Reuters
As India made strides toward becoming a global manufacturing hub, a recent trade “reset” between Washington and Beijing could hinder its aspirations to surpass China.
Last week, tariffs imposed by Trump on China were dramatically reduced from 145% to 30%, compared to 27% for India, following negotiations in Switzerland.
Consequently, there is a risk that the manufacturing investments shifting from China to India may either “stagnate” or even reverse, according to Ajay Srivastava of the Global Trade Research Institute (GTRI) in Delhi.
“While India’s low-cost assembly lines may endure, the potential for value-added growth is threatened.”
This shift in perspective sharply contrasts the optimism in Delhi last month when Apple noted that it would move a majority of its iPhone production aimed at the US from China to India.
Even with this development, President Donald Trump reportedly advised Apple CEO Tim Cook against building in India, citing its high tariffs.
“In the short term, India is well-positioned to serve as an alternative to China for supplying goods to the US,” wrote Shilan Shah, an economist at Capital Economics, in a report before the announcement. He highlighted that 40% of India’s exports to the US resemble those exported by China.
Initial indicators suggested that Indian exporters were stepping in to cover the void left by Chinese manufacturers, with new export orders reaching a 14-year peak according to a recent survey.
Nomura, a Japanese brokerage, also noted an increase in “anecdotal evidence” that India could benefit from “trade diversion and supply-chain shifts in lower to mid-tech manufacturing,” especially in electronics, textiles, and toys.
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Some analysts remain optimistic that despite the recent trade “reset” between Washington and Beijing, a significant strategic separation from China may, over time, favor India.
For one, Prime Minister Narendra Modi’s administration shows a growing willingness to welcome foreign enterprises after years of protective measures, which could serve as a positive force.
India and the US are also discussing a trade agreement that could position Asia’s third-largest economy advantageously amid the “China exodus,” as global companies move to diversify their supply chains.
Furthermore, India has recently finalized a trade agreement with the UK that significantly reduces tariffs in protected sectors like whiskey and automobiles, hinting at possible concessions Modi could offer Trump in ongoing trade negotiations.
However, such optimism must be approached with caution for various reasons.
Despite China’s return to the race, firms are also “not fully discounting other Asian competitors,” with nations like Vietnam still on their radar, as noted by economists Sonal Verma and Aurodeep Nandi from Nomura earlier this month.
“Thus, for India to capitalize on this opportunity, it must complement tariff benefits with substantive ease-of-business reforms.”
A challenging business environment has historically frustrated foreign investors and hindered India’s manufacturing growth, which has remained about 15% of GDP for the past two decades.
Modi’s administration has implemented initiatives like the Production Linked Incentive (PLI) scheme but has experienced limited success in increasing this figure.
The government’s think tank, Niti Aayog, has acknowledged India’s “limited success” in attracting investment moving from China, noting that elements such as cheaper labor, simpler tax regulations, lower tariffs, and upcoming Free Trade Agreements have allowed countries like Vietnam, Thailand, Cambodia, and Malaysia to boost exports while India has fallen short.
Reuters
Another significant concern, according to Nomura, is India’s ongoing dependence on China for raw materials and components for electronics like iPhones, which restricts Delhi’s ability to fully take advantage of changes in the supply chain.
“India will experience an increase in earnings from manufacturing iPhones only if more of the phones are produced locally,” Mr. Srivastava mentioned during an interview with the BBC.
Currently, Apple profits over $450 for every iPhone sold in the US, while India retains less than $25, even if the full $1,000 is recorded as an Indian export.
“Simply assembling more iPhones in India won’t yield substantial benefits unless Apple and its suppliers begin manufacturing components and conducting high-value operations locally. Without this, India’s stake remains minimal and the export figures may only rise on paper, potentially leading to increased scrutiny from the US without tangible economic benefits for India,” Mr. Srivastava cautioned.
Moreover, the jobs generated by assembly lines are often of lower quality, according to GTRI.
Unlike companies like Nokia, which established a factory in Chennai in 2007, leading to an influx of suppliers, “current smartphone manufacturers primarily import components and advocate for lower tariffs rather than developing supply chains within India,” Mr. Srivastava explained. He also noted that, in some cases, investments may fall short of the subsidies provided through India’s PLI initiative.
Lastly, there are worries that Chinese manufacturers might attempt to utilize India as a conduit for rerouting products to the US.
Despite the risks, India appears open to this possibility. The nation’s chief economic advisor mentioned last year that attracting more Chinese enterprises to establish export-oriented factories could enhance its manufacturing sector, implicitly acknowledging that its industrial policy has yet to yield desired outcomes.
However, experts warn that this could further limit India’s capacity to cultivate local expertise and develop its industrial foundation.
Overall, it remains evident that while ambitious announcements from companies like Apple are promising, India still faces significant challenges in achieving its manufacturing goals.
“Reduce production costs, streamline logistics, and establish regulatory clarity,” urged Mr. Srivastava in a social media post directed at policymakers.
“It’s important to recognize that this US-China reset is merely damage control, not a long-term resolution. India must adopt a long-term perspective to avoid being overshadowed.”
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