Pritam Banerjee writes: Focus on jobs in digitally delivered services, incentivise mid-sized firms, rationalise tariffs for GVC integration

Thanks to the digital revolution, a vast number of services across a range of occupations can now be performed remotely. Much of the work related to professional services like accounting, financial and legal services have been performed remotely for some time. But entirely new areas have come up in recent years.

Consider a few examples. A security team based in Gurugram remotely monitors warehouses in Norway using drones. Locomotives in the UK are operated remotely by loco drivers sitting in Gurugram. Maintenance teams in Hyderabad monitor and remotely maintain critical equipment for factories across the world. The entire support team for a globally available dating app is based out of Pune.

Services already account for 42% of the value of global exports. Within services exports, Digitally Delivered Services (DDS) account for 56% share, and this will likely increase to 66% by 2030. The adoption of AI and automation will accentuate these trends.

The rise of Global Capability Centres (GCCs) is integral to the growth of DDS. DDS represents a huge employment opportunity to college educated youth. Unlike the earlier IT/ITES revolution, job opportunities in DDS will be across a wide range of occupations, i.e., engineering, design, accounting, lab assistants, paramedics, yoga teachers, tuition teachers, maintenance technicians etc.

To optimise this opportunity, India will have to leverage the competitive strength of its college educated youth, most of whom, especially those coming from less renowned universities/colleges in smaller towns are not considered employable.

Cost competitiveness can also come from relocating to non-metro areas. In this context, two specific recommendations are:

• Creating a special scheme for 50 universities located in smaller Indian towns to develop dedicated programmes for courses that support the DDS industry across a range of occupational specialisations

• In the same set of small towns, create DDS clusters that provide all amenities at competitive costs to firms in the DDS space, including Global Capability Centres (GCC). This will reduce the cost and hassle for these firms to operate out of smaller towns

These two interventions will take the global opportunity in services to India’s smaller towns and integrate those graduates who are otherwise not being able to fully leverage these opportunities.

Unleashing India’s Hidden Champions in Manufacturing

India has industrial policies for large firms. We are missing a dedicated focus on mid-sized firms. Mid-sized firms that are specialised in production of a narrow range of goods are the bedrock of GVCs. Such mid-sized firms (by Indian

standards firms with revenues of Rs 100 to 1,000 crore) account for the bulk of exports and manufacturing employment in Germany, Japan, France, Italy etc.

Realising the potential of such mid-sized firms that are large enough to have the economies of scale allowing rapid absorption of technology and skills essential to global competitiveness, China has initiated a dedicated programme to develop its own mid-sized global champions called “Little Giants’. The programme includes targeted subsidies, R&D support with state financing, and support with product development. China aims to create 1,000 such champion niche firms. Even if they achieve 25% of that target, it will have a major impact on global value-chains. India needs its own dedicated programme for mid- sized firms that show promise.

Some specific interventions could include:

• Incentivising employment through EPFO contributions along the lines of the previous budget, but specially adopted for mid-sized manufacturing companies

• Creating a specialised fund that supports acquisition of technology/firms overseas by mid-sized firms who unlike large corporations, would not be able to raise funds from the market for such investments

• A programme that allows mid-sized firms to lease or rent manufacturing facilities in industrial parks at a discount for the first three to five years of operations

• A high-profile recognition programme for innovators for development of new products that are commercially successful, especially in global markets.

Rationalising India’s tariff structure to support GVC integration

A recent FICCI report has highlighted inverted duty structures (where duties on inputs are higher than those on finished products that use them) in India’s MFN regime as well as specific to FTAs.

This coming Budget must ensure that any instances of inverted duty structures that impact India’s manufacturing competitiveness are addressed proactively.

But this Budget should also pave the way for much more comprehensive structural reforms of tariffs. Consider the fact that India has 19 different MFN tariff rates today, ranging from 2.5% to 125%. This can easily be rationalised to no more than 5 different rates of duty. A plethora of tariff rates leads to transactions costs as well as rent seeking due to businesses trying to find favourable classification for their products, not to mention needless disputes and need for adjudication.

This Budget should also address India’s tariff structure, which is flawed in the opinion of this author. Strategically, India already has or is pursuing FTAs with all major global manufacturing economies-this includes Japan, Korea, ASEAN member states, Australia, EU, and the UK. The only major exceptions are China, US, and Mexico. US manufacturing would not compete with India on price. Therefore, our MFN tariffs would primarily apply to China in the coming years.

But most of our tariffs, close to 67% of our tariff lines, are in the 5-10% duty range. This is at odds with almost all our key competitors. Countries like Malaysia, Thailand and Vietnam have most of their tariff lines at very low levels, i.e., duties below 5% but keep between 20 to 25% of their tariff lines at very high levels, i.e., duties of over 15 or 20%. Essentially applying lower tariffs for most intermediates and raw-materials helping their manufacturing industry go up the value-chain but ensuring focused protection for key product lines representing both finished and intermediate goods at a very high level of tariff.

As our trade data clearly shows, 5-10% tariff protection is ineffective to protect our domestic industry from Chinese competition, but they add costs across the value-chain. However, only 13% of our tariffs are 20% duty plus. A much more effective strategy for MFN tariffs would be to move out most tariff lines from this 5-10% duty bracket to much lower band, especially in key intermediate products while moving about 20% products to a much higher 20% duty plus tariff line to provide effective protection from competition, especially potentially unfair competition from less transparent non-market economies.

A rational and effective distribution of MFN tariffs would have 70% of our tariff lines below 5% duty, and have 25% of our tariff lines at 20% duty or more. Just 5% of tariff lines should be within these two bands, depending on need for flexibility or strategic trade concerns.

(Views are personal)