Can India Replace China as World’s Factory?

As China reels from the combined impact of Covid and the US trade war, does India now have an opportunity to emerge as an alternative global manufacturing hub? The big issue is that India’s manufacturing is tailored to the domestic market and it will take time to make the changes so that manufacturers can ramp up production for international markets.

Only some locations in India are suitable for large-scale production and there are logistical challenges in getting raw materials to these production hubs and then getting finished products to the ports. India’s ports need a major revamp. Bangladesh is building the Matarbari deep sea port, which will handle 8,000 TEU ships. However at present Bangladesh cannot handle ships of more than 2,000 TEU.

A large-scale reskilling of workers will also be required and will not happen overnight. India’s Labour laws created 50 years ago are archaic and need to be overhauled. Unions can be militant and strikes are frequent.  At the same time there is stiff competition from neighbours Vietnam and Bangladesh.

India’s laws differ from province to province, making things difficult for potential investors and dealing with local-level politics. Although India has moved up many places in the World Bank’s ease of doing business rankings, in the 2020 Doing Business report, India was ranked 63rd out of 190 economies, a major improvement from 142nd place in 2014. But it is too early to sit on its laurels.

For companies to take advantage of India’s huge domestic market, favourable location and shift their supply chains to India, more SEZ’s need to be built and more attractive tax regimes introduced. This is where India’s ambitious Sagarmala initiative (ports & roads) can play a very important role in the years ahead, in unlocking the full potential of India’s coastline and waterways.

All of these issues have to be addressed and quickly as there are other countries waiting to do the same. Even before Covid, low-wage jobs had already moved out of China to Vietnam, Bangladesh and Thailand. The changes will need significant investment from both the government and the private sector. Bringing global supply lines to India would help alleviate the unemployment situation and move much of the population away from agriculture. But India still has a mountain to climb.