Interim Budget: India has in recent years expressed a clear intention to expand its role in global manufacturing and trade, aiming to emerge as a viable alternative to China. This strategic shift has been emphasised by Finance Minister Nirmala Sitharaman, who highlighted India’s plans to incentivise production and bolster its domestic consumer market.
For decades, China dominated global manufacturing, earning the title of “factory of the world.” However, recent global events have sparked a reconsideration of this dependency.
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Various factors, including China’s handling of the Covid-19 pandemic, territorial disputes with neighboring countries like India and Taiwan, and its increasing geopolitical and economic assertiveness, have raised concerns among international corporations. Additionally, the ongoing trade tensions between China and the United States have created an opportunity for India to position itself as an alternative manufacturing hub.
India’s ascent as a credible substitute to China is propelled by several encouraging indicators. The government under Prime Minister Narendra Modi has undertaken substantial infrastructure development initiatives and focused efforts on bolstering the logistics sector. These endeavors are seen as pivotal steps to establish India as a manufacturing nucleus.
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An example is the surge in Apple iPhone exports from India to unprecedented levels. Moreover, Apple has expressed intentions to transform India into a major manufacturing and export center, prompting its contract manufacturers to intensify their operations in the country.
Multinational corporations, including industry giants like Walmart and Apple, are increasingly directing their attention towards India, gradually reducing their reliance on China, a country entangled in trade disputes with the US and engaged in border conflicts with India.
However, despite this progress, there’s acknowledgment that significant strides are necessary for India to substantially increase its global manufacturing share and Budget 2024 will need to take care of that.
India’s potential to establish manufacturing prowess in burgeoning sectors positions the country as a strong contender for the role of the world’s new-age manufacturer. This transformative leap also enables India to assume leadership in sectors experiencing a global demand surge, promoting its position in the export value chain.
To capitalise on this momentum, India needs to focus on forging trade agreements that make exports more lucrative for companies seeking to diversify their production. Free Trade Agreements (FTAs) could serve as catalysts for manufacturers in making crucial production decisions.
India has recently pursued bilateral trade deals or is in talks with various nations, including Australia, the UK, Canada, deviating from its conventional cautious approach to such agreements.
Key government initiatives such as PM Gati Shakti and the National Logistics Policy are set to provide a conducive ecosystem for India’s manufacturing sector to flourish.
The country has implemented several reforms, including the liberalisation of Foreign Direct Investment (FDI) norms, the introduction of the Production-Linked Incentive (PLI) scheme, opening up previously restricted sectors like defense and manufacturing, and making adjustments to labor laws. These measures aim to challenge China’s dominance in manufacturing.
However, the interim budget will again need to throw light if more such actions are planned for India to be a solid alternative for the supply chain shift.
In addition to incentive-based programs like PLI, there is a growing call for increased allocation of funds towards upskilling and vocational training in the upcoming Budget. Strengthening skills required for emerging sectors will be pivotal for the next phase of manufacturing growth.
An effective budget strategy, offering financial and regulatory incentives such as PLI schemes, coupled with investments in infrastructure projects to mitigate domestic logistics costs, remains crucial. Improving India’s overall supply chain efficiency through enhancements in transportation infrastructure is essential, considering India’s current lag in global Logistics Performance Index rankings.
Strengthening these aspects in the budget will further solidify India’s position as a manufacturing hub.
Continued efforts to simplify policies and regulations to enhance the ease of doing business will create an environment conducive for firms to thrive in India and the budget will have to address that as well.
However, there are challenges on the horizon. Fitch points out regulatory hurdles like a complex business environment and limited labor market reforms, which could deter foreign investments. Despite initiatives in states like Karnataka and Tamil Nadu to introduce labor reforms, resistance from labor unions poses a hindrance to progress. Additionally, India’s high tariffs and limited support for free trade could impede its integration into global supply chains.
