In recent times, India has been hinting at its ambition to become a significant player in global manufacturing, specifically with aspirations to replace China as the leading manufacturing hub. However, recent developments in US-China trade relations could potentially derail these plans. The context is underscored by a recent trade “reset” agreement between Washington and Beijing, which has resulted in significant tariff reductions on imports, a move that some analysts believe may impede India’s growth trajectory in manufacturing.
Last week, the Trump administration announced a substantial reduction in tariffs on imports from China, dropping them from a staggering 145% to 30%. This poses a stark contrast to India’s tariffs, which stand at approximately 27%. Analysts like Ajay Srivastava from the Global Trade Research Institute (GTRI) express concerns that the momentum of manufacturing investments moving from China to India could either stall or reverse, following this trade agreement. While India’s low-cost labor markets may endure, the risk is that high-value-added growth could be compromised, stunting any advancements made.
The previous optimism that enveloped India, particularly after Apple Inc. announced a shift in production of iPhones destined for the US from China to India, stands in stark contrast to the current concerns. Notably, even as US President Donald Trump advised Apple CEO Tim Cook against setting up manufacturing in India due to its high tariff status, some analysts argue that India remains well positioned to emerge as an alternative supply source for the US in the near term.
Some positive signs were emerging prior to the trade agreement, with economists like Shilan Shah from Capital Economics indicating that India’s exports to the US closely mirrored those that came from China. Furthermore, a recent survey reported a remarkable surge in new export orders, reaching a 14-year high. When additional anecdotes were reported by Nomura, suggesting that India appeared to be carving out a niche amidst trade diversions and a supply chain shift, it painted a hopeful picture against an otherwise uncertain backdrop.
However, the broader picture necessitates a cautious approach. Analysts are inclined to believe that opportunistic shifts in manufacturing might favor India in the long run regardless of the immediate ramifications of the US-China trade developments. Prime Minister Narendra Modi’s government has demonstrated a new willingness to attract foreign investments, moving away from previous protectionist stances, which bodes well for India.
The entrenchment of trade negotiations between India and the US also presents potential opportunities for the Indian economy. By negotiating favorable trade deals, India could strategically position itself to benefit from the fallout of the ongoing “China exodus” as firms look to diversify their supply chains. On the diplomatic front, India has successfully signed a trade pact with the UK, which considerably reduces duties in influential sectors such as automotive and liquor.
However, challenges remain multifaceted. The aforementioned trade reset has allowed China to regain its competitive posture. Even as companies from various Asian nations vie for manufacturing opportunities, analysts highlight the importance of India enhancing its ease of doing business ecosystem, which has frequently frustrated foreign investors and hampered production capacity. Consequently, the manufacturing share of India’s GDP has stagnated around 15% for two decades, indicating underlying challenges resistant to the current optimism.
Moreover, India’s reliance on Chinese imports for vital raw materials and components gives rise to complications in fully capitalizing on potential shifts in supply chains. Srivastava pointed out that while Apple reportedly garners over $450 per iPhone sold in the US, India retains less than $25, as a substantial portion of the phone’s value lies in components imported from China.
Lastly, broader concerns loom regarding the potential for Chinese enterprises to reroute their exports through India, complicating the nation’s ability to develop its own manufacturing capabilities. Analysts caution that while such actions may address immediate manufacturing gaps, they could stymie local innovation and capacity growth, ultimately hindering India’s long-term aspirations.
Despite flagship announcements from major companies like Apple, a fundamental shift in India’s manufacturing ecosystem remains a distant goal. For India to realize its ambitions, substantial reforms are essential to lower production costs, streamline logistics, and enhance regulatory certainty. In summary, while optimism abounds, India must be judicious in securing its position in global manufacturing, navigating through complex geopolitical landscapes and internal challenges.