How India could become a global manufacturing powerhouse

Fifty-six corporations moved production facilities out of China between April 2018 and August 2019. However, only three of those companies relocated to India and two set-up manufacturing facilities in Indonesia. According to a report by Nomura, a Japanese financial organization, the majority moved to Vietnam and a good portion went to Taiwan and Thailand.

One major reason these companies relocated is the ongoing trade dispute between China and the United States. Tariffs are making exports from China unaffordable for many U.S. importers.

Granted, many businesses have contemplated leaving China for some time now. Costs to maintain production facilities in the country have been increasing over the last couple of years. With the addition of U.S. tariffs levied on Chinese-made merchandise, many businesses have had little choice but to relocate to survive.

However, relocation is no simple feat. Companies must find the ideal infrastructure, pay moving and set-up costs, and typically must re-establish employees and business connections. This may include training programs for the new workforce, finding new and cost-effective shipping or transportation methods for products, and learning about new incentives and tax regimes for businesses in the country of choice.

Currently, India offers the demographics to become a global manufacturing powerhouse, similar to China. China may produce one-fifth of the world’s goods, but India’s population is comparatively young and expected to surpass China’s by 2030. The United Nations predicts that India has a median age of 30, whereas China’s is 40.

What’s more: India’s employment costs are half of that of China. Although India’s GDP costs are high compared with other major global economies, economists typically agree that the country is performing below its market potential. The same can be said for Indonesia, which has an even lower median age (of 21). Both India and Indonesia are considered “sleeping giants” in terms of each country’s foreign direct investment (FDI) in production.

FDI is a reliable indicator of investor confidence in a country. It’s also ideal for a developing economy to better generate jobs, absorb excess labor supply, and deal with financial challenges. Unfortunately, India only draws in about 0.6 percent of GDP in production FDI. Indonesia is a tad better at one percent.

To attract a greater FDI, India and Indonesia need to increase trade. This means the countries also need to spend more on infrastructure development, reform land and labor laws, and offer tax incentives for foreign investors. The good news is that both countries are aware of this and moving in the right regulation.

Capitalizing on the U.S.-China trade war?
In the trade deadlock between the U.S. and China, increasing tariffs seem inevitable and China’s production is likely to suffer long-term. The result is that major international companies investing in China are exploring other options.

Some experts have pointed to India as a country that may, in turn, benefit from expanding exports to the U.S. The country’s FDI may also increase. Currently, China’s commodities exports are almost equivalent to India’s GDP. A slight change — say even a 10 percent shift from Chinese commodities to Indian exports — could greatly affect Indian exports. However, to profit from this situation, India needs a strategic and competitive approach.

This is because India is only one of many countries that international organizations are considering for future investments. Indonesia, Thailand, Malaysia, Mexico, and Vietnam also offer access to big potential markets.

India’s ambition to double its exports and generate more jobs is highly dependent on its ability to become a successful part of the global value chain (GVC) — which includes transportation and shipping capacities. In comparison, China’s 2018 shipping to the U.S. (at USD 560 billion) was nearly double that of India’s total exports.

As the seventh-largest global marketplace and the 20th largest goods exporter, it’s no secret that India lacks in its GVC. As per the United Nations Conference on Trade and Development (Unctad), multi-national corporations account for 80 percent of GVCs. To better establish export hubs and a strong value chain, India requires strong operational support, infrastructure, and favorable policies for foreign investors.

One step in the right direction is the country’s Make In India program, a government initiative for job creation and skill enhancement in 25 sectors of its economy. It will be interesting what other steps, if any, India takes to become a global manufacturing powerhouse.