China’s handling of the Covid-19 pandemic, along with its border outbreaks with India and Taiwan and increased geopolitical and economic bullying are making global businesses wary.
The new surge in covid cases in China in the form of BF.7, a highly contagious new sub-variant of Omicron, has once again raised the risks of an over-reliance on Beijing as a manufacturing hub, forcing global companies to find more suitable low-cost alternatives. .
In fact, according to a global survey published by Container xChange this month, companies around the world are looking to diversify their supply chains this year and are looking at India and Vietnam as attractive alternative locations.
India as a counterweight to China
India’s emergence as an alternative to China is being fueled by several positive indicators. The Modi government’s infrastructure push along with its concerted efforts to boost the logistics sector are seen as measures to position India as a hub for manufacturing.
In September, the country introduced the National Logistics Policy with the aim of further strengthening the supply chain. Announcing the policy, Prime Minister Narendra Modi said it would “add fresh impetus to India’s manufacturing sector.”
“The government’s infrastructure and logistics push – a recent example being the $900 million container port in Kerala, which is expected to meet its September 2023 deadline – is helping India get goods to market faster. and make it more competitive in world markets. These factors are helping India build a resilient supply chain by creating a stable environment for businesses to operate, said Swati Babel, a specialist in cross-border trade finance deals.
The country has also undertaken various other reforms such as liberalization of FDI rules, introduction of Production Linked Incentive (PLI) scheme, opening up of various sectors including defense and manufacturing, adjustments to labor laws in an attempt to challenge China’s manufacturing influence.
Due to the easing of its FDI policy, the country witnessed an increase in the inflow of foreign investment. In fact, with a growth rate of 75%, the manufacturing sector accounted for 27% of total FDI inflows in FY22. Not only this, the world’s fastest growing economy also witnessed an increase in the number of FDI projects. As many as 108 project deals were announced in 2021, according to the UNCTAD Investment Report 2022.
“The Make in India initiative has helped attract FDI which, in turn, is in the process of setting up many manufacturing units and creating jobs. Strong domestic macroeconomic fundamentals have helped India keep prices stable and control inflation and exchange rates even when other economies and global macroeconomics are not in a very good shape,” Babel said.
Other factors such as improved ease of doing business ranking, positive demographic dividend, diversified corporate environment, skilled workforce, access to vast resources and its expanding market of 1.3 billion people also place India in a strong position to become a well-integrated supply chain marketplace. .
New Delhi is also sending strong signals about its intention to emerge as a manufacturing hub. In July 2022, India, along with 17 other nations, launched a four-point roadmap to build resilient supply chains for the long term. Prior to that, India, Japan and Australia jointly launched the Resilient Supply Chain Initiative (RSCI) with the aim of developing well-planned industry clusters to diversify supply chains.
The country is also entering into Free Trade Agreements (FTAs) and signing bilateral trade agreements with various countries. India has already signed trade agreements with the United Arab Emirates and Australia, while FTAs with the United Kingdom and Canada are in preparation. New Delhi also resumed negotiations for a Comprehensive Free Trade Agreement with the EU, its second largest trading partner, after a nine-year gap.
Finance Minister Nirmala Sitharaman can certainly do well by announcing a series of measures in her next budget to increase India’s attractiveness as a manufacturing hub.
In recent years, the Budget has shown some consistency in spending for the infrastructure sector. Spending more on infrastructure and growth projects is key to building resilient supply chains in India.
“The next budget seeks to accelerate the current modest growth of the economy. Manufacturing and logistics industries are offered incentives to drive local production and reduce logistics costs as a percentage of COGS. To strengthen the competitiveness of Indian exports and foreign exchange earnings, the government could also consider enhancing and expanding the PLI scheme for specific industries,” said ShakeDeal co-founder Akshay Hegde.
Recognizing the logistics sector as one of the seven growth engines of the Indian economy, Sitharaman’s latest budget allocated Rs 1.4 lakh crore for rail infrastructure development while Rs 20,000 crore was allocated to expand the national road network by 25,000 km. Therefore, the next budget could focus on the implementation of infrastructure development initiatives to strengthen the multimodal supply chain network and allow the logistics industry to operate at maximum efficiency.
Also, the PLI scheme, introduced in 2021 for 13 sectors with an initial outlay of around Rs 2 lakh crore, has done a lot to boost domestic manufacturing and investment. The industry is pinning hope on the Budget to substantially increase the allocation for the scheme and its expansion to other sectors to stimulate investment in the country.
“A proper budget boost by giving financial and regulatory incentives through PLI schemes etc., and more investment to create infrastructure projects to reduce domestic logistics costs (trucks, trains) as India is still lagging behind in the global ranking of the Logistics Performance Index, can help improve overall supply chain efficiency and give India a greater advantage in becoming a manufacturing hub,” Babel said.
Furthermore, the Budget should continue to simplify policies and regulations to improve the ease of doing business, thus creating a conducive environment for businesses to grow in India.
“Manufacturers may well be attracted to the expansion of single window authorization schemes because of the simplified processes for obtaining business permits. Not to mention that expanding the level of income tax exemption can increase disposable income and encourage consumption, which would help the SME sector,” Hegde said.