Heading UPwards: Uttar Pradesh and its impending rise

In our previous article, we talked about how perspectives on China are changing each day as we foray into 2020. India is undeniably the one country that crosses the mind of anyone who is pondering over China’s indispensability. Without wasting much time, capitalizing on this, some Indian states have been quick to advertise themselves as the next best factory destinations. One such state to lay down the path has been Uttar Pradesh.

With a population as big as that of Brazil, Uttar Pradesh which was looked at as a state ridden with extreme poverty, has now emerged out of its downtrodden image and established itself as a land of resources and limitless growth opportunities. Not to say that it was not prosperous earlier, but it has risen into its new image not too long ago. In the past 10 years, UP has seen a GDP growth of approximately ~11% and by 2021, it is estimated to reach ~256 Bn$, approximately 10% of India’s GDP.

Growth trend of Uttar Pradesh's contribution to the nation's GDP

Huge land resources and a comparatively low rate of urbanization as compared to the rest of India has made UP a highly agricultural economy. Nearly 65% of its population is dependent on agriculture. Having said that, UP has still not missed out on gaining from other major sectors. ~50% of its GDP comes from the services sector. A major chunk of it comes from a major IT boom that Delhi’s satellite cities of Noida, Greater Noida and Ghaziabad saw in the past 2 decades. Manufacturing and other industries collectively contribute as much as agriculture does. Not stopping there, each district in UP has a unique product to sell that together make it famous for what it is. This is a proof of UP’s rich history and skilled craftsmanship and has also been reflected in unique policies like One District One Product.

UP has always been an attractive base for industries. Cities with close proximity to the capital have offered a unique advantage with relatively cheaper real estate, and market advantages of being at the center of the country at the same time. Secondly, UP migrates the highest number of laborers across the country. With such manpower abundance, any employment opportunity seems attractive. And at the same time, it is working to offer better connectivity with 11 airport projects across the state, in the pipeline. A push from the government capitalizing these advantages, tweaking laws to be more inviting for industries shall go a long way in UP’s development. We are discussing this at the time, as over the past two months, UP has been in much highlight.

China offers itself as a cheap manufacturing base for all companies. The model works great as it has always, surviving trade wars and well, wars. However, it won’t be preposterous to doubt if China has been able to maintain its leadership owing to a lack of alternative manufacturing powerhouses in the world. But, with the Coronavirus lockdowns organizations have started looking to diversify their investments and start an outward movement from China.

Vietnam and some countries from ASEAN are the usual suspects for alternate manufacturing destinations, but with increased flexibility India is becoming ever more attractive.

With each strategic decision to push India's image a production-friendly economy has made it rise through the ranks of global competitiveness

The electronics sector has already taken the lead. Just last year, Samsung inaugurated the world’s largest mobile factory here. Apple is looking to shift close to a fifth of its manufacturing to India, and Lava International eyes a complete relocation to India. Even as a market, India has been motivating. As seen over the past year, even in a smudged Automobile sector, KIA Motors and Morris Garages were able to share with its shareholders positive news about their new market, India.

In the last 1-2 months, the UP government has held discussions with organizations from Japan, EU and US. Seems that it has covered a major portion of the globe. The interactions held have been with giants across continents, who would be interested in shifting their base. Companies as big as FedEx, UPS, Cisco, Adobe, Lockheed Martin and Honeywell have been part of these discussions. Overall, in terms of sectors Electronics, Automobile, Pharma and Medical Devices seem to top the list. How the whole thing plays out eventually is in the future, but let’s take a close look at some of the factors which support the change, and some which are a hindrance.

The Japanese Prime Minister has injected a stimulus of around 2.2 Bn$, to assist Japanese companies shifting out of China. More than 900 companies will be looking to move out their procurement centers and it might be facilitated with an added stimulus from their states. UP Government has made what can be called a bold move, and has scrapped all but three labor laws for the next three years. More specifically, the Building and Other Construction Workers Act, 1996, Workmen Compensation Act, 1923, Bonded Labour Act, 1976 and Section 5 of the Payment of Wages Act, 1936 (the right to receive timely wages) will be the three acts to remain in place. For us to understand simply, there are multiple key takeaways from the move. Business owners will have a higher flexibility in hiring and firing employees. They will have greater control over setting wages. Although, unions will lose much power in the new system, as ascertained in the act, however, there will be provisions in place to uphold rights of human resource, especially in matters of health and safety.

