Despite the US-China trade deal last month providing a window of limited relief, the manufacturing exodus out of China is expected to gain momentum. The ensuing uncertainty has opened up significant opportunities for emerging markets in South Asia to increase attraction to the investment landscape. These countries recognise that marginal changes to China’s manufacturing-led export basket will create substantial opportunities of scale in their home turfs.
The little resemblance between India’s and China’s current export basket doesn’t make the former a natural substitute. But GoI’s intent to boost electronics manufacturing has sent out a signal to global companies that India is ready to scale up labour-intensive manufacturing to fill the supply-chain gap in the immediate term. Also, steps undertaken to ramp up investments in infrastructure will only help expedite this transition.
While the race for a viable alternate investment destination to China may seem transitory, the decision on new investments will carry a longterm view. India must avoid getting carried away by the promise of an uncommitted capital inflow marked by uncertain period and benefits. Efforts should be made to enable fresh investments in capital-intensive manufacturing activities to reach Indian shores in permanence.
Realising this requires significant improvement in basic enablers that will attract foreign direct investment (FDI). The recent announcement of the lower tax rate for new manufacturing, and a fresh view towards tax dispute resolution will certainly add to India’s competitiveness. More needs to be done to drive globally aligned labour reforms, promoting hassle-free access to raw materials and, most importantly, investments in logistics infrastructure to significantly bring down operating costs for foreign businesses.
In an evolving bilateral relationship between India and the US, there is an increased likelihood of American organisations upping their presence in India in general. Some on the back of the ensuing global trade dynamic have amplified the relevance of this relationship. The germination of the Indo-Pacific geopolitical construct, and the growing collaboration between the US and India, has firmed up ties. Add to this, President Donald Trump’s visit this coming week has created a sense of optimism, and one hopes of increased bilateral cooperation on several fronts.
The timing is right for India to leverage US expertise to drive its two distinct ambitions. First, help shift gears and change its focus from the supply-based export model to a more global demand-based export basket diversification approach, and move up the global value chain. Second, support faster implementation and adoption of India’s long-term aspiration around advanced manufacturing. Efforts are required to attract more US investments in critical sectors.
The success of India to achieve the above two goals will also rest on creating a conducive ecosystem for cross-border engagement and investments in the enterprise segment of small and medium businesses (SMBs), especially in emerging sectors such as agriculture, battery manufacturing, renewable energy, pharmaceuticals and biotech.
While one remains hopeful of a mutually beneficial trade deal in the near future, the opportunity horizon for India and the bilateral dynamic between US and India is far greater and aspirational. The growing domestic market story remains relevant for US companies, as does the promise of an open, competitive and skilled business ecosystem that strives for global excellence in manufacturing and export competitiveness.
It provides significant opportunities for US companies to not just lead efforts to make India a global manufacturing hub, but also to drive profitability and fuel their own global ambitions by leveraging India as an export hub.
(A version of this article appeared in The Economic Times on Feb 22, 2020)