By: Neeta Lal

With a continuing trade standoff between US and China upending trading arrangements and injecting uncertainty into an already fragile global business climate, India is seeking to use the crisis to capture some of the multinational production bases and supply chains that are looking to relocate out of China.

Indian Prime Minister Narendra Modi is hoping to use the situation to power India’s rise and secure a place at the geopolitical high table. Grave policy missteps in his first term notwithstanding, the Indian premier knows only too well that there is nothing like economic heft to win global respect.

Even though India’s current growth rate is a cause for worry (with GDP falling to 8.6 percent from 10 percent) there is optimism that with strategic planning US-China trade tensions can be mined for benefits.

It is no secret that there has been a gradual shift away from China in the wake of the China-US tariff wars. Major international firms investing in China are re-examining their options to spread risk and shift some of their existing and new investments to other countries. Chinese firms are moving production to their plants in other countries as well.

“Western companies are de-risking operations by moving production lines out of China. India should take all measures necessary to attract them,” said Rajeev Dhingra, senior advisor to the ministry of commerce and trade. “Even though India has few manufacturing capabilities in areas where US may be most interested – mobile phones, telecom equipment, household appliances, industrial machinery – what it brings to the table are definite advantages in sectors such as textiles, clothing, auto components and certain types of chemicals. A similar outreach can be done to  China in terms of  what it imports from the US.”

Analysts caution that it is vital “to get our act together in areas such as e-commerce, medical devices and high tariffs where the current policy is counterproductive.”

What is helping though is the Chinese attitude. India’s exports to China surged 31.4 percent in 2018. China is also more willing than ever before to provide better market access to India on a wide range of agriculture and processed food products.  This largesse can perhaps be attributed to Beijing’s keenness to prove to a domestic audience that the tariff war is having minimal or no impact on the country.

As China seeks to minimize its dependence on the monopoly of US tech companies, trade analysts say, India should try to get a foothold into the Chinese technology industry as well, According to Euromonitor (2017), hourly manufacturing wages in China are around five times greater than those paid in India. This asymmetry in wages is already pushing companies to shift assembly lines to countries such as India and Sri Lanka.

What also works to India’s advantage is the easing up of its onerous regulatory environment. The country has moved up the ease of doing business rankings of the World Bank as well, moving up by 23 positions in the latest report to rank at a still anemic 77th of 190 countries. Foreign direct investment has been steadily climbing, and though the shocks of transition to GST and demonetization which disrupted many existing supply chains hasn’t quite abated, things are moving in the right direction.

However, apart from investor-friendliness,  global companies are also looking for reliability and quality. Market surveys have pointed out that India will need far-reaching reforms if it wants to compete with China, which currently holds nearly 40 percent of global trade.

India can do this by integrating its manufacturing ability to cater to the global value chains by building world-class infrastructure and a skilled labor force. High tariffs in sectors such as e-commerce and medical devices (a perpetual bone of contention with Trump’s administration) also need to be addressed.   

“Strong opportunity is also unfolding for India in apparel and ready-made garments as after China, India is the only country in the world to match the scale of operations and integrate its supply chain for global customers,” Rakesh Mohan Joshi, a professor at the Indian Institute of Foreign Trade told The Economic Times.

However, Joshi added, to effectively harness the emerging opportunities, India needs a carefully crafted strategy and meticulous implementation at the grass-roots level.

“Trade will not be automatically diverted from China to India,” he wrote. “There is a lot of hard work to do. The initial fear is that Indonesia, Vietnam and the Philippines have already started walking away with the prize.”

The response by India, Asia’s third largest and the world’s sixth largest economy, to tap emerging economic opportunities arising out the US-China squabble, needs to be holistic, encompassing trade, investment, tax, regulatory and exchange rate policies, say experts. It also needs to focus on becoming a new powerhouse as a global hub for exports. 

“Don’t forget, India is only one among the many alternative countries being considered by major international companies as an investment destination,” said the Delhi-based economist Dr. Sushant Pandit.

“Indonesia, Malaysia, Mexico, Thailand and Vietnam already have access to these large markets. Vietnam and Bangladesh had the first-mover advantage as they started capturing export share in these sectors because of higher costs and lower incentives. Besides, we still need to develop a global hub for exports, with a major positive impact on competitiveness and job creation.” 

Though New Delhi’s past record in the sphere of leveraging such opportunities is dispiriting, as it frittered away many such chances before the US-China trade war got underway, and when low-end manufacturing (ready-made garments, leather garments and footwear) had started moving out from China as labor costs rose, its time to wake up. 

The United Nations Conference on Trade and Development released data last month that shows how international firms have announced plans to pour money into new projects in Indonesia (US$28 billion), Vietnam (US$18 billion) and the Philippines (US$12 billion).

The case for India to diversify its trade basket and attract more FDI becomes all the more compelling given Trump’s mercurial nature and transactional approach to bilateral relations. Even though he considers India as the pivot for US’s Asia’s policy, he has continued to antagonize New Delhi by delivering what India considers to be unreasonable demands.

As a result of Trump’s intransigence, India’s energy security stands compromised by unilateral economic sanctions imposed on Iran. A threat looms large on the security front as well while uncertainty hovers over the impact of US sanctions on India’s missile deal with Russia. Trump recently shocked India by terminating its preferential trade treatment.

Be that as it may, the economic engagement with the US is of utmost importance to India. Washington is far more amenable to Indian exports than China is, and bilateral trade was worth $142.1 billion in 2018 as against a  US$53-billion trade deficit with China.

New Delhi will get a chance to persuade US to alter its position when US Secretary of State Mike Pompeo visits Delhi this month. But overall, much will depend on how well New Delhi plays its cards to derive economic benefits from the warring Chinese and Americans while antagonizing neither.

Neeta Lal is a Delhi-based Editor & journalist. She is a regular contributor to Asia Sentinel.