India: China’s replacement as the world’s manufacturing hub

Numerous manufacturing companies are considering to transfer their services out of China due to over-dependency, structural view, and long term vision. The Trade war between China and the USA has escalated heavily during the COVID-19 pandemic. The businesses can’t completely craft away their manufacturing units from China since it represents a heavy stake in their financial liability. However, the pandemic has forced the manufacturing units to distribute their supply chain.

The manufacturing units are searching for alternatives to shift from China to South-Asia or South-East Asia since they are developing countries and the cost of labor is low compared to Western countries. According to this year’s World Bank report, India has escalated 14 places to be 63rd among 190 nations in ease of doing business. The country was 77th in the previous rankings 2019.

The Free Trade Agreement between India and the USA can boost the Indian Economy since India is also concerned about cheap goods coming from China, an FTA will eliminate that. The US-India Strategic and Partnership Forum’s (USISPF) President Mukesh Aghi said that the COVID-19 crisis has offered India the best opportunity to attract foreign investment and replace China as the world’s manufacturing hub.

Recently, India slashed corporate tax rates from 30% to 22% for existing companies and new manufacturing companies’ corporate tax rate from 25% to 15%, firms that have been incorporated after 1st October 2019, and starting operations before March 31st, 2023. These Tax reductions bring transparency in the decision-making process for manufacturing units that wanted to invest in India. 

For example, Karnataka is to set up a 500-acre exclusive township for Japanese firms which will be located at Vasanthanarasapura. Two companies, Kirloskar Toyota textile machinery Pvt. Ltd. and Showa India Pvt. Ltd. have received the state government’s approval for their investment proposals. Both companies will be investing in approx. 580 crores and 10-11 companies are waiting for similar approval. Thus, gates are open for other firms to enter the country.

The outstanding agreement between Reliance Jio and Facebook, selling a 9.9% stake for $5.7 billion (43500 crores), points to the advantages that India offers. The combination of Facebook-owned WhatsApp and Jio’s connectivity with the neighborhood’s Kirana shops will offer a payment platform that will represent strong competition to companies such as Paytm, Google Pay, Phonepe, and others. 

The Finance Minister, Nirmala Sitharaman, said that 20 global companies have openly declared their interest to invest in the Indian market. The advantages of such moves could be: 

  1. Increase in employment opportunities
  2. Increase of per-capita income
  3. Consistent increase of GDP rates

Hence, the Indo-Chinese battlefield is set and India seems to be leading the race.  The real question may be whether India will be able to deliver as per the foreign firms’ expectations?

This article has been co-authored by Dr. Raul V. Rodriguez, Madagoni Rakesh and G Vamshidhar Reddy, Woxsen School of Business.