By Subrata Majumder
Atmanirbhar Bharat Abhiyan campaign by Prime Minister Narendra Modi aims to make India a global supply chain, said, the senior foreign ministry officials. Tax breaks, modified PLI scheme, digitization, massive investment are the bedrocks for India emerging as the future global supply chain manufacturing hub.
In the forum for supply chain resilience, under IPEF (Indo-Pacific Economic Framework) summit in May 2022, Prime Minister Narendra Modi was assertive for building supply chain manufacturing hub. This spills the beans of India’s strategic shift towards manufacturing supply chain and its potential. Currently, for most of the new age manufacturing like electronic and digitization, manufacturing takes place in assembly operation in India and most of the components, parts are imported.
According to Mr. Chris Devenshire Elliis of Dezan Shira & Associates, Hong Kong, China is no longer a manufacturing power house. With USA – China war intensifying and China undergoing zero COVID strategy, opportunity is galore for other Asian nations to be alternative to China. To this end, Vietnam emerged asa promising alternative manufacturing destination to China for USA, S. Korea and Japan.
But, India is not left behind. The truth of the matter is that Vietnam hogged the limelight with USA and Korea shifting their production facilities. But, the irony is that US investment was four times more in India than in Vietnam. In 2021, USA investment in India was US $ 8.5 billion, as compared to US $ 2.7 billion in Vietnam.
Vietnam emerged a new destination for China+1 strategy for the investors. Instead of abandoning China investment, investors were preferring to supplement China operation with low cost manufacturing in Vietnam. According to Mr Kyle Freeman, partner and Head of Dezan Shira & Associates, “ even prior to the start of the USA- China trade war and more recently the outbreak of COVID 19 pandemic, Vietnam offered the most competitive alternative to China for general manufacturing”.
Advantages enticing the investors were stable government, accustomed to similar cultural similarity of doing business with China, low labour costs, business friendly tax regime and proximity to pre-existing Asia supply chain. Another factor, which led foreign investors shifting from China, was China’s transition towards consumption-led growth, which was apprehended to push cost factors due to rise in wages, especially in coastal areas where export oriented , mostly foreign invested companies, have clustered.
Major US investors, such as Apple, Intel, Qualcomm, Universal Alloy Corporation, Nike, Key Tronics EMS, and Samsung of Korea moved to Vietnam.
Though India has not appeared in the limelight as alternative to China as against Vietnam for supply chain manufacturing, it has several factors to edge out Vietnam. Firstly, it has bigger domestic market and more skilled workforce than Vietnam, such as in IT operation manufacturing. Secondly, it’s wage levels are only marginally higher than Vietnam. Thirdly, it is far ahead in digitization than Vietnam. Lastly, political stability and strong democracy in India are ensured by its independent judiciary, which reaffirm India’s strength over Vietnam.
According to a JETRO survey, India’s annual manufacturing compensation to workers was US $ 3,982 in 2017, as compared to US $ 3,673 in Vietnam. In comparison to wage level in China, wages in Vietnam were 63 percent cheaper as compared to 61 percent cheaper in India. The marginal difference in wage level is offset by more skill of Indian workforce in terms of IT solution.
Currently, India’s middle class market is of 250 million, which is similar to China. It provides a strong base for insulation while the global export market is in deep volatility owing to USA- China trade war and unabated Ukraine – Russia dispute. In contrast, Vietnam is wooed by small domestic market and its over-dependence on export warrant higher market risk. , India is now one of the few countries where both cheap labour and a large wealthy consumer class go-hand-in-hand.
Toeing the global strategic shift in manufacturing, India is on the binge to allure domestic and foreign investors by incentivizing the supply chain manufacturing. Launching of new model of PLI scheme (Production Linked Incentive) is a case in point. One of the main modifications in the policy is the broadening of the scope of the scheme. Hitherto, only 3 industries were focused under the scheme. Now 13 industries were included in the scope.
Under PLI scheme, government provides 4 to 6 percent incentives on incremental sales of manufacturing for 5 years over the base period. In the new model of PLI, thrusts were given on supply chain industries relating mainly to IT and digital industries.
Recently, Ministry of Electronics and Telecommunication (MeitY) approved a comprehensive policy for development of Semiconductor and Display Manufacturing Ecosystem. Under the policy, government will provide incentives worth Rs 760,000 million over a period of 5 years. Simultaneously, under PLI scheme, government will give incentive support of Rs 553,920 million (US$ 7.5 billion) for manufacture IT hardware and development of electronic manufacturing clusters.
According to Asia Briefing survey, India is neck to neck to Vietnam in terms of labour productivity growth and wage level, excepting in bureaucracy. The antiquated bureaucracy tarnished India’s promising parameters for foreign investment opportunities, causing delay in multiple approvals and raising cost of projects.
Notwithstanding, USA investment surged in India. The paradox of USA investment is that it defied the COVID 19 pandemic, which crippled the manufacturing sector and poured investment, commensurate with uptick in digitization. (IPA Service)
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