According to the latest reports, the Japanese government has struck a deal with two companies – Toyota-Tsusho and Sumida – which will see it offer financial assistance to shift their manufacturing bases out of China to India, under a recent subsidy-based programme to reduce the nation’s supply-chain reliance on China. The announcement followed Prime Minister Narendra Modi’s meeting with global investors yesterday where he reiterated his intent to transform India into a global manufacturing hub in the coming years.
China’s phenomenal and sustained rise to the top of the manufacturing ladder has, in recent months, been severely dented in the face of one of its most dangerous exports – the COVID-19 virus. During the initial months of the outbreak, the virus’ effect on China’s factory output led to unprecedented disruptions in the global supply-chain network. This has subsequently led several companies to turn their focus towards a ‘China+1’ model to diversify the degree of supply-chain risk that has been so brutally exposed by the pandemic.
India in a pool of competitors
As the global consensus around delinking from an increasingly aggressive and dictatorial China takes shape, India is presented with a unique opportunity to position itself as a manufacturing alternative. This, of course, is no easily achievable feat.
It took 3 decades for China to grow into the manufacturing powerhouse it currently is. According to data from the Economist, in 1990, China accounted for just 3 per cent of total global manufacturing output. Data from a United Nations report published in 2018 shows this figure to have risen to a whopping 28 per cent. The same report pegged India’s contribution to global manufacturing output at just 3 per cent.
Yet, India is not alone in seeking to capture foreign direct investment into manufacturing. Its competition comes from other Asia-Pacific powers like Malaysia, Indonesia, Thailand and Vietnam, each of which has varying advantages and disadvantages.
Malaysia benefits from a low-cost production base making it ideal for high-tech sectors but on the flip side, suffers from lower productivity and a shortage of skilled workers. Indonesia has grown remarkably in recent times as an attractive alternative to China specifically due to an increased focus towards manufacturing relative to its overall GDP. In Thailand, manufacturing companies can benefit from a highly-skilled workforce and low rates of corporate taxation. Over the last decade, Vietnam has also managed to increase its overall productivity by nearly 50 per cent.
The five nations (including India), popularly known as the MITI-V (Mighty Five), are widely regarded as likely to be the chief beneficiaries from the global drive to de-link from China.
India needs to address several institutional, labour-related and infrastructural challenges if it is to be able to, firstly, attract FDI into its manufacturing space, and secondly, retain these flows. India’s import tariff regime, for instance, which effectively increases the cost of inputs for domestic firms, has long been touted as a hindrance.
The nation’s significant deficits as they relate to physical and social infrastructure will also need to be addressed. India has made some headway in moving up the ease of doing business rankings yet there remains space for further reforms towards improving the overall business climate. Ultimately, the fundamental rule of microeconomics will prevail – minimum risk brings maximum investment.