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Why Is India The Best Option To Replace China As World's Production Hub? May 09 2020World Market

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Why Is India The Best Option To Replace China As World's Production Hub?

Low-cost manufacturing, relatively cheaper land and labour and factories equipped with the latest technology have all played a key role in making China the second largest economy in the world. Besides, it is a leading manufacturing hub for companies worldwide.

Reason for China’s Downfall as a Global Manufacturing Hub

However, due to the coronavirus crisis coupled with ongoing trade tensions with the US, China’s supply chain has been completely disrupted. Furthermore, nationwide lockdown and closure of factories in China due to COVID-19 have significantly impacted major industry sectors including electronics, pharmaceuticals and automobiles, among others.

Owing to the disruption in China, more and more global companies are looking to shift their manufacturing and production dependencies to other countries as a part of their risk hedging strategy for the future. This is opening opportunities for other countries to move into low-cost manufacturing.

India – The New Manufacturing Hub Replacing China

India is proving to be an efficient manufacturing hub and holds an edge over other countries. It enjoys low-cost advantages. For instance, the entry level salaries of workers in India is around Rs. 12,000 to 15,000 which is almost three times lower than that of China. Besides, India also holds other advantages like world-class infrastructure, lower operating costs, special economic zones (SEZs) that promote duty-free exports, favourable business policies, reduced corporate tax rates, government support in the form of various incentives and subsidies to promote domestic manufacturing and much more.

Moreover, India is aggressively working towards building its supply chain capacities in order to cater to foreign companies who are eyeing to relocate from China or expand their manufacturing operations in India.

Chart Depicting Per Capita Income Increase in India in Last 5 Years

                 India GDP Per Capita - Historical Data                                                                                                    

Year

GDP Per Capita (US $)

Annual Growth Rate (%)

2018

$2,016

1.72%

2017

$1,981

14.59%

2016

$1,729

7.70%

2015

$1,606

2.02%

2014

$1,574

8.57%

 

Chart Depicting FDI Inflows in India and China in Last 5 Years


Recent Significant FDI Announcements in India

Date

Company

FDI Investment Amount

Purpose

April 2020

Facebook

US$5.7 billion

To buy 9.9% stake in Reliance Jio

January 2020

Amazