India’s Manufacturing Opportunity with China Plus One Strategy

Context:

India is well-positioned to leverage the China Plus One strategy to attract global manufacturing investments. While China maintains strong export capabilities, India’s large domestic market, affordable talent pool, and significant growth potential present it as a compelling alternative for global investors.

Relevance:

GS II: International Relations

Dimensions of the Article:

1. Overview of China+1 Strategy
2. Opportunities for India to Attract Foreign Investment
3. Factors Hindering India’s Competitiveness
4. Way Forward

Overview of China+1 Strategy

The “China+1” strategy refers to a global trend where companies diversify their manufacturing and supply chains by establishing operations in countries other than China. Here’s a detailed overview of this strategy and India’s opportunities to attract foreign investment:

Background:

• Historical Dependence: China has been termed the “World’s Factory” due to its advantageous factors of production and robust business ecosystem, attracting global manufacturing entities since the 1990s.
• Recent Challenges: The Covid-19 pandemic highlighted vulnerabilities in global supply chains centered around China, exacerbated by China’s zero-Covid policy and resulting industrial lockdowns.

Evolution:

• Adoption of China-Plus-One: Many companies are adopting a “China-Plus-One” strategy to mitigate risks associated with over-reliance on China. This involves establishing manufacturing bases in other Asian countries like India, Vietnam, Thailand, Bangladesh, and Malaysia.

Opportunities for India to Attract Foreign Investment

• Demographic Advantage:
  • India’s youthful population (28.4% under 30 in 2023) presents a dynamic workforce and growing consumer market, stimulating consumption, savings, and investments. This demographic dividend enhances India’s attractiveness as a potential multi-trillion dollar economy.
• Cost Competitiveness:
  • Labour and Capital Costs: India offers lower labour and capital costs compared to competitors like Vietnam, with manufacturing wages 47% lower than China’s average.
  • Infrastructure Investment: The National Infrastructure Pipeline (NIP) aims to reduce manufacturing costs by improving logistics, making India’s production sector highly competitive.
• Policy Support:
  • Production Linked Incentive (PLI) Scheme: Introduced to boost domestic manufacturing across various sectors by providing financial incentives.
  • Tax Reforms and FDI Norms: Relaxed regulations and tax reforms create a conducive business environment for foreign investors.
  • Ease of Doing Business: Initiatives under the Make in India campaign promote ease of doing business, further attracting foreign investments.
• Digital Advantage:
  • India’s large internet user base (870 million as of January 2024, 61% of the population) and access to global tech giants provide a digital advantage, especially compared to China’s restricted digital environment.
• Geopolitical Strategy:
  • Sub-regional Partnerships: Initiatives like the Comprehensive Economic Partnership Agreement (CEPA) with the UAE aim to diversify trade and reduce dependence on China, enhancing bilateral trade prospects.
• Global Engagements:
  • Strategic Groupings: Participation in QUAD and bilateral agreements strengthen economic ties, facilitate technology transfer, finance, and market access.
  • Leadership Roles: India’s involvement in G20 and SCO allows it to influence global trade policies and trends.
• Large Domestic Market:
  • India’s massive domestic market of 1.3 billion people with rising incomes provides a strong foundation for sustained economic growth and increased global trade, offering a viable alternative to China.

Factors Hindering India’s Competitiveness

India faces several challenges that hinder its competitiveness in the global manufacturing landscape:

• Complex Regulatory Environment:
  • Bureaucratic hurdles and inconsistent policy implementation deter both domestic and foreign investors.
  • Regulatory uncertainty adds to the complexity of doing business in India.
• Manufacturing Challenges:
  • High Input Costs: Including raw materials, labour, and capital, which affect cost competitiveness.
  • Infrastructure Deficit: Inadequate transportation, logistics, and energy infrastructure increase operational costs and reduce efficiency.
  • Skilled Labour Shortage: The manufacturing sector faces challenges in finding skilled workers, impacting productivity and quality.
• Labour Laws:
  • Restrictive labour laws in the organised sector hinder flexibility and discourage job creation.
• Tax Regime:
  • Complex and multiplicative indirect tax structure increases the cost of compliance and doing business.
• Land Acquisition Issues:
  • Cumbersome land acquisition processes delay industrial projects and escalate costs.
• Education System:
  • The education system often fails to produce graduates with the skills required by the modern economy, particularly in technical and vocational fields.
• Corruption:
  • Corruption erodes investor confidence, increases transaction costs, and creates an uneven playing field.

Way Forward

To enhance India’s competitiveness and attract more manufacturing investments, the following steps are crucial:

• Incentives and Subsidies:
  • Offer attractive incentives and subsidies, such as tax benefits, land subsidies, and infrastructure support, particularly in key sectors like electronics, automotive, and pharmaceuticals.
• Regulatory Reforms:
  • Streamline regulatory processes, reduce bureaucratic hurdles, and simplify labour laws, land acquisition procedures, and environmental clearances to improve ease of doing business.
• Industrial Clusters:
  • Develop dedicated industrial clusters or manufacturing hubs with world-class infrastructure, including plug-and-play facilities, common testing centres, and shared logistics infrastructure.
• Skills Development:
  • Strengthen vocational training programs and collaborate with industry to develop a skilled workforce aligned with the needs of the manufacturing sector.
  • Promote STEM education and upskill the existing workforce to meet the demands of high-tech manufacturing.
• Infrastructure Development:
  • Invest in modern and efficient transportation networks (roads, railways, ports, airports) to improve connectivity and reduce logistics costs.
  • Ensure reliable and adequate supply of power, water, and other essential utilities.
• Trade Agreements:
  • Negotiate and sign free trade agreements (FTAs) with key trading partners to enhance market access for Indian exports, simplify import-export procedures, and reduce tariffs.
• Research and Development (R&D):
  • Encourage public-private partnerships in R&D to foster innovation in manufacturing technologies and processes.
  • Provide incentives for companies to establish R&D centres and collaborate with academic institutions.

-Source: The Hindu