US President Joe Biden (right) speaks with India’s Prime Minister Narendra Modi during a meeting with American and Indian business leaders in the East Room of the White House in Washington on June 23. Modi’s US visit came as multinational corporations are increasingly looking to India as an option for diversifying away from China. Photo: AP
Opinion
Macroscope
by Tai Hui
Macroscope
by Tai Hui
US-China tensions offer India a chance to flex its manufacturing muscles
Rising US-China tensions have made India an option for multinational firms looking to diversify their supply chains, but there is still work to do
Making India an easier place to do business must include improvements in infrastructure and managing the interaction between the central and state governments
India is attracting investors’ attention, more so after Indian Prime Minister Narendra Modi’s visit to Washington, where he met US President Joe Biden and addressed a joint session of Congress. Meanwhile, US tech giants, including Amazon and Google, are increasing investment in India.
Recent US-China geopolitical tensions have also made India an option for multinational companies looking to diversify their supply chains. For example, Apple has started to make consumer electronic products in India.
Is this an opportunity for India to enter a period of rapid growth, similar to China’s growth spurt after its accession to the World Trade Organization in 2001? The conditions for such a success story are coming together, but additional development is needed.
The most frequently cited advantage for India is its demographic trend. China’s population is starting to shrink, and the legacy of its one-child policy means it is also rapidly ageing. In contrast, India’s population is still expanding. By 2040, the United Nations projects that China’s median age would reach 48 years, up from last year’s 38.5. In contrast, India’s median age would only rise to 34.6 years from 27.9.
China’s demographic shift and the rise in its educational level mean its historical advantage of cheap, abundant labour is disappearing. In the past decade, many labour-intensive manufacturing jobs have shifted to South and Southeast Asia, including Indonesia, Vietnam and Bangladesh. In China, these factory jobs are being replaced by jobs in the service sector as the country’s consumption shifts from goods to services.
This opens up an opportunity for India to play a larger role in global manufacturing. The rise in Indian consumers’ income could also help develop the local market for multinational companies, making moving production to India even more justifiable.
12:50
World’s largest population: why it could be a headache for India
World’s largest population: why it could be a headache for India
Ample cheap labour alone is not enough to attract multinational companies to set up manufacturing bases in a country. While India’s population is large, there are other countries with large and young populations that are also cost-competitive. The ability to conduct business and having the necessary infrastructure are also critical.
India has risen through the Business Environment Rankings compiled by Economist Intelligence Unit. It ranked 10th in Asia in the 2023-2027 forecast period, up from 14th in the 2018-2022 period. India’s gains in the rankings came from policy reforms and expected improvements in areas such as infrastructure, taxation and trade regulation.
Infrastructure is an important component of a successful manufacturing powerhouse. India ranked 38th in the World Bank’s Logistics Performance Index, compared with China’s 19th, Vietnam’s 43rd and Indonesia’s 61st. The overall scale of India’s infrastructure is still modest compared with that of China, but this also offers an opportunity for investment to build ports, airports, roads and rail.
Another development that businesses need to manage is the interaction between the federal and state governments. Compared with China or Vietnam, local voter preferences in India could have a stronger impact on the government’s policy when it comes to striking a balance between creating jobs and handling environmental and social issues associated with foreign investment. The next general election is expected to take place in April or May next year, and businesses might want to see if Modi’s economic policy can continue in coming years.
These business environment metrics show that India has reached a sweet spot to compete with a number of Southeast Asian nations to be the “plus one” when multinationals are considering their “China+1” manufacturing strategy. This is likely to be a multi-year process as India builds up its capability in infrastructure while providing tax incentives and support for overseas investors looking to set up shop in the country.
With these improvements in mind, the latest progress in diplomatic relations between the United States and India will further enhance the country’s appeal. International businesses can potentially hedge themselves against the tense Sino-US relationship. The stars are better aligned for India’s manufacturing sector to enter a new phase of development.
Tai Hui is chief market strategist for the Asia-Pacific at JP Morgan Asset Management
