Is India the New China

Recent economic developments and geopolitical tensions, particularly between the US and China, have led to a shift in attention. Tit-for-tat tariffs and other trade restrictions are concerning governments, with the result that the US and leading European countries such as the UK, Germany and France are actively courting India. Companies want greater trading stability as well, so are looking to de-risk and diversify their supply chains.   

So at all levels, there’s a fresh focus on India as a potentially more desirable trading partner – even “the new factory of the world”. To assess whether India can provide the future that so many seek, we talked to Meghna Nair, Manager Risk Services, Atradius India, and to Arun Soundarajan, Country Manager Atradius India. These are their conclusions.

What advantages does India offer as a trading partner?

To begin with, India offers many structural and demographic attractions. A population of 1.4 billion ensures plentiful skilled labour, combined with a relatively low cost base – and enticing consumer markets. In particular, there’s a growing number of educated and tech-oriented professionals, along with a growing middle class, many of whom speak good English.

The country has a long history of manufacturing and associated set-up capabilities. There is also strong government support for boosting industry and exports.

In particular, as Arun Soundarajan observes, “There is a tremendous logistics push by the government. Spending more on infrastructure and growth projects is key to developing resilient supply chains in India; and that’s what India is working towards.”

How has India been benefitting in recent years?

The favourable investment climate has meant that India has been making major gains for some time. In the financial year 2014-2015, foreign direct investment (FDI) in India stood at USD 45.15 billion. That had increased to USD 60.22 billion by 2016-2017 and to USD 83.57 billion in 2021-2022.

A contributing factor to this is the Make in India initiative. This is a major government programme designed to facilitate investment, foster innovation, enhance skill development, protect intellectual property and build best-in-class manufacturing infrastructure in the country. 

The Production Linked Incentive (PLI) scheme, launched in March 2020, is part of this initiative, aimed at boosting domestic manufacturing. It offers an incentive to eligible firms on incremental sales for five years.

Meghna Nair cites the importance of Free Trade Agreements (FTAs) and bilateral trade pacts in helping India become a well-integrated supply chain market: “India has already signed trade agreements with the UAE and Australia, while FTAs with the UK and Canada are in the pipeline.” India and the European Union are also aiming to conclude a deal by late 2023 or early 2024.

Will India become the next ‘factory of the world’?

In many ways, it seems like it. Meghna Nair highlights an excellent example the quantity and quality of investment the country is now attracting: “Apple has significantly increased its iPhone production in India, with output tripling to USD 7 billion in the financial year 2022-2023. Almost 7% of Apple's iPhones were manufactured in India in the previous financial year, assembled by its partners such as Foxconn Technology Group and Pegatron Corp.”

Apple has not been the only success story in the electronics sector either. India increased the value of its electronics exports to the US by 260% during 2018-2022. Only Vietnam achieved a higher growth rate. This has been helped by the political and strategic sensitivity of the sector, and increased trade restrictions on China.

Arun Soundarajan also mentions other sectors to watch: “Pharma, food processing, telecoms, white goods, auto and auto components are all likely to be a big part of the future – especially as these sectors are also covered under the PLI.”

One further plus for India in terms of supply chains is a lack of dependence on its main rival. China's involvement in Indian manufactured products stands at less than 5%, so in contrast to many Southeast Asian countries, India is not part of a China-centred supply chain.

What are the potential obstacles?

There are, however, some notes of caution to add to this rosy picture. India has a history of protectionism, which can make it less competitive in terms of attracting large FDI. As Meghna Nair observes: “In order to ramp up the manufacturing in India on a large scale and maintain quality, better infrastructure and skilled labour will be the need of the hour. In order to attract all these factories and other component players to invest in India, it is important to make sure that the policies are very strong. There are still gaps which need to be addressed and it will take a while to replace China, which has a huge advantage.”

Other potential issues include manufacturing ecosystem gaps, making it slower to transport goods to market. In particular, first- and last-mile logistical connectivity gaps remain.

Higher value-added manufacturing activities may also face a skilled-worker shortage. Training should alleviate this, although it will add to labour costs.

Despite improved global ranking for ease of doing business ranking, bureaucratic delays remain common. Legal recourse is also still not very robust. Resolving disputes through the courts can be time-consuming and cumbersome, particularly with dispute resolution and contract enforcement.

Are there any practical tips for companies thinking of trading in India?

The good news is that measures are being taken to overcome the above issues. Various business-friendly financial reforms and initiatives have been implemented over nearly a decade by the Narendra Modi-led government.

The strong government investment and push for infrastructure and logistics development also continues. So the situation is likely to improve for would-be investors soon.

For now, establishing a local presence or having a local partner is definitely advantageous. They can often advise on local regulations and may also have practical experience of settling disputes. They can additionally assist with business-critical issues such as trade credit risk.

As India’s global presence grows, so will opportunities. Businesses with a clear strategy for this exciting and growing market look set to reap dividends.