, India has been experiencing robust export performance with Apr’21-Jan’22 cumulative exports at $335.9 billion, which is higher than the maximum amount achieved in any year. Exports of engineering goods, petroleum products, gems and jewellery, organic and inorganic chemicals, drugs and pharmaceuticals, textiles, electronic goods have all done well.

When we look at imports, India continues to reduce its trade deficit with China in FY21, however, share of China in our total merchandise imports has been steadily increasing to 16.5% currently. At 8-digit level, in FY22 Apr-Dec’21 there were 6367 products with total value of $68 billion (or 15.3% of the total imports) imported by India from China. We estimated the import dependence of each product on China, by checking the share of Chinese imports in India’s overall imports of these categories. The maximum aggregate value ($9.7 billion) is of the products in which our import dependence on China is between 50-60%, although the number of products is lower. Although number wise the imports were highest in the category where our dependence was lowest (0-10%), the value is not that high at around $1894 million.

The most important imports for FY22 so far are personal computers and parts of telephonic and telegraphic equipment, electronic integrated circuits, solar cells, urea and micro-assemblies’ lithium-ion and diammonium phosphate. There are other goods also under the electrical and electronics imports. Our dependence on China is huge in these products, constituting around 48% of total imports of these. Drastic reduction in these areas can only be possible if, we source from other countries, while building a domestic manufacturing base for these. The items in the low value category are a mix of finished goods and intermediate inputs and India has a revealed comparative advantage in most of these imports. If India wants to wean itself off its dependence on China, capabilities have to be developed in these areas, especially chemicals, textiles, footwear, so that both inputs and final consumer goods in these low value imports can be manufactured domestically.

Amidst the increasing imports from China, the PLI scheme deserves to be mentioned. In FY21 of $65 billion of imports from China, around $39.5 billion is commodities and goods where PLI scheme has been announced (textile, agri, electronics goods, pharmaceuticals & chemicals). If by leveraging PLI scheme we can reduce our dependence on China even to the extent of 20%, then we can add around $8 billion to our GDP and overtime if our dependence is further reduced by 50%, we can add $20 billion to GDP because of the incentives to domestically manufacture these goods owing to the PLI scheme.

Lastly, about our participation in Global Value Chains (GVC). As per the Global Value Chain Development Report 2021 of ADB India’s participation has improved over the years in production-based GVC. The good thing is that there has been a significant improvement in case of medium to high technology manufacturing. When compared to China, India’s participation is higher in case of both trade based and production based GVC. India should focus on building the right infrastructure which can help in making India’s exports more cost competitive. Also increased investment in R&D spend is required so that more innovative products are developed.

The author of this article is Dr. Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India

The views and opinions expressed are not of IIFL Capital Services, indiainfoline.com