The Covid-19 pandemic has proved that the world’s dependence on China poses serious economic, political, and strategic risks. As global companies look for ways to be less reliant on the nation, India is waiting eagerly in the wings.
The impact of the pandemic on China is a “blessing in disguise” for India, transport minister Nitin Gadkari said in a recent interview.
India’s geographical proximity to China and its massive, cheap labor base make it a potential alternative to the world’s factory. But the country remains miles behind China on important factors such as mass production infrastructure, availability of skilled labour (pdf), and stability in foreign investment and tax policies.
Companies may be willing at this moment to take higher risks than before to make things work in India. And the Indian government appears more committed than ever to make the most of the opportunity provided by the pandemic, even as it battles a rise in cases.
Does India have what it takes to make the most of this moment?
In 2016, an estimated 890 multinational firms were operating some part of their business in India, according to an analysis by global consultancy Bain & Company. Over the last three months, the Indian government has announced incentives that could potentially woo many more. These efforts have already caught the attention of firms in sectors such as mobiles, electronics, medical devices, and textiles, who officials say are actively pursuing plans to set up in India.
For instance, in May, the Indian government announced a new $5.3 billion incentive program for the electronics sector which will see domestic and international companies rewarded for hitting specific investment and sales targets.
India is also reportedly preparing a piece of industrial land, cited in media reports as being “nearly double the size of Luxembourg” to attract investors who are looking for alternatives to China. The difficulty of acquiring land in India in the past has forced both foreign and domestic companies to abandon or drastically alter investment plans.
Just days after the incentive program was introduced, Indian phonemaker Lava announced it was shifting production back home from China as the incentives made production in the country much cheaper. Casa Everz Gmbh, the owner of the German footwear brand WellX, has also recently said it will move production from China to India. US-based electronics products makers Teledyne and Amphenol, and medical equipment maker Johnson & Johnson $JNJ, have also shown interest in setting up factories in India.
“China is nearly fully penetrated in most consumer goods but India has a huge scope for expansion,” Swaminathan Aiyar, an economist and research fellow at the Washington DC-based think-tank Cato Institute, told Quartz.
Besides manufacturing, experts say investors may also start pumping funds into India as they hedge their bets on China. Anand S, a vice president at growth strategy firm Frost & Sullivan, says he’s observed a “significant reduction” in investment interest from Japanese and American companies in China in the first quarter of 2020. He believes those firms may now be open to plowing their money into “favorable countries like India.”
Skeptics don’t believe these moves can be claimed as victories yet. Moving export manufacturing bases, such as in Lava’s case, could take years, points out Jaison Davis, a senior economic analyst at research firm GlobalData. “It may be too soon to celebrate on our own companies coming back home,” Davis wrote in an email. “Regarding Apple $AAPL, we need to increase our capacities to do actual production.”
Narendra Modi’s flagship “Make in India” initiative has tried to promote domestic manufacturing by making government policies more business-friendly.
Six years after its launch, the campaign has not managed to solve major bottlenecks. A low-skilled labor population and lack of manufacturing capabilities have played a role.
As an example, some international mobile phonemakers have set up factories in the country. But these factories mostly only assemble components that are imported from China, because India does not have the capabilities to make the thousands of parts that go into the device. The situation is the same when it comes to manufacturing other electronics.
Some place the blame on erratic policy and poor execution from above. “The Indian government doesn’t have the vision to create India as a manufacturing hub. They have piecemeal initiatives, but on the ground, things continue to be very different,” said Yugal Joshi, vice-president at Texas-based consultancy Everest Group. “Most of the push may come from corporates themselves who want to de-risk manufacturing operations,” Joshi says, given, among other factors, China’s “growing friction with the US and other international powers.”
Add to this mix India’s infamous bureaucracy, issues with corruption, and the slowing economy, and it’s clear that the country is nowhere close to becoming China as yet. This has only been augmented by its decision to pull out of a multilateral trade agreement with 12 Asian countries last year, weakening its regional trade integration further.
In a recent survey of Indian business leaders, almost 30% of respondents said they believe India has no advantage over China because the country will take at least the next two to three years to come out of the economic moribund caused by Covid-19. Conducted by infrastructure projects databank Projects Today, the survey included 233 builders, architects, consultants, and contractors.
They expressed concerns that India lacks top-notch infrastructure, liberal labor laws, and the industry-friendly policies China has developed since the 1950s. India is also beset by dismal literacy and education rates. Only around 37% of Indian students graduate high school, compared to 65% in China, according to the most recent World Bank data available.
The survey respondents did say that once the country has emerged from the impact of Covid-19, India could take the lead in some sectors such as pharmaceuticals, medical equipment, automobiles, and textiles. After all, India did increase its production of personal protective equipment (PPE) from 47,000 annually to 200,000 items daily pretty recently.
Ironically, any chance of India’s success hinges on its dealing with its dependencies on China first.
Most industries in India today are heavily dependent on China, which could make it difficult for India to get a leg up in manufacturing without it.
Raw materials: Around 88% of the components used by India’s mobile handsets industry today are imported from countries like China, according to the Confederation of Indian Industry. The country’s successful generic pharmaceutical sector sources most of its advanced ingredients from China. ”If India wants to continue to make low-cost medical drugs and export it to other nations (African countries are one of our major markets), India should be able to procure the raw material at cheap prices,” GlobalData’s Davis wrote.
Capital: Estimates of net Chinese investment in various sectors in India surpass $26 billion. “There are several infrastructure projects including the high-speed rail network between Chennai and Bengaluru that are likely to have investment coming from China,” Anand S of Frost & Sullivan said. “Any initiatives that are likely to have an adverse impact may end up hobbling economic relations between these two countries.”
Virtual economy: Eighteen out of India’s 30 tech unicorns are backed by Chinese investors, November 2019 research from Mumbai-based foreign policy think-tank Gateway House showed.
Entertainment: Tiktok, owned by Chinese “app factory” ByteDance, has become all the rage in India, as a form of entertainment, and a platform for companies’ marketing and branding efforts. Companies like Paytm, Vodafone, Cadbury, and Flipkart advertise extensively on the video platform to attract consumers in smaller cities. India is also obsessed with Tencent’s gaming platform PUBG, and youngsters in the country have been known to earn up to Rs600,000 month by live-streaming their games.
These dependencies poses serious challenges for India as it works to position itself as an alternative to China.
It took four decades of concerted effort for China to get to where it is today. India needs to make the right investments now and reevaluate how it regulates industry at both state and national levels, independent startup sector analyst Harish HV says.
Regardless, the stiff competition from China-made goods is here to stay, despite any coronavirus-related hiccups facing industries. In spite of sluggish demand, China’s factories posted a 3.9% hike in industrial output in April versus a year earlier. Meanwhile, India’s Index of Industrial Production (IIP) fell 16.7% in March compared to last year.
“What happens if China depreciates its currency? In that case, Chinese products will be cheaper and people will continue to buy their products,” Nobel laureate Abhijit Banerjee told Bengali news channel ABP Ananda on May 11.
India is also not the only competitor in the race. Southeast Asian countries such as Vietnam, Thailand, and the Philippines are increasingly filling up the vacuum created by China.
Still, “between the US-China trade war, recent skirmishes regarding Hong Kong, and the overall impact of Covid-19, I think we are going to see some major global shifts,” says Anindya Ghose, professor of technology, operations, and statistics at New York University’s Stern business school.
If India doesn’t take the opportunity caused by the pandemic to position itself as a business-friendly alternative to China, companies could easily look to other low-cost, more efficient hubs. If it’s ever had a chance to play catch-up with China, the moment is now.
