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Soon after Narendra Modi clinched a landslide victory in 2014 general elections he had vouched for ‘Make in India’. The ambitions have had a heroic journey to grow sinews that makes the Prime Minister of world’s fifth largest economy to now vouch for ‘Make for the world’.
There are still miles to go before India laps up a significantly greater share of what the world consumes. However, companies, and we are talking about the big boys, across sectors from Walmart to Apple have increasingly focused on India while slowly junking dependence on China, a country who has been engaged in trade war with the US and in real fight scenarios with India at the border.
In the aftermath of border clashes, India took several measures to counter Chinese influence, banning several apps and excluding Chinese companies from telecom gear supply. Fuelled by growing nationalism, there emerged a resounding call within India to eschew Chinese products. The scenario for vocal for local cheer has amplified to a stage where China was seen to incur a substantial loss of around Rs 1 lakh crore in just Diwali-related business this year.
India gains, China loses
This apart, India is increasingly hitting China where it hurts the most – making the factory floor to lose work. Data patterns have stamped India as a great alternative to China as the global supply chain shifts away from the world’s second largest economy to the one that is aspiring to be the third largest by 2030.
In fact, while India is repeatedly making headlines for optimistic growth amid global challenges, China is at crossroads with structural issues and real estate, among others, dragging the economy. Last week, S&P came out with a report titled ‘China Slow India Grows’. They predicted India’s GDP to grow to 7% in 2026 and China’s economy to ease to 4.6% in 2026. S&P also expects Asia-Pacific’s growth engine to shift from China to South and Southeast Asia.
Moody’s on December 5 cut outlook on China to negative from stable.
UBS had earlier said India’s growth could rise to 6.25-6.75% YoY by 2030 under an optimistic scenario and 6.75-7.25% YoY under a blue-sky scenario, leading to job creation, helped by the supply chain shift happening owing to the US-China trade war, deglobalisation and pandemic disruptions.
The Chinese sad story: Decline amidst global shifts
Fitch today said citing recent data that China continues to serve as the primary supply-chain hub and its outlook maintains that China will persist as a crucial component of global supply chains, likely attracting Foreign Direct Investments.
However, it for sure is experiencing a decline in the production of specific manufactured goods and the FDIs are losing pace.
In 2022, China maintained its preeminent status in global supply chains, commanding nearly 18% of total global goods exports, surpassing the U.S. at 12%, Fitch said.
Despite escalating trade tensions with the U.S., China exhibited a consistent rise in market share since 2018, notably accelerating during the pandemic-induced surge in global demand for goods. China expanded its global market share across machinery, electronics, chemicals, metals, and automobiles in recent years, although 2023 data suggest a modest decline.
Trade between China and the U.S. slowed over the past decade, with Chinese export growth to the U.S. diminishing from double to single digits, further reflected in the decrease of Chinese products in U.S. imports to about 15% by mid-2023 from 23% in 2015.
In the third quarter, China witnessed its first negative FDI inflow since data collection began in 1998. Fitch said the dip in FDI is partially due to temporary factors such as increased repatriation of earnings by foreign firms caused by growing interest rate gaps between China and advanced economies. However, structural aspects, including geopolitical concerns, are increasingly impacting the decline in FDI inflows.
Fitch expects incremental FDIs and decisions in supply-chain management are inclined to support alternative destinations due to a combination of geopolitical influences and increasing production expenses in China. This trend is expected to facilitate a gradual relocation of supply chains away from China, potentially benefiting other emerging markets in the medium term, including India.
Shifts in supply chains seem evident in the FDI data of various APAC countries, with increased inflows observed. Comparing inflows in the 12 months up to 2Q23 with the total in 2019 reveals substantial increases in Singapore (30% to USD138 billion), Malaysia (18% to USD10 billion), and India (68% to USD31 billion), Fitch said.
India’s triumph: Gaining ground in global manufacturing
India possesses substantial potential to capitalise on heightened supply chain involvement, emerging as a crucial alternative hub for enterprises seeking to relocate manufacturing operations away from China.
“India is the only country with a large and rapidly growing consumer market and vast labor force on a scale that rivals China for growth potential,” Fitch said. “Companies are likely to be attracted to access this market, with supply-chain considerations acting as a secondary benefit.”
Apple is increasingly looking to harvest India’s fertile soil for iPhone production in a clear shift away from China that once made about 85% of the Pro lineup of iPhones. Media reports on Dec 6 suggested Apple wants Indian factories to make batteries for its forthcoming iPhone. Meanwhile, Walmart is importing more goods to the United States from India and reducing its reliance on China as it looks to cut costs and diversify its supply chain, Reuters had reported.
China remains Walmart’s primary country for importing goods. However, in the first eight months of this year, only 60% of Walmart’s shipments originated from China, down from 80% in 2018. During the same period this year, the world’s largest retailer got a quarter of its imports from India, a jump from mere 2% in 2018.
India has emerged as one of the winners in global manufacturing over the past five years, with its exports to the US surging by $23 billion, a 44% increase from 2018 to 2022, while China experienced a 10% decline in exports to the US during this period, the study reveals.
What India is doing
The Indian government is actively positioning the country as an alternative to China for manufacturing Foreign Direct Investment (FDI) through its Production Linked Incentives (PLI) scheme. Although initial successes mostly involve low value-added assembly plants, these investments could potentially integrate India into global supply chains if companies experience success and contribute to upstream manufacturing and industry growth.
Success stories from India’s PLI scheme include Taiwan’s Foxconn, the world’s largest contract electronics manufacturer, investing significantly in expanding electronics manufacturing within India, aiming to create 100,000 jobs with a USD 700 million investment. Moreover, Apple’s iPhone production in India is expected to increase from 1 in 20 in 2022 to 1 in 4 by 2025. Tata, a major Indian conglomerate, is partnering with Taiwanese universities to train Indian labor in electronics.
India’s infrastructure upgrade efforts, including substantial capital spending reaching 3.3% of GDP in FY24, aim to close infrastructure gaps, a key concern for foreign investors. However, several factors might constrain India’s supply-chain ambitions, such as a challenging business environment, protectionist tendencies, and skill mismatches.
Some distance to cover
Regulatory challenges, like a cumbersome business environment and limited labor market reforms, pose obstacles to foreign investments, Fitch said. Though states like Karnataka and Tamil Nadu introduced labor reforms to attract investment, opposition from labor unions hampers progress. India’s high tariffs and limited support for free trade might also deter global supply-chain integration. Skill gaps in manufacturing technical expertise pose another challenge despite India’s strong high-tech services workforce, the ratings agency added.
While India strives to attract FDI and revamp its manufacturing sector, constraints like regulatory complexities, protectionist tendencies, and skill gaps necessitate gradual reforms to foster a more conducive environment for global supply-chain integration.
India has emerged as a significant beneficiary amid global disruptions that is breaking a 40-year habit of seeing China as its sole factory floor. Nevertheless, with China regaining its footing and other countries vying for a share in the manufacturing landscape, policymakers must revise strategies to position India as a thriving export hub.
India would also need an industrial policy to further up the shifting game. Currently, India lacks a comprehensive industrial policy per se. Instead, it relies on various government schemes, amounting to approximately Rs. 2 trillion, centered around “production-linked incentives”.
An effective industrial policy would solidify government objectives and priorities. It enables companies to understand the government’s commitment to specific sectors, its confidence and assurance in the business environment.
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