Key lessons from Nokia's India exit: India isn't the best place to make things

( Read the first part of the story here )

The Nokia decision to stop manufacturing in India is a complex story in a complex country. The interactions between a chaotic domestic environment, and sourcing and investment decisions by a major MNC trying to extract value from its supply chain, are what stand out. Prima facie, Nokia’s attempts to build the cluster was a victim of strategic exposure to the exchange rate and changing market conditions. Further, there was the presence of attractive alternatives - Vietnam. Of course, harassment by host governments of MNCs that have made their exit decisions, is also a very delicate issue that needs to be looked at.

But there are some lessons.

First, industrialists and economists will have to get over their fetish for the thesis that India as a low wage economy is a credible alternative to China with its overheating real wages. The story’s a little more complex than that. Besides the obvious rejoinder that Chinese productivity will rise commensurate, or even more than real wages, manufacturing competitiveness depends on a lot more than low labour costs. If international sourcing and investment decisions were only about low labour costs, India would be the world’s largest electronics supplier. Right now, it is just making cardboard dabbas for cell phones. Countries on China’s periphery can make more credible claims than India can in this regard.

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Second, and this is a technical one, “created” comparative advantage tends to be more fragile than the robust comparative advantage based on natural endowments that underlie Ricardo’s pure theory of international trade. It tends to move around, and government policy can only do so much to make it stay. No reason therefore, to draw exaggerated parallels between the Nokia exit and the “hai hai, tauba tauba” on domestic manufacturing. Vietnam’s advantages were so compelling that Nokia would have left anyways.

Third, India’s tax system and legal system have broken down. The Indian legal system has become an exercise where the dominant value is power, not justice. The sooner everybody acknowledges that the Emperor has no clothes, the better ; at least with that realisation, the tax and legal system can appear on the reform agenda. Despite all those acres of dusty legal books on shelves, there’s a lot of law but little justice. Much of the smash-and-grab of India’s “banana republic” style crony capitalism plays out in lawyers’ office and the courts. The legal system is being used strategically as an instrument of business policy, and often of coercion. In all this, the “learned friends” are having a field day. They seem to be the biggest beneficiaries of the above breakdown. As Shakespeare’s Dick would say, “The first thing we do, let’s kill all the lawyers.”

Fourth, the Indian policy mindset is “If we allow it, they will come”. So sorry, but if you allow it with absurd restrictions like FDI in retail, they will not come. And even if they come, like Nokia they might leave.

Adil Rustomjee is an investment adviser in Mumbai. Comments are welcome ata_ rustomjee@hotmail.com.