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Due to the escalating trade war between the US and China, several American companies are planning to shift their supply chain from China to avoid any tariff backlash. India appears to be the potential benefactor in this case.

Tanmoyee Bannerjee, Professor, Department of Economics, Jadavpur University, said to BE, “From February onwards, the US has imposed very high tariffs on the products of China, namely, 10% on steel and 25% on aluminium. This is not going to affect only the Chinese or the US economy but other economies as well. There are some countries like India, Vietnam, Taiwan who are going to get some benefits due to this policy.”

However, even before the trade war started in 2018, several top brands like Nokia, Adidas, Delta Electronics, and Samsung had already began to shift their manufacturing base to reduce the cost and diversify their supply chain. The trade war has only accelerated the process. The US-India Strategic and Partnership Forum (USISPF), a US-based advocacy group in a recent media interview said that it has been discussing plans to move outside China with as many as 200 American companies and help them to set up an alternative base in India.

India as a rising manufacturing destination

According to a study by Deloitte, it is expected that India will jump six ranks to number five in 2020 in terms of Predicted Manufacturing Competitiveness (PMC). Interestingly, India’s manufacturing labour cost was $1.72/ hour in 2015 compared to $37.96/ hour for the US. China’s cost is almost double than that of India. The Indian government has set an aggressive target of increasing the manufacturing share to 25% of GDP by 2025. A new factory was opened by Samsung Electronics in India in July 2018. It happens to be the world’s biggest mobile phone manufacturing plant. Apple has also started assembling its top-end iPhones in India through the local unit of Taiwan-based Foxconn. Wistron Corp, the company’s other manufacturer already produces older models of iPhones at a plant in Bengaluru.

Mukesh Aghi, USISPF President, informed PTI, “We are seeing US companies look at some of the decisions being made, either related to e-commerce or to data localisation, as becoming more domestic-oriented than global. We need to understand how we can attract those companies. There’s a whole plethora of reforms that need to go further down and I think that is also going to create a lot of jobs.”

Indian incentives

India is offering lucrative incentives to attract companies, which are moving out of China. Financial incentives such as preferential tax rates and the tax holiday provided by Vietnam to lure companies are among the measures that are being considered by Indian authorities. The industries which are identified for incentives include electronics, consumer appliances, electric vehicles, footwear and toys. The trade ministry’s effort is part of a larger plan to cut the reliance on imports and boost exports and this process needs the approval of the Indian finance minister. According to the trade ministry document circulated to stakeholders, other measures include setting up affordable industrial zones across India’s coastline. The ministry is giving preference to local manufacturers in government procurement as an incentive to win over companies looking for an alternative production base. This plan will help the growth of India’s manufacturing base and will aid Prime Minister Narendra Modi’s ‘Make in India’ initiative.

Challenges and effects

Bannerjee said, “From the point of view of India, it is very unlikely that the products that are mostly sold by China to the US can be supplied by India as India is not the exporter of iron, steel and aluminium. From that point of view, India is not going to get any benefit. Second, for companies which have already installed their plants in China, if they want to shift, there are other destinations as well with which India has to compete.”

Banerjee is of the opinion that if India has to compete globally, then Indian policy-makers should focus on giving proper incentives. She added, “Proper support should be given and then only India can compete with other developing countries like the East Asian countries.” For more aggressive attraction, the Indian government should try to build proper infrastructure which include special economic zones and export processing zones to attract foreign investment. Infrastructure tax benefit can also prove to be beneficial. There can be both positive and negative impacts of this policy. Dr. Kaushik Gupta, Professor, Department of Economics, Calcutta University, said to BE, “On the positive front, such relocation will promote employment. On the negative side, the domestic producers will face competition from the newly relocated companies and may cause shut down of domestic companies.”