Can India Take Over China’s Position as a Global Manufacturing Hub?

Posted by Written by Nishtha Yadav Reading Time: 4 minutes
  • With disruptions in China’s manufacturing and production operations and delayed delivery of goods as a result of the ongoing coronavirus outbreak, many global companies are seeking alternative destinations to diversify their supply chains.
  • With low labor costs, incentives and regulatory relaxations for manufacturing, and a reduced corporate tax rate, India has emerged as an alternative hub for global manufacturing.
  • India is already building its local supply chain capacities, which is key to manufacturing firms relocating from China or expanding their operations into the country.

Due to its relatively cheap land and labor, factories equipped with the latest technology, and favorable policies for foreign investors, China is a leading manufacturing hub for companies worldwide. However, the ongoing trade tensions with the US and now the COVID-19 outbreak has completely disrupted China’s supply chain. The subsequent closure of Chinese factories during the outbreak heavily impacted sectors as diverse as automobile, pharmaceuticals, and electronics across the globe.

As a result, more global companies are now actively looking to diversify their manufacturing and production dependencies to be better prepared for any future emergencies.

India certainly has an edge to be an alternative manufacturing site of choice – for instance, according to industry experts, the entry level salaries for workers in India start between INR 12,000 (US$157) and INR 15,000 (US$196), while in China the salaries are about three times higher.

Apart from low cost of labor, India also offers lower operating costs, competitive infrastructure, special economic zones (SEZs) that offer duty free exports among other benefits, incentives to boost domestic manufacturing, and business-friendly policies. Plus, while China is engulfed in a trade war with the US, India has a comparatively good relationship with the US with both countries currently engaged in bilateral trade talks.

Further, businesses in India have started building up local supply chain capacity in order to de-risk from China and lower manufacturing costs. This development will definitely be of interest to foreign companies who are looking to exit China or expand their manufacturing operations.

Here we spotlight a few reasons why India is the best suited destination to replace China as the next global manufacturing hub.

Large market

According to the World Economic Forum, India is expected to be the third largest consumer market by 2025, just behind the US and China. In the report, it was said, “India’s top 40 cities will form a USD 1.5 trillion opportunity by 2030, many thousands of small urban towns will also drive an equally large spend in aggregate. In parallel, there will be an opportunity to unlock nearly US$1.2 trillion of spend in developed rural areas by improving infrastructure and providing access to organized and online retail.”

Rising affluence is the biggest driver of this growth, followed by the change in consumer behavior and spending patterns, especially in lower-tier cities.

Growth in digital connectivity, infrastructure development, coupled with rising household incomes and an increase in India’s consumer spending represent massive opportunities that lie in the Indian market.

Corporate tax rate

To encourage investment in the manufacturing sector, the Indian government has taken proactive steps, including offering competitive tax rates.

Last year, the corporate tax rate was reduced in India for the first time in three decades, and the manufacturing sector benefited the most from the slashed taxation rate.

For manufacturing firms incorporated after October 1, 2019 and beginning operations before March 31, 2023, the corporate tax rate has been slashed from 25 percent to 15 percent (this will amount to an effective tax rate at near 17 percent, including surcharge and cess).

This lower tax rate has allowed India to compete with ASEAN’s emerging economies like Vietnam, Thailand, and Indonesia for foreign investment more effectively. India, however, has an edge over these nations due to its larger market, cheap labor pool, and quick availability of labor.

Boosting domestic manufacturing

Under the ‘Make in India’ initiative that encourages companies to manufacture their products in India, the government announced several incentives for foreign firms looking to set up here.

For instance, last month, it was announced that about US$6 billion is now allocated to boost domestic manufacturing – to attract investment, incentivize local electronics and components manufacturing, and export-based production in the country.

Under this program, India is intent on setting up more local manufacturing and assembling units taking advantage of tax and industry-wide incentives, easing foreign direct investment (FDI) rules, and raising import duties.

Encouraging forecasts

In a report published in February 2020 by UBS, a financial services company based in Switzerland, analysts remarked on initial signs that India was becoming a preferred destination for companies looking to shift from China, and to diversify their supply chain.

The UBS report added, “given India’s competitive advantage in terms of land and labor availability, exports has always been a big hope historically but it is now seeing a turn as global manufacturers long settled in China are looking to diversify their manufacturing base. India has scale advantage and key success factors locally are also improving.”

Foreign firms in China are talking to India

Around 1,000 foreign firms are presently engaged in conversations with Indian authorities, and at least 300 are actively pursuing production plans in India – in sectors such as smartphones, electronics, medical devices, textiles, and synthetic fabric.

A government official was quoted in a media report saying, “We are hopeful that once COVID-19 is in control, a lot of things will fructify into actual relocation. And India will emerge as an alternate manufacturing destination. Many countries like Japan, US, and South Korea are over-dependent on China and that is now very apparent.”

With this latest development, the government is expected to focus its efforts on reducing the cost of production and manufacturing to attract foreign firms in India.


India Briefing is produced by Dezan Shira & Associates. The firm assists foreign investors throughout Asia from offices across the world, including in Delhi and Mumbai. Readers may write to india@dezshira.com for business support in India.

 

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