India as a Global-Manufacturing Hub

Introduction

China’s reign as the world’s leading manufacturer came to a halt with the onset of the pandemic, COVID-19, in the first quarter of the FY 2020. According to seasonally adjusted index numbers, China’s manufacturing output plunged by 14.1 percent, mainly because of the COVID-19 lockdown measures, registering an unprecedented decline. The global supply chain disruption came as a shock, even for China. A growing consensus emerged amongst industries on the drawbacks of overreliance on one country for global production. Apprehensions about China has prompted South Asian countries to bid for the position of a global manufacturing hub.

In 1990, China produced less than 3% of global manufacturing output by value as reported by the Economist. However, its share in 2018, as per data published by the United Nations Statistics Division, accounts for 28 percent of global manufacturing output. On the same list, India stands at 3% global manufacturing output in 2018. It took China years to build a systematic structure of aggressive manufacturing; resting on cheap labour in an abundant labour pool, thriving in a business ecosystem backed by state policy and dismal compliance rates.

MITI-V and Global Manufacturing

In close quarters, a group of Asia-Pacific powers often termed the ‘MITI-V’, an acronym for Malaysia, Indonesia, Thailand, India, and Vietnam have emerged as competitors challenging the hegemonic presence of China in global manufacturing. Popularly called the ‘Mighty Five’, there exists stiff competition among the MITI-V countries to displace China. In Deloitte’s report on Global Manufacturing Competitiveness Index, 2016, according to a Global CEO Survey on manufacturing, the report ranks India at 11 in 2016 and projects India to stand at 5 in 2020.

According to the report, all MITI-V nations will be among the top 15 countries in manufacturing competitiveness over the next decade. This projection has gained prominence mainly after the pandemic gripped the world. Global manufacturing output growth has registered a sharp decline of 6.0 percent in the first quarter of 2020 due to economic lockdown measures motivated by COVID-19 pandemic.

In 2016, China, as the leading manufacturer, indicated interests in moving towards a technology and innovation-driven, high-value manufacturing paradigm. Perceived as an opportunity, this opened the market for lower-cost global manufacturing destinations such as the MITI-V; each with their distinctive advantages. Malaysia has a production base with low costs, well suited to high-tech sectors but is fraught with low productivity and talent shortage. Indonesia is an attractive alternative to China because of its robust manufacturing focus in its overall GDP. Thailand attracts manufacturing companies with its highly-skilled workforce and low corporate tax rate, standing slightly below India, but exceeds Malaysia, Vietnam, and Indonesia. Vietnam has raised its overall productivity over the last ten years, growing 49 percent during the period, outpacing other nations like Thailand and Malaysia, but has a long way to go before catching up with China.

The MITI-V nations pose as an ‘attractive option for market and economic growth as well as a growing customer base for manufacturers’. Other advantages include tax incentives, reduced import duties, and lowered tariffs on capital goods and raw materials used in export-oriented production. These nations are emerging as a compelling alternative to the BRICS alliance, solely focused on manufacturing in a world with growing anti-China sentiment.

India

Amongst MITI-V, India has bright prospects of giving China stiff competition. In the Global CEO Survey on Manufacturing Competitiveness by Deloitte, ‘Sixty-two percent of global manufacturing executives’ surveyed rank India as highly competitive on cost, closely mirroring China’s performance on this metric’. In the 2020 Doing Business report by the World Bank Group comparing business regulation, India has ranked 63rd out of 190 economies, improving its position for a third consecutive year, showing commendable efforts at reform. The ranking is a significant improvement from 142nd place in 2014.

Similarly, on the annual Global Manufacturing Risk Index developed by Cushman and Wakefield, countries are ranked on three weighted rankings that focus on conditions, cost and risk. In this report, Vietnam and India move up the cost competitiveness ranking; standing at 2 and 3 respectively for the year 2020, while China continues to retain the top position.

According to the US-India Business Council (USIBC); a powerful lobby group that works to enhance investment flows between India and the US said that ‘India has significantly stepped up its pitch’ to emerge as a global manufacturing hub.

Challenges and the road ahead

As the global confidence in China as the world’s factory dwindles, opportunities emerge for countries like India in capturing the global market. India should prioritise manufacturing in sectors like electronics, textiles, cement and electrical equipment, which have received comparatively less FDI inflow between 2000 and 2019, according to India Brand Equity Foundation. Data on FDI provided by the Department for Promotion of Industry and Internal Trade shows that in 2018-19, the manufacturing sector’s share in total inflows was just 20 percent, while service sectors accounted for most of the inflows. While India has improved its overall performance on the ease of doing business index, focussing on creating an ecosystem which facilitates starting a business, registering property and secure enforcement of contracts could improve investments.

Some strategies to establish India as a global manufacturing hub propose improving the trade balance with China on crucial imports and exports while strategising domestic production according to international market needs. ‘India can potentially reduce its trade deficit with China by $8.4 billion over FY 21-22, which is equivalent to 17.3% of the deficit with China and 0.3% of India’s GDP’ according to a study by Acuite Ratings and Research. The study identifies as many as 40 sub-sectors that have the potential to lower import dependency on China.

On the road ahead, the government must set up large-scale production hubs for labour-intensive industries to provide quality infrastructure. The feasibility of using alternative sources of energy should be estimated to ensure stable power supply to these industries and investments must be made in renewable sources of energy. Improving educational quality with technical training will ensure higher productivity in the workforce. Technological advances in manufacturing, such as the incorporation of automation and 3D Printing, should be encouraged to increase the efficiency of labour. Innovation and skill must form the cornerstone of the manufacturing sector; for India to emerge as a global manufacturing hub.

The pandemic revealed that overreliance on a single country could have severe consequences on the global supply chain and world economy. The post-pandemic world order reinforces the need for a China-Plus-One strategy, indicating the urgency for diversification. While it may be challenging to replace China as a leading manufacturer, India can hope to establish itself as a lucrative alternative.