Global supply chains are undergoing a radical reconfiguration, against the backdrop of the COVID-19 pandemic, rising economic nationalism across the world, and significant geopolitical shifts.
The pandemic has highlighted the risks a single-source supply chain carries, as companies across the world have faced disruptions to the flow of materials from China, the initial epicentre of the pandemic. Geopolitical and trade tensions between the U.S. and China have also simmered in recent months, turbocharging the push to diversify supply chains1.
As multinational companies seek to relocate their global supply chains, emerging economies— including Thailand, Vietnam, Malaysia, Indonesia, Philippines and India—are increasingly seen as attractive sourcing destinations.
As a stable economy with a host of enabling factors for attracting investments, India emerges as a natural choice in filling the supply chain vacuum left by the exodus from China.
The strength of India’s case lies in its diverse business landscape, skilled workforce, and domestic market of 1.3 billion people with growing disposable incomes. Labour costs are also relatively low-- monthly minimum wages in India are INR5340 (or USD73)2, versus USD320 in China3, USD132 in Vietnam4, and USD127 in Indonesia5. India has the fifth largest gross domestic product (GDP) by World Bank estimates and is ranked ninth in the list of global FDI recipients in 20196. A young populace, a wide base of English speakers, robust macroeconomic indicators, massive consumption levels, and a politically stable government dedicated to fast-tracking reforms, are among the other factors that can be considered in India’s favour.
Further, India has been liberalising its foreign direct investment (FDI) policy in recent years; and now has a 100 per cent FDI allowance in greenfield projects and 74 per cent in brownfield projects under the automatic route7.
Among India’s states, Tamil Nadu, Gujarat, Andhra Pradesh and Odisha offer advantages, with dedicated regions spreading over 250 sq. km. for manufacturing facilities and logistics support, as well as various export-, state-, and area-based incentives to promote investments in specific regions.
While India offers global investors a large and attractive market, a sizeable demographic advantage and a vibrant private sector, there are a few obstacles that need to be addressed if the country is to realise its immense potential as a global manufacturing hub. Two of the most well cited impediments are poor infrastructure and stifling bureaucracy.
There’s broad agreement that infrastructure development is key to lifting India out of its worst economic crisis since independence. Infrastructure spending has, therefore, received a great deal of attention from the government, which last December created the National Infrastructure Pipeline (NIP) that envisages about USD1.6 trillion (INR111 lakh crore) of infrastructure spending over the next five years, with the sweeping objectives of improving productivity, ease of living, economic growth and employment.
Complex government regulations and red tape can also be critical challenges and there can be a lot of variance in central and state government jurisdictions. Manufacturing operations, for instance, apply under state jurisdictions. India is making progress towards addressing some of these challenges, with central and state governments increasingly aligned and dedicated towards the twin-targets of improving the ease of doing business and transforming India into a global manufacturing hub.
Businesses that are looking to reconstitute their global production networks will require substantial due diligence in evaluating the suitability of specific geographies for their respective set ups. The availability of raw material, land and labour, are among the factors that they will need to carefully assess.
Given India’s inherent strengths and weaknesses, specific industries in India are relatively better positioned than others to emerge as attractive and viable alternative locations in the global supply chain rebalancing efforts. India could offer significant advantages in the following sectors to businesses that are seeking to diversify supply chains.
The Indian pharmaceutical industry is the world’s third largest in terms of volume and thirteen largest in terms of value. The impact transcends the value chain, with Indian pharmaceutical companies leading in APIs as well as formulations. India’s API industry is ranked the third largest in the world, and the country contributes approximately 57 per cent of APIs to the WHO’s pre-qualified list8.
It also caters to 62 per cent of the global vaccine supply and is the largest supplier of generic drugs to the global manufacturing industry. Supported by a growing pharma industry, India has a large, growing trained and skilled workforce to support large-scale pharmaceutical manufacturing projects. It also has the ability to manufacture high-quality medicines at competitive prices, with approximately 33 per cent lower manufacturing cost than that of the U.S. and half of that in Europe9.
India’s chemical industry is expected to clock a compound annual growth rate (CAGR) of 7 to 8 per cent10 to reach USD160 billion by 2025 and account for 3-3.5 per cent of the global chemical industry according to KPMG in India’s analysis. India has showcased continuous growth and outperformed the global industry in the past decade, driven by strong domestic demand, export competitiveness and an enabling ecosystem. India is seen as a reliable source for chemicals, with increased exports to the EU and the US on the back of rising competitiveness of domestic production, investments in R&D and protection from cheap imports. India has also witnessed manufacturing growth driven by usage in construction, automotive, F&B and consumer products.
Auto-components segment in India is estimated at USD48 bn and is expected to motor along at a CAGR of 27 per cent11 in years to come. The Automotive Mission Plan 2016-26 targets 3X growth for automotive industry and establishes India as a manufacturing base and an export hub. The plan also seeks to outline the trajectory of advancement of the auto-ancillary ecosystem in India. Central and state governments have introduced multiple policies and financial incentives to drive the growth in the auto-components segment. India is well positioned to be an alternative source of supply to the global auto-components industry with 100 per cent FDI, cost advantages and incentives.
India is poised to become one of the world’s largest connected economies owing to a huge strategic ecosystem of digital consumers, the internet and smartphones. India is home to the second largest digital citizenry in the world, after China, with a reported 673 million internet users12, and is also the second largest global market for smartphones13. Given these intrinsic advantages, India is emerging as a destination of choice for smartphone manufacturers across the globe. The government has rolled out various policies and incentives to drive the manufacturing of electronic components and launched production-linked incentive schemes to drive investments in the sector.
While India has many of the ingredients to emerge as the preferred market for global investments and manufacturing, it is critical that the government maintains both the pace as well as scalability of reforms, while strengthening infrastructure growth.
Regulatory and investment reforms will need to integrate progressive policy changes in land, incentives and infrastructure, with foreign investment norms and tax regimes. India also needs a more aggressive approach in reaching out to global companies to expand their business footprint in the country.
As China is expected to remain one of the most popular destinations for FDI, even with the ongoing geo-political rebalancing, the most realistic strategy for supply chain realignment is a ‘China Plus One’14 approach. This also allows for a non-linear consideration of global trade and a de-risking of supply chains.
There would, therefore, likely be a shift in focus from efficiency and lowest cost drivers, to a value framework that assigns greater weight to risk exposure, supply alternatives, tax considerations, and channel complexity.
In the quest for safer harbour in supply chain configurations and selection of manufacturing locations, three factors will ultimately play a pivotal role: 1) long-term geopolitical stability; 2) supportive policies, taxation and regulations; or 3) availability of land and logistics infrastructure.