Shifting Supply Chains: The Rise of India as a Manufacturing Hub

Global companies looking to de-risk from China should look no further than India, argues Suryaprabha Sadasivan.

Over recent years, global manufacturing has been undergoing significant changes due to evolving geopolitics and externalities. For nearly four decades, China, termed as the “world’s factory”, has been a leading manufacturing base due to its strong business ecosystem with a widespread domestic value chain that supports large-scale, cost-effective production, low taxes, and favourable currency practices. However, before the US-China trade war and the COVID-19 pandemic, rising wages and taxes led to the increased cost of doing business in China, which weighed heavily on companies, causing them to look at alternative options in the region, such as Thailand, Malaysia, and Vietnam. The Russia-Ukraine conflict, Taiwan sovereignty issues, and the vulnerability from the fallout of the pandemic further heightened the need for diversification, prompting many companies to adopt „China +1“ strategies, aiming to reduce dependence on a single country.

India’s Emergence as an Alternative

In this context, India has emerged as a robust alternative, offering stability and strengths, making it a potentially lucrative manufacturing hub. Several compelling factors, such as demographic strengths, investments in infrastructure and efforts towards supportive policy enablement, drive India’s opportunity to become the prime beneficiary of the China+1 strategy. India also has a strategic geographical advantage, given its good connectivity to major markets in Asia, the Middle East, and Africa.

Building Blocks of India’s Manufacturing Hub

One of India’s most significant advantages is its demographic profile, which provides India with a sustainable advantage over other, ageing, economies. With more than half of its 1.45 billion population under 30, it is not only a source of abundant cost-competitive labour compared to China, but also a potential consumer base for manufactured goods.

A supportive policy environment has unlocked the potential of the manufacturing sector. Several key initiatives lay the foundation for companies to consider India a China+1 option. Those include “Make in India”, launched in 2014, targeting 25 sectors, including automobiles, pharmaceuticals, electronics, and textiles, to enhance skill development, foster innovation, and create a conducive business environment and the “Production-Linked Incentive” schemes offering financial incentives to boost domestic manufacturing and attract foreign investments across various sectors. This is supported by the “Digital India” initiative to enhance digital infrastructure and widespread internet connectivity, which has opened the potential of digital technologies, including the integration of “Internet of Things”, artificial intelligence, and data analytics, which are being used for smart manufacturing practices to enhance productivity and efficiency. These initiatives are well supported by the “Skill India Mission”, which has already trained over 400 million people in various industry-ready skills, to date.

To ensure India has a strong backbone infrastructure to support this growth momentum, India launched the “National Infrastructure Pipeline” (NIP) with an investment outlay of over $1.5 trillion in 2019 to develop world-class infrastructure across the country, reduce logistics costs, and improve the overall business environment. India is creating a favourable environment for manufacturing activities and improving trade efficiency by developing industrial corridors, dedicated freight corridors, smart cities, and the modernization of its ports.

These efforts have led to India’s substantial strides in improving its ease of doing business ranking, moving from 142nd in 2014 to 63rd in 2023, as per the World Bank’s “Ease of Doing Business” report. However, what is most critical to note is that through such initiatives, the Indian government does not just aim to leverage the China+1 strategy to gain immediate economic benefits but also to strategically position the country as a pivotal player in global value chains.

Economic Growth and Political Stability

In the last decade, with GDP per capita surging from approximately USD 1,500 to over USD 2,700, India has emerged as one of the fastest-growing economies, propelling it from the ninth to the fifth-largest economy globally and contributing to its rise as a manufacturing hub. Despite global economic uncertainties, due to political constancy and continuity of economic reforms and development, India’s GDP growth rate has remained promising, ensuring a stable environment for long-term manufacturing investments. After the recent elections in India, there have been questions on whether this growth, policy continuity, and momentum can be sustained in a coalition government. Prime Minister Modi’s government may need to adopt a more consultative and deliberative approach than his earlier terms in office and be open to input by his coalition partners into its policy initiatives. However, from a reform and policy perspective, strengthening India’s position as a global manufacturing hub will likely remain a key priority that will continue to be supported by the government and its coalition partners. Over the last few years, India’s geopolitical position has strengthened due to robust economic growth, enhanced military capabilities, and proactive foreign policy, including a renewed focus on its Act East Policy. Robust relationships with key global powers like the US, Japan, and the EU, alongside active participation in global forums such as the G7, COP summits, and UNGA, have amplified India’s global influence. India’s successful G20 presidency was certainly a pivotal moment for India to emerge as a leading voice of the Global South. Involvement in the Quadrilateral Security Dialogue (QUAD) underscores its commitment to a free and open Indo-Pacific. Additionally, strengthening ties with Middle Eastern countries through energy cooperation and trade has further bolstered India’s geopolitical standing, positioning it as a trusted partner to the world. India aims to leverage this renewed global status to further its trade agreements and economic agenda with key economies globally.

