Can India be the Alternative for Companies Moving Out of China?

Janifha Evangeline

South Korean Multinational Electronics company Samsung has completed the construction of the display manufacturing unit, which is shifted to Noida, UP from China. Due to Noida’s better industrial environment & investor-friendly policies, the Electronics major decided to set up its Display Manufacturing Unit in Noida, Uttar Pradesh that was earlier located in China, an official release stated.

Furthermore, the construction work indicates the commitment towards India, making UP a manufacturing hub, the delegation said. UP’s CM Mr. Adityanath said that Samsung’s Noida factory is a classic example of the success of the ‘Make in India’ program that will help the in creating employment opportunities for the youths of UP. He also assured that the UP government will extend help to Samsung in the future as well, during the meeting with the delegation.

Opportunities for India to become a global manufacturing hub
India is not only making it easier for entrepreneurs to carry out their businesses but it has also been laying down special measures to improve the business climate. And this is expected to help in making India a 5 trillion-dollar economy, although it would be a little delayed.

Thus far, the country has significantly fallen behind in expanding its production capability the contrary to its capability in capturing service outsourcing. Manufacturing/Production capability and scale can be enhanced only when there is substantial ease of carrying out business in the country. This in turn would not only induce confidence but also attract foreign investments and domestic investments to establish and expand businesses in the country.

At present, India’s merchandise imports account for nineteen percent of GDP, while the country’s Gross Domestic Product share of manufacturing has remained consistent around seventeen percent during the last ten-twelve years. However, when we look at the GDP share of manufacturing of countries such as Bangladesh and Vietnam, they have increased it by five-six percent in the past ten-twelve years.

India’s present manufacturing push under the ‘Atmanirbhar Bharat’ program is coming in at a time when most of the global manufacturing enterprises are exploring a China plus one strategy, intending to diversify supply chains, in a post-Covid world. What is anticipated to expedite the migration of manufacturing out of China are factors that include rising labor costs in China, and supply disruptions and Geopolitical tensions, owing to concerns regarding the production risks concentrated in a single country increase.

What one may think is that India’s huge domestic market and low corporate taxation would make the country’s economy not only highly competitive but also attract huge/higher investments. India hadn’t been a beneficiary, although migration of companies out of China has been occurring from past 2 years.

According to a study conducted by Nomura Group between the month of Apr in the year 2018 & Aug 2019, on 56 enterprises shifting their production out of China, only 3 of the companies relocated to India. The study also stated that twenty-six shifted to Vietnam, eleven shifted to Taiwan, 8 shifted to Thailand and 6 to Mexico.

India yet to be a preferred destination
India has been lagging behind by countries that include Vietnam, Taiwan, and Thailand, as these countries have come out as the preferred locations for companies that wanted to relocate from China in spite of the numerous initiatives that the central government and various state governments proclaimed to attract MNCs looking to shift base outside China after the Covid Pandemic.

Taking this into consideration, a parliamentary standing committee has identified administrative and regulatory obstacles in India as some of the reasons among the other main reasons. “The committee feels that the main challenges faced by the country presently are administrative and regulatory hurdles, inadequate and costly credit facility, tedious land acquisition procedure, inadequate infrastructure facilities, high logistics cost, and large unorganized manufacturing sector, among others,” stated the standing committee in its report titled ‘Attracting investment in post-Covid Economy: Challenges and Opportunities for India’. This report was submitted in the just-concluded session, in Parliament.

The report also stated that many enterprises have shifted their manufacturing bases out of China, “motivated not only by political but also economic reasons”, during the past year. “To capitalize on the evolving situation and to attract such companies, a few countries including India announced special policies. However, it is learned through media reports that most of these 58 companies shifted their base to Vietnam, Taiwan, Thailand, etc. and only a few came to India,” it added.

Four organizations have shifted base from India to China, which are in the Electronic System Design Manufacturing segment and several other companies have shown interest, as per a parliament reply. Furthermore, the committee recognized and appreciated the efforts of the Centre taken in this direction stating that the incentives schemes and policy changes announced are “welcome measures.” Furthermore, it also suggested to the Indian government to enter into many more international trade pacts that would be beneficial to India.

Strengthening India’s manufacturing ecosystem
In order to capitalize on the opportunities that could come India’s way, the country should strengthen its manufacturing ecosystem. Hence, under the Aatmanirbhar Bharat package, the government of India has introduced multiple measures that not only address the immediate pain points of the economy but also step to improve India’s manufacturing competitiveness.

To boost domestic manufacturing, increase exports and create new jobs, and cut down on import bills, the Government of India has introduced PLI in specific sectors. The PLI scheme renders incentives to enterprises against their incremental sales from products, which are produced in domestic units, capital expenditure/investments after the program is notified. The PLI scheme will not only make Indian manufacturers globally competitive, attract investment in the areas of core competency and cutting-edge technology, but it will also ensure efficiencies and create economies of scale.

Besides inviting foreign enterprises to set up their shops in the country, the PLI scheme also aims at encouraging local or domestic enterprises to either set up or expand their existing manufacturing units. Earlier, in 2020, the government of India launched the PLI scheme with a total incentive of over Rs 500 billion for bulk drugs and medical devices and mobile phones, and electronics.

And in November 2020, the government of India with a total 5-year outlay of Rs 1460 billion, approved the PLI scheme for additional 10 sectors. Some of these sectors include textile, electronic products, automotive, pharmaceuticals, solar panels, etc.

Intending to position itself as an attractive investment destination, India is in the process of taking constructive measures.