Can India lure international manufacturers away from China?

India is hoping to attract major manufacturers spooked by the geopolitical friction buffeting the US-China trade relationship. In an interview with the Wall Street Journal earlier this month, Indian Finance Minister Nirmala Sitharaman highlighted the example of Apple looking to move production away from China, stating that “we are one of the big countries which can provide an alternative”.

With Modi strengthened following his re-election, and China weighed down by the trade war, the government is drawing up policies to boost India’s chances of becoming an investment destination of choice.

Using our global risk indices, we assess the viability of India as an alternative manufacturing base by comparing its risk profile with China to evaluate the potential challenges for major multinationals who might be tempted to make the switch.

Relative geopolitical calm an advantage for India

Since President Trump launched the trade war in early 2018, major manufacturers with a presence in China have become starkly aware of the potential impact of geopolitical tensions on their operations: from higher costs and supply chain disruption as a result of trade sanctions, to the prospect of being singled out by Beijing (or Trump) for perceived indiscretions in the fractious environment.

India by contrast currently enjoys reasonably benign relations with both the US and China, despite ongoing territorial disputes with Beijing and a degree of trade friction with the US over duties and market access. Of course, India’s geopolitical rivalry with neighbouring Pakistan is among the world’s most dangerous potential flashpoints, but it has minimal day to day relevance for international companies outside of a major crisis.

But what of the operating environment?

Our indices show that India enjoys one important advantage beyond geopolitics for manufacturers looking for an alternative to China. While labour costs are increasing in both countries, they remain considerably lower in India. This is reflected in the 2019 edition of our Labour Costs Index, where both countries sit in the high-risk category (home to almost half of the countries in the index), but with India closer to the medium risk end of the scale.

However, while labour costs are lower in India, it is still a high-risk country overall due to its poor performance on the indicator which assesses the relative productivity of workers. India’s workforce is also relatively under-skilled, and this represents a problem for companies who require large numbers of skilled workers to fill more technical roles. As shown in the table below, India lags behind China in both our Education and Human Capital indices, held back in part by indicators assessing the adult literacy rate and the number of expected years of schooling.

India risk scorecard
China risk scorecard

Two other factors which might make manufacturers think twice before trading China in for India are the relative regulatory burden across the two jurisdictions, and the logistical challenges companies will face.

India is categorised as a high-risk country in the 2019 edition of our Regulatory Framework Index, which assesses the extent to which regulation affects the ease of doing business in each country, using data on procedures, time and cost in carrying out key activities throughout the main stages in the life of an investment. Companies locating operations in India face longer waits to acquire land, establish a new business, connect to key services, import across borders, pay taxes, and register property. These factors can hamper efficiency and productivity, leading to costly delays and disruptions.

But India has been moving in the right direction over recent years, with a series of reforms aimed at reducing the regulatory burden facing companies. The country’s score has accordingly improved in our Regulatory Framework Index, from 3.50/10.00 in 2009 to 4.60/10.00 in 2019 (where 0 represents the highest risk possible).

India is also outperformed by China in the 2019 edition of our Logistics Index, which provides a multidimensional assessment of the risks companies face, taking into account speediness as well as efficiency. India’s transport infrastructure and port facilities are lacking compared with China’s plethora of advanced options, meaning both domestic and international shipping of goods can be slow. Previous efforts to boost infrastructure have been hampered by a relative lack of success in driving private sector investment, linked to the regulatory barriers outlined above (see visual below).

Weak private investment has hampered Indian infrastructure

Latest reforms will address weaknesses, but likely too little too late to capitalise on trade war

To support the next phase of ‘Make in India’ and capitalise on the opportunity presented by the trade war, the government has announced a series of new policy measures:

In September 2019, the effective corporate tax rate was cut from 35% to 25% in a move welcomed by the business community

In his Independence Day speech in August 2019, Modi announced a more than USD1 trillion plan to invest in modern infrastructure over the next five years

The government is also offering targeted incentives to industries like mobile phone manufacturing and is developing a blueprint to lure specific companies looking for an alternative to China

However, while India has had some recent successes in attracting major manufacturers – notably Taiwan-based Foxconn’s decision to expand its Tamil Nadu plant and shift iPhone manufacturing to India – countries like Vietnam have so far proven to be a bigger draw. Without further rapid progress on reducing the regulatory and logistical barriers identified above, India will struggle to become the destination of choice for manufacturers leaving or diversifying away from China.

Joseph Parkes

Asia Analyst, Risk Insight