By Subrata Majumder
Chinese official English daily “Global Times” reiterated recently in its column that India’s policy initiative to reduce imports from China would backfire. It said “India needs integration, not protection”. In another argument, given the Apple’s Inc shifting to India, Global Times jeered, “Apple, facing softening demand, can hardly make India a manufacturing hub”.
Needless to say, Chinese media brushing aside, India’s policy to reduce imports from China has upset Chinese researchers, who raised alarms on India emerging as substitute for China. According to Hu Shisheng, Director, South Asia, China – Institute for Contemporary Industrial Relation, “since past 2 years Modi government initiated Industrial Substitution for China. There are 3 major components of Modi government policy. First, introduction of PLI scheme (Production Linked Incentive), second, the global search for China alternatives and third, enhancing free trade agreement routes to topple the burgeoning imports from China”.
“China’s export slowdown demonstrate the end of an era of supply chain”, said Devenshire –Elli, Chairman of Dezan Shire & Associates. He revealed that during first 4 months of 2022, there has been a slowdown in China’s exports.
Debates, arguments spun on India’s various policy attempts and challenges to reduce import dependence on China. In the trade imbalances of India, there are two areas, which became the prime factors to trigger the misbalance. One, it is oil imports and second, large imports of machinery, equipments, components and parts. Among the machinery, equipments, components and parts, import of supply chain is the major cause for trade imbalance after India transformed itself into a major hub in manufacturing.
Supply chain consists of largely electronic components, auto components and pharmaceutical products. China is the major source for import of these supply chain. Given the strategic shift in manufacturing base, imports from China spurred and have become the primary cause for trade imbalance.
Government of India has made several attempts to substitute these imports through various policy initiatives to increase indigenization. Among them, top priority was given on PLI (Production Linked Intensive). It provides direct incentive to encourage domestic production through sales, covering 13 industries.
Initially, eyebrows were raised on the success of PLI scheme to reduce dependence on China. This is because big gap exists between the economic viability of the two countries to challenge the Chinese competitiveness in terms of costs, logistic and timely supply. Notwithstanding, success stories were exhibited. This gives ray of hope to reduce dependence on China.
A drastic fall was noticed in the import of electronic components from China. This specific industry alone was the major reason for over-dependence on China. Nearly 50 percent of imports of electronic components come from China.
During the first nine months of 2022-23 (April-November), India’s dependence on China for electronic components plunged to 34 percent, as compared to 49 percent in 2021-022 (April-March). Following suit, dependence on auto components from China dropped to 24 percent during nine months of 2022-23, as compared to 26 percent in 2021-22 (April-March). Given this, further reduction in Chinese imports is imminent.
PLI (Production Linked Incentive) is a new challenge to give a lease of life to Make in India. Though several reforms were made to push Make in India, such as stepping up Ease of Doing business, reduction in corporate taxes, adopting digitization and others, they lagged investment initiative, mainly battered by COVID pandemic.
PLI made a new inspiration among the investors. As of September 2022, PLI for large scale electronic manufacturing (LSEM) attracted investment of Rs. 4784 crore and led production of Rs 2,03,952 crore , including exports of Rs 80,769 crore. India emerges the second biggest manufacturer of mobile phone and the largest manufacturer of smart phone in the world.
Recently, Standford economist and Nobel laureate Michael Spence declared “India is the outstanding performer now, noting that the country remained the most preferred destination for investment”. Julie Gerdeman, the CEO of supply chain risk management platform Everstream, said “India has a large labour pool, a long history of manufacturing and government support for boosting industry and exports. Because of these, many are exploring whether India is viable alternative to China”.
However, much was said about Vietnam as an emerging alternative to China and a major competitor to India. Undoubtedly, throes of shifting of US firms from China fortifies Vietnam as the tough competitor to India. Nevertheless, India was not left behind. India emerged a major destination for US investment. US investment in India is four times bigger than in Vietnam. In 2021, US investment in India was US $ 8.5 billion, as compared to the US $ 2.7 billion in Vietnam.
Though India was not hyped as Vietnam for alternative supply-chain manufacturing, it has several factors to edge Vietnam. Firstly, it has a larger domestic market and a larger pool of skilled workforce, including IT operation. Secondly, its wage level is marginally higher than in Vietnam. Thirdly, it is far ahead in digitization than Vietnam. Lastly, political sovereignty of India is stronger. The decade long Vietnam – China faceoff in South China sea is a case in point.
As a matter of fact, what hindered India from to being a better place for investment is its antiquated bureaucracy and not its economic merits. According to the Asia Briefing survey, India is neck to neck with Vietnam in terms of labour productivity, growth and wage level. (IPA Service)