There is a perspective, which looks at these laws as exploitative of a desperate and hungry labor population post Covid-19. However, it needs to be understood that currently,

· UP is already having a very high influx of people with more 35 Lakh of its migrant population returning. Creating employment, in a state of existence, where unemployment is already at its highest has to be the next big target of any leader. UP seems to have set a steep target of creating jobs for more than a crore people. This programme, launched on 26 June ‘20 is being called the ‘Atma Nirbhar Uttar Pradesh Rojgar Yojana’, which will work with MNREGA to reach its aim. The government with its own resources can only employ a limited number of people. It requires private entities to make use of the abundant skill.

· Businesses are at a loss of confidence. It is as if some businesses have had to hit the pause button on all of their operations. There is no certainty of how the future will play out. They need that economic stimulus to believe that they will not be the ones to go down. Relaxed labor laws are nothing but an economic stimulus for these rattled industries, a hope of getting reinstated.

· Supply and Demand, both are at their lowest. Supplies have stopped. Eventually, diminishing revenues have left companies choosing between survival and massive lay-offs. People have lower and lower disposable income in their banks and credit will only go a length causing demands to be as low as they could be. Pushing the supply side is the node where the domino starts.

· Hundreds of international companies are THINKING of moving out of China NOW. The negative sentiment against China is a temporary wave. It is now that India needs to present itself as an attractive proposition.

The fortunate part is that the state doesn’t want to position itself as just another land owner that hosts a webinar talking about how they are a great investment. They have gone further and made bold amendments. As long as that is done without hampering basic rights of a human being, it shall be seen with a positive outlook.

The most recent policy change to come in is the removal of the clause that entitled foreign plants and machinery at only 40% of their value and invoking ‘Performance Linked Incentive’. Within the PLI scheme, manufacturers will receive graded incentives between 4% and 6% over a tenure of 5 years. These incentives will be linked to targets that have been set for each subsequent year after its first (base) year of production. But, there is more flexibility to this clause. Earlier, a government assigned committee was responsible for making any changes to nuances of such a scheme, however, now, industry’s inputs and consultation will have to be accounted for before making any such amendments. Further, there are provisions for a company to ask for relief in cases when they are not able to meet the set targets. These changes have been roped in specifically for large scale electronics manufacturers. Although UP is a major destination for mobile phone factories, accounting for almost 60% of India’s total production, these policy changes are now being made all across the country to increase India’s exports over the years.

What has been happening smoothly until now, is now being looked at with suspicion after a recent announcement made by Donald Trump.

"One incentive, frankly, is to charge tax for them when they make products outside [the US]. We don't have to do much for them. They have to do it for us,.."

A possibility of taxation on companies that set up their base anywhere except the US is being hinted at. As any country would want at the current time, the US too wants to bring back its companies’ production within US borders. They too have to solve their unemployment problem which is increasing by the day. Now, it will be upon the companies and eventual host countries who will have to weigh between the cost benefits and sinks of all the options they have at their hands. Apple was the company to be specifically mentioned in the statement, causing a grim light on Apple’s future India plans.

Alongside all announcements, amendments and statements, the one thing organizations will face a challenge in, is actually relocating. Relocating a very big manufacturing base is not an overnight process, not even a process that could be finished within a fortnight. Once the laws and agreements are in place, hiring and training, infrastructure developments are long processes and big enough to bleed a lot of money off these companies’ balance sheets, which will be very hard to tackle. It is upon the host country/state, to assist these companies in this challenge, and amendments like labor laws are a step in the right direction. Greater flexibility with other resources of setting up shop could be calibrated and eventually led to further reforms.

Following UP’s footsteps, Madhya Pradesh and Gujarat are other big states to have relaxed labor laws temporarily. Done in a similar fashion with an expectation of a similar outcome, these states too are preparing themselves like UP. Both the other states offer advantages similar to that of UP, abundant land resources, major cities and a huge population that they will have to employ.

It is not known if all the pieces of this dream opportunity will actually place themselves for UP. However, what is known is the conviction that the state has towards achieving its target. There might certainly be some surprises as the mist clears, but it is only a collaborative approach that will take these efforts a long way.