India top destination for China Plus, but conditions apply

Global brands are beginning to make India an essential component of their China Plus plans. (Representative image)

Policy consistency, non-hostile tax laws and rules, domestic market size, the potential buying power of the local population, availability of local labour and technology, and export possibilities are among the key reasons that draw investors to any geography. These, broadly, have attracted global manufacturing giants towards China over the two-and-a-half decades, turning it into the world’s factory. From sophisticated inventions such as iPhones to the quintessential safety pins; from everyday garments to active pharmaceutical ingredients (APIs), assembly lines in China were shipping out products to the rest of the world in trillions, both by value and volume.

That dependency, however, is changing. Or so it appears. The COVID-19 pandemic, which shattered world economies, forced governments and economic administrators to the dangers of the concentration risk as global supply chains suddenly stuttered to a screeching halt. As factories, from where the goods hop on to the giant shipping liners to traverse the high seas and eventually reach people’s homes, shuttered down for long periods because of China’s `Zero-COVID’ goal, policymakers realised the urgency of creating alternative source destinations.

Diversifying Risks

To be sure, the need to have alternatives to China has been occupying the global economic and strategic mindspace for more than a decade, particularly since 2013 when the phrase China Plus One or simply Plus One strategy was coined. India, clearly, has some distinct advantages to appropriate this space over the medium term. How do you spot signs of an expanding economy? One of the surest signals can be found in shopping malls or neighbourhood shopping complexes or car showrooms. The footfalls in these have seen remarkable long-term growth over the last 15 years or so.

Let’s consider some numbers. In 2005 an estimated 1.11 million passenger vehicles were sold in India. In 2019 (the last pre-pandemic year), an estimated 3.4 million passenger vehicles were sold in the country. During this period, India’s GDP grew from less than $1 trillion to about $2.5 trillion in 2019. This is, in many ways, a marker that buttresses the consumption-driven economic growth in India driven by a rapidly expanding middle class fuelled by aspirations.

Leading The Way

Global brands are also beginning to make India an essential component of their China Plus plans. Apple CEO Tim Cook, who recently visited India, has described it as an "incredibly exciting market" and a "major focus" for the company, as the Cupertino-based iPhone maker highlighted that business in India "set a quarterly record, grew very strong, double-digits year-over-year". India is at a "tipping point", he said during the Q2 earnings call of the company, where Cook mentioned India 20 times.

Elon Musk's Tesla, in a bid to diversify its supply chain beyond China, has eyed India as the next potential spot of manufacturing. A top-level team from the electric vehicle major is in India at a time when the carmaker is considering ways to diversify beyond China. According to reports, while this meeting is focused on discussing the local sourcing of EV components to expand Tesla’s supply chain, it may also lead to Tesla's potential entry into India for the domestic production of its vehicles. From China to Germany, Tesla has set up massive production units called gigafactories in these countries.

The Transformation

While consumption as India’s primary growth driver is well understood, there are a few other underlying trends that are emerging in India. One of these is urbanisation. In 2011 urban areas accounted for 31.2 percent of the population; it was 23.3 percent in 1981. By the time the next decadal census data comes along, India’s urban landscape would have changed dramatically—the biggest jump coming in the last decade.

This has been accompanied by a visible improvement in material circumstances such as the quality of transport and mobile phones of the population. Add to this the large villages that mimic the demographic characteristics of a town.

The Economic Survey 2023 has pegged India’s 2022-23 growth at 6-6.8 percent, and medium-term GDP growth potential at 7-8 percent. The International Monetary Fund (IMF) says India will grow 6.1 percent in 2023-24 and accelerate further to 6.8 percent in 2024-25, firmly cementing India as a powerful growth engine.

The government has also demonstrated its intent to walk the talk on frontloading investment in infrastructure by accelerating the pace of highways, ports and airport projects, to considerably reduce logistics costs and time, and to initiate a “crowding in” effect of private sector investment.

Besides, India’s young demographics is a well-documented global story. With better spending ability they will decide on products—style, utility, need and affordability. Importantly, it also addresses worries about assured labour supplies for any global giant looking to reshore out of China.

Having said that, there are still two boxes that need to be ticked if India is to emerge as a serious contender for turning itself into a serious manufacturing destination, standing shoulder-to-shoulder with China. One, the armies of youth joining the queue of hopefuls should be skilled and upskilled to meet the labour demand. And, two, the policy and regulatory architecture have to remain consistent to enable long-term investment.

Gaurav Choudhury is consulting editor, Network18. Views are personal, and do not represent the stand of this publication.