How India will benefit from China plus one strategy
28 Nov 2022 13:32:29
New Delhi, Nov 28: Some countries stand to benefit more from India as western countries are concerned about excessive dependence on China. US Treasury Secretary Janet Yellen described India as an "indispensable partner" in America's quest to diversify its supply chains during her first visit to New Delhi earlier this month.
Former Australian Prime Minister Kevin Rudd expressed a similar sentiment a day later. "As someone who has dealt with India for the last 20 years, I am convinced firsthand that they are about to attempt a significant policy change," Rudd told a business conference in Singapore.
Rudd's comments highlight a growing consensus among policymakers and analysts that India is emerging as a viable alternative to China as a manufacturing base. "Against this backdrop, India hopes to capitalize economically on Western concerns about growing Chinese hegemony." While the International Monetary Fund has slashed China's growth forecast for next year to 4.4 percent, investment bank Morgan Stanley projects India's economy to grow by 6.1 percent by 2027, on track to become the world's third largest. India has seen a surge in foreign direct investment in recent years, with the country receiving the highest-ever inflow of US$ 81.97 billion in 2020-21. The amount invested in 2018 was more than double the $39.9 billion recorded in 2017. While growing distrust of China is one explanation, government reforms have also made the country more attractive to multinational corporations. "The government has implemented labor market and tax reforms, adopted digital technologies, and improved soft and physical infrastructure," said Ishwar Prasad, Tolani Senior Professor of Business Policy at Cornell University. According to Morgan Stanley, manufacturing as a percentage of India's GDP could grow from 15.6% today to 21% in 2031, more than doubling the export market share of the world's fifth-largest economy. "India is gaining power in the world order," Ridham Desai, Morgan Stanley's chief equity strategist for India, said earlier this month. "In our opinion, these particular changes signal a once-in-a-generation change and an opportunity for investors and companies alike." MNCs are paying attention. As coronavirus disruptions threaten Chinese production, Apple supplier Foxconn is ramping up capacity at an existing factory in Chennai. Pegatron, one of Apple's Taiwanese contract manufacturers, has also started assembling the latest iPhone 14 models in India. Still, about 70% of manufacturing components are sourced from China, according to Counterpoint Research senior analyst Evan Lam, so Apple's reliance on the world's second-largest economy is unlikely to change anytime soon. "Apple's shipments to India continue to grow, as does local demand for Apple products," he added. India has made significant investments in areas dominated by China. Vedanta Resources, an Indian mining conglomerate, and Foxconn announced the setting up of India's first semiconductor plant in the state of Gujarat in September. First Solar announced last year that it would set up a vertically integrated solar module manufacturing facility in the Indian state of Tamil Nadu. China produces 80 percent of the world's solar panels. It is also the fourth largest semiconductor manufacturer with a global share of 15% in 2020, according to the Australian Strategic Policy Institute. The balance is still heavily tilted towards China, and other countries are vying for a piece of the pie. "India hopes to be seen as part of a more reliable supply chain based in a democratic world." However, there are many hurdles in the way of India delivering on its promise. The reform agenda is far from complete," Prasad said, referring to the much-needed cleaning up of the banking sector as well as further improvements to public governance and infrastructure. India ranked 44 out of 160 countries in the World Bank's 2018 logistics performance index, trailing regional heavyweights such as Vietnam and South Korea. "India cannot rely on a level playing field," Prasad said, adding that competitors such as Vietnam, Mexico, and Chile are "ready to seize any attempts by the US and other Western firms to diversify their production bases away from China."
"There is no shortage of labor, but there is a relative shortage of skilled labor," he said, adding that "all of this is taking place against the backdrop of India effectively building higher walls than before." India's protectionist tendencies are another source of concern. Despite signing bilateral agreements with countries such as Australia, the United Arab Emirates, Canada, and the United Kingdom, the government is wary of entering into multilateral trade treaties.