Implications for EU-India Trade Relations

In 2022, the European Union (formerly the European Economic Community) and India celebrated six decades of bilateral relations. In 2021, the EU was India’s third-largest trading partner, just behind the USA (11.6%) and China (11.4%). The EU is also the second-largest destination for Indian exports. Despite this long history and the successfully ongoing trade relations, the full potential of EU-India dynamics remains untapped. Therefore, the rise of India as a manufacturing hub holds significant relevance for EU-India trade relations. The improved economic ties and trade relations will hope to address mutual concerns over China and enhance global supply chain resilience, especially in critical and emerging technologies. In an increasingly geopolitically fragmented world with multiple flashpoints threatening to exacerbate the situation further, the EU and India stand mostly aligned from a geostrategic standpoint. However, trade remains the primary driver in EU-India relations, underscoring the critical importance of the potential India-EU Free Trade Agreement (FTA), which could serve as a cornerstone for a deeper economic and strategic partnership.

The agreement is currently at a critical juncture.  For India, investments in its „Make in India“ initiative and the interest in security ties and technology transfer are central to its ambitions. For the EU, market diversification and tapping into the immensely huge consumer market for manufactured goods remain key. However, divergent priorities, particularly the EU’s emphasis on binding commitments on climate, environment, and human rights, pose significant challenges. Additionally, the EU’s “Carbon Border Adjustment Mechanism”, which aims to tax imports based on their carbon footprint, could impact India’s manufacturing sector by raising costs for Indian exporters. The FTA, though being touted as something around the corner, still has some hurdles to cross and tough negotiations ahead before it sees the light of day. It will require pragmatism and compromise on both sides to materialize, especially since it holds substantial economic and geopolitical benefits for both parties.

Challenges and the Path Forward

Despite growing interest in diversifying supply chains away from China, looking at the data, the country has remained dominant in global exports. In fact, from 2018 to 2023, China’s share has risen from 12.9% to 14.9%, while traditional exporters like the Republic of Korea, Germany, Japan, France, and the UK have lost market shares. During this period, while India’s share grew, it only showed a modest increase from 1.7% to 1.9%, indicating limited benefits from the China +1 strategy. The primary reason lies in the stark difference between the two nations‘ export baskets. China’s top exports are high-value industrial products, such as electrical machinery, nuclear reactors, and vehicles. In contrast, India’s exports are predominantly mineral fuels, jewelry, and organic chemicals.

For this to change, several regulatory bottlenecks and policy challenges remain that need to be prioritized and addressed. For example, Indian policymakers are relying on import restrictions to prevent cheap Chinese imports from being dumped into the Indian markets. But as India’s Economic Survey of 2024 states, some of these Chinese goods are so cheap that no amount of tariff can reduce their price competitiveness. Further, some Chinese products can move past these restrictions without being noticed since they are packaged in third countries.

Thus, policy solutions have to be agile and cognizant of such challenges. Policy gaps are also challenging, especially in areas where finding uniformity and alignment between central and state government priorities, policies, budgets, etc., has remained unaddressed. Environmental sustainability and social responsibility are also increasingly important for transnational corporations. While improving, India’s environmental regulations still face challenges related to enforcement and compliance. The same applies to labour laws and practices, which must evolve to meet global standards. Attending to these issues and doubling down on investments in infrastructure and skilled labour, among other enablers, are essential for India to become a preferred manufacturing hub for global companies looking to de-risk from China.