Can India Take Over China’s Position As A Global Manufacturing Hub?

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With disruptions in China’s manufacturing and production operations and delayed delivery of goods, many global companies are seeking alternative destinations to diversify their supply chains. With low labour costs, incentives and regulatory relaxations for manufacturing, and a reduced corporate tax rate, India has emerged as an alternative hub for global manufacturing.

India is already building its local supply chain capacities, which is key to manufacturing firms relocating from China or expanding their operations into the country.

Due to its relatively cheap land and labour, factories equipped with the latest technology, and favorable policies for foreign investors, China is a leading manufacturing hub for companies worldwide. However, the ongoing trade tensions with the US and now the Covid-19 outbreak has completely disrupted China’s supply chain. The subsequent closure of Chinese factories during the outbreak heavily impacted sectors as diverse as automobile, pharmaceuticals, & electronics across the globe.

As a result, more global companies are now actively looking to diversify their manufacturing and production dependencies to be better prepared for any future emergencies.

India certainly has an edge to be an alternative manufacturing site of choice – for instance, according to industry experts, the entry level salaries for workers in India start between Rs 12,000 (US$157) and Rs 15,000 (US$196), while in China the salaries are about three times higher.

Apart from low cost of labour, India also offers lower operating costs, competitive infrastructure, special economic zones (SEZs) that offer duty-free exports among other benefits, incentives to boost domestic manufacturing, and business-friendly policies. Plus, while China is engulfed in a trade war with the US, India has a comparatively good relationship with the US with both countries currently engaged in bilateral trade talks.

Further, businesses in India have started building up local supply chain capacity in order to de-risk from China and lower manufacturing costs. This development will definitely be of interest to foreign companies who are looking to exit China or expand their manufacturing operations. Here we spotlight a few reasons why India is the best suited destination to replace China as the next global manufacturing hub.

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Large market
According to the World Economic Forum, India is expected to be the third largest consumer market by 2025, just behind the US and China. In the report, it was said, “India’s top 40 cities will form a US$ 1.5 trillion opportunity by 2030, many thousands of small urban towns will also drive an equally large spend in aggregate. In parallel, there will be an opportunity to unlock nearly US$ 1.2 trillion of spend in developed rural areas by improving infrastructure & providing access to organised & online retail.”

Rising affluence is the biggest driver of this growth, followed by the change in consumer behaviour and spending patterns, especially in lower-tier cities.

Growth in digital connectivity, infrastructure development, coupled with rising household incomes and an increase in India’s consumer spending represent massive opportunities that lie in the Indian market.

Corporate tax rate
Last year, the corporate tax rate was reduced in India for the first time in three decades, and the manufacturing sector benefited the most from the slashed taxation rate. For manufacturing firms incorporated after October 1, 2019 and beginning operations before March 31, 2023, the corporate tax rate has been slashed from 25% to 15% (this will amount to an effective tax rate at near 17%, including surcharge and cess).

This lower tax rate has allowed India to compete with ASEAN’s emerging economies like Vietnam, Thailand, and Indonesia for foreign investment more effectively. India, however, has an edge over these nations due to its larger market, cheap labour pool, and quick availability of labour.

Boosting domestic manufacturing
Under the ‘Make in India’ initiative that encourages companies to manufacture their products in India, the government announced several incentives for foreign firms looking to set up here.

For instance, last month, it was announced that about US$ 6 billion is now allocated to boost domestic manufacturing – to attract investment, incentivise local electronics & components manufacturing, and export-based production in the country.

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Under this programme, India is intent on setting up more local manufacturing and assembling units taking advantage of tax and industry-wide incentives, easing foreign direct investment (FDI) rules, and raising import duties.

Encouraging forecasts
In a report published in February 2020 by UBS, a financial services company based in Switzerland, analysts remarked on initial signs that India was becoming a preferred destination for companies looking to shift from China, and to diversify their supply chain.

The UBS report added, “Given India’s competitive advantage in terms of land and labour availability, exports has always been a big hope historically but it is now seeing a turn as global manufacturers long settled in China are looking to diversify their manufacturing base. India has scale advantage and key success factors locally are also improving.”

Foreign firms in China are talking to India
Around 1,000 foreign firms are presently engaged in conversations with Indian authorities, and at least 300 are actively pursuing production plans in India – in sectors such as smartphones, electronics, medical devices, textiles, and synthetic fabric.

A government official was quoted in a media report saying, “We are hopeful that once Covid-19 is in control, a lot of things will fructify into actual relocation. And India will emerge as an alternate manufacturing destination. Many countries like Japan, US, and South Korea are over-dependent on China & that is now very apparent.” With this latest development, the government is expected to focus its efforts on reducing the cost of production and manufacturing to attract foreign firms in India.

India maps out post-Covid export plan
India has begun work on a continuity plan to kickstart exports once the country emerges from the shadows of the Covid-19 pandemic. The plan includes cutting down import dependence, especially on China, by focusing aggressively on substitution while improving safety compliance and quality goods to gain global market share. The commerce and industry ministry is mulling setting up groups to draw up strategies for sectors where China has vacated space and countries are looking to diversify suppliers.

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As per an analysis done by the commerce department, medical textiles, electronics, plastics and toys are some sectors whose exports can be promoted in the next three months or phase one, while  phase two exports include gems and jewellery, pharmaceuticals and steel, in the next six months.

As part of the strategy, India will look at areas where it has capability but continues to import and focus on the area of core competence. Piyush Goyal told exporters that with shortage of food items in several countries due to supply chain disruptions, it is a good opportunity for export of agricultural and processed food items. He told exporters that incentives can be given, but they have to be “justified, reasonable and WTO compliant.”

“Covid-19 will emerge as a non-tariff barrier as countries would insist on various certifications. We need to maintain those SOPs and provide digital certificates,” said Ajay Sahai, director general, Federation of Indian Export Organisations.

Goods exports shrank 35% in March, the biggest contraction in almost a decade, while full-year shipments declined in 2019-20 for the first time after 2015-16, at 4.8% to US$ 314.31 billion in FY20 from US$ 330.08 billion in FY19. The ministry has suggested forming groups of thinkers to brainstorm on what should be done after the pandemic for world dominance with a humanitarian approach.

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