India seen gaining from post-Covid supply chain shift  

An outcome of Covid has been a reconfiguration in global supply chains away from China to other economies. India is already benefitting as latest incentives are drawing companies to the country looking to diversify amidst US-China trade tensions

India seen gaining from post-Covid supply chain shift
Wistron's India plant that has de-risked its global supply chain by shifting part of its manufacturing to India. Photo: Reuters,

(ATF) India’s latest set of incentives to entice businesses to ramp up manufacturing in the country have already seen global businesses shift their global supply chains from China, recent surveys have revealed.

The UBS Evidence Lab's CFO survey report released on Tuesday showed that an exodus of sorts to move some production out of China following trade war risks and pandemic-revealed vulnerabilities in global supply chains, is already under way.

Close to 70% of the China-based CFOs surveyed and 86% of US-based CFOs surveyed admitted that they had moved or plan to move a part of their production out.

The move has been partly fuelled by the pandemic, which experts say has exposed the risks companies centring their supply chains on a single source - in most cases China. That was especially highlighted by the logistics snarl ups that occurred when China became the initial focus of the outbreak.

India has emerged as an attractive destination, partly due to a slew of liberalising economic reforms.

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UBS’s detailed analysis of input/output tables and export competitiveness suggested that around 30% of China's gross exports are in industries that don't have strong competitive onshore supply chain advantages – mainly in electronics assembly industries.

A Ficci-Dhruva Advisors Survey conducted in December covering more than 150 companies in India also indicated a similar trend. It said, following the Covid outbreak and the consequent likely shift in global supply chains away from China to other economies, nearly 70% of the survey participants felt India has started benefitting with a fair share of manufacturing starting to shift from China to India.

“As we speak, some of the shift has already happened with the India Government rolling out a number of incentives and tax sops, and each state with its own incentives and labour reforms,” Dinesh Kanabar, CEO of the advisory firm Dhruva Advisors, told Asia Times Financial.

“But a major part of the shift is also underway, with many realizing that by making China their manufacturing hub, they are actually putting their eggs in one basket, so to speak, and they must hedge,” he added.

Policy boost

While companies like Samsung Electronics, Nokia, Ericsson, Lenovo, and all major contract manufacturers of Apple Inc. including, Foxconn, Wistron Corp, and Pegatron Corp have already shifted part of their operations to India, “scores from the pharmaceuticals, automobiles-most recently being Tesla, textiles, and food processing sectors, among many others are also moving out of China,” adds Kanabar.

Latest reports also said that the Japanese government has struck a deal with two companies – Toyota-Tsusho and Sumida – which will see it offer financial assistance to shift their manufacturing bases out of China to India, under a recent subsidy-based programme to reduce the nation's supply-chain reliance on China.

These moves follow Prime Minister Narendra Modi's policy intent to transform India into a global manufacturing hub in the coming years.

And, the government's five-year production-linked incentive (PLI) scheme (4%-6% of incremental sales) for IT hardware and electronic manufacturing has been a significant turn in that pursuit. It incentivizes selected companies to scale up production and boost domestic value-addition.

Million jobs

The government expects the programme for electronics alone could lead to $153 billion worth of manufactured products over the next five years and create about one million jobs directly and indirectly.

This would also bring an additional investment of $55 billion over five years, adding 0.5% to India’s economic output, according to analysts

That apart, the government has identified 12 other sectors for development into global scale manufacturing industries in India, with active financial support from government (of $27bn over five years).

Those financial support will be in the form of a certain percentage of incremental revenues given as cash incentives from the government. Moreover, these incentives filter out smaller firms (with minimum size criteria), but do not preclude foreign companies, which experts say, has been a clever move that bodes well for encouraging local manufacturing by global/domestic firms and discourage imports.

However, Modi’s killer move has been the corporate tax rate cut, and “a big-bang tax reform” that has cut the basic corporate tax to 22% from 30% earlier, while that for new manufacturing companies has been lowered to 15% from 25%.

“India's tax rate for new manufacturing companies is now the lowest, which strengthens India's competitiveness to benefit from the golden opportunity of a potential big, structural shift in manufacturing from China and will help in gaining greater share of FDI (foreign direct investment) flows,” says Tanvee Gupta Jain, Economist at UBS

But competitors abound

Yet, as the global supply chain reconfigures to delink from China, India is not alone in seeking to capture FDI into manufacturing. It faces competition from Asian powers like Malaysia, Indonesia, Thailand and Vietnam, each of which has varying advantages and disadvantages.

Manufacturing in Malaysia, for instance, benefits from a low-cost production base making it ideal for high-tech sectors but on the flip side, suffers from lower productivity and a shortage of skilled labour force.

Thailand on the other hand, boasts of a highly-skilled workforce and low rates of corporate taxation, and over the last decade, Vietnam has also managed to increase its overall productivity by nearly 50%.

Indonesia has proved to be an attractive alternative to China too on the back its increasing prowess as a manufacturing base.

“However, India has the advantage of a huge population base that can assure very high domestic consumption and a huge pool of cheap and skilled labour that none of the competing economies can offer,” says Kanabar of Dhruva Advisors.

This is why, India needs to address several institutional, labour-related and infrastructural challenges if it is to be able to, firstly, attract FDI into its manufacturing space, and secondly, retain these flows, says UBS.

The nation though, has made some headway in moving up the ease of doing business rankings and improving the overall business climate, UBS added.

“India so far has just reached a small fraction of its potential as an alternative manufacturing hub,” Kanabar added.

And, from almost zero now, India's capacity should reach 20-30% of the total global supply chain in 2-3 years, predicted UBS.

Global Supply Chain UBS Production Linked Incentive Scheme India's Tax Reforms India's Manufacturing Incentives