Can India Capitalise On China’s Shift Away From Low-End Manufacturing?

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India's hope that it will benefit from China's shift away from low-end, labour-intensive manufacturing, is unlikely to be fulfilled with rivals like Bangladesh, Vietnam, Cambodia, Mexico and Poland giving it tough competition.

China is moving up the value chain of manufacturing, vacating space for other low-cost producers in the developing world. Shares of apparel and home textiles in China's basket of textile products are projected to further decline by 2025, creating a US$ 50 billion opportunity for other low-cost producers in apparel market alone, according to FASH455, a global apparel and textile trade and sourcing agency.

Apparel accounts for as much as 40% of India's textile exports. The country hopes to take advantage of China's shift away from apparel manufacturing and ramp up exports. However, data shows that rivals like Bangladesh, Vietnam and Cambodia have stolen India's thunder.

In 2000, India held 3% share of apparel export market while Bangladesh's and Vietnam's shares stood at 2.6% & 0.9% respectively.

But the scenario has drastically changed in 2016, with Bangladesh and Vietnam seeing their market shares jump to 6.4% and 5.5%  respectively, zooming past India whose share modestly increased to 4%. Meanwhile, Ethiopia too is emerging as a serious player in the global apparel market. The African country exported textile and apparel worth US$ 7.32 billion in 2015, which it has targeted to raise to US$ 30 billion by 2025. Among all industries, apparel has the highest employment generation potential. For every Rs 1 lakh of investment, nearly 24 jobs are created, compared to 1.3, 0.3 and 0.1 in food processing, auto and steel respectively. Moreover, it has the highest potential to absorb women workers.

Footwear and furniture

India fares even worse in footwear and furniture export markets. Country's footwear exports, valued at US$ 2.54 billion in 2013, came down to US$ 0.42 billion in 2016. In comparison, new player Vietnam exported footwear worth US$ 18 billion during the same year, next only to China.

As far as furniture export is concerned, India does not have any significant presence in this market. Its export of furniture bedding and mattress shrunk to US$ 0.2 billion in 2016 from US$ 1.09 billion in 2013.

While China remains the largest global supplier of furniture, developing countries like Poland, Mexico and Vietnam have significant presence in this segment. According to credit rating agency Fitch, Bangladesh and Vietnam already have strong footholds in these sectors. Together they accounted for 8% of global clothing, footwear and furniture exports in 2015, up from 3% in 2010. This established scale could be an advantage. Bangladesh, for example, has a ready-made garments industry that accounts for over 80% of its exports, and has the capacity to meet large orders swiftly.

Indian exports may not gain much from rise in global trade

While global trade growth is expected to rebound in 2017, India may not be in a position to fully take advantage of it in United States and China, which are the major markets where consumer and industrial demand drive trade forward.

The World Trade Organization (WTO) raised the estimate of growth in world merchandise trade volume for 2017 to 3.6% up from the 2.4% estimate earlier. The latest rise has been due to positive economic trends in North America – with the United States in particular – along with China, which has lead to resurgence of industrial and consumer demand. However, exporters & trade experts alike believe it will be difficult for India to tap into this demand in the near future for a plethora of reasons.

Stagnation in the US

The US is the largest destination for Indian exports, earning US$ 42 billion in 2016-17. The share of goods heading to the US has gradually increased over the past five years and stood at 15.3% last year.

However, major export categories such as textiles, gems and jewellery have seen stagnation in the US market. India's textile exports, across categories such as apparels and accessories have suffered over the past few years due to the onslaught of cheaper alternatives from Bangladesh, Vietnam and Philippines.

"Our market share has stagnated in the low single digit levels and I don't see a change anytime soon, both in the United States or Europe." S K Jain, Chairman of the Apparel Export Promotion Council said.

Not geared for China either

On the other hand, India is ill-equipped to grow its exports to China. While its northern neighbour is its largest trading partner, only 3.68% of India's exports find their way to China. Apart from finding it difficult to bridge the whopping US$ 51 billion trade deficit, India is also looking to upgrade its current basket of exports to China. Raw materials like cotton, iron ore and copper – long a hallmark of Indian exports to neighbouring China – has come under increased scrutiny as both government as well as exporters try to shift exports towards value added products in a bid to cap growing trade deficit. While previous Commerce and Industry Minister Nirmala Sitharaman had earlier said that export focus should shift from raw materials, her Ministry has identified key sectors such as hardware, electronics, pharmaceuticals, textiles and auto components, to realign and boost exports.

With a burgeoning middle class and rising labour prices, China is expected to relinquish its dominance over the labour intensive, low-end manufacturing space in the near future, which is being eyed by the Indian industry. Changing consumer pattern has also moulded a greater demand for consumer goods in China where overall demand in the first half of 2017 was driven by solid growth in industry (up 6.4%) & even stronger growth in services (up 7.7%).

"We are looking to harness our strengths in labour intensive sectors where India enjoys significant advantage over other developing nations," a Commerce Ministry official said under conditions of anonymity.

Currently, the top five export categories to China are all input products. These are used by China to manufacture costlier goods which it ships abroad, often back to India. These, along with other raw materials like iron and iron ores, constitutes for more than 70% of India's exports to China, Ajay Sahai, Federation of Indian Exports Organisations said.

These are subject to volatile global commodity prices and should be periodically swapped with products higher in the value chain, a Delhi based trade expert said.

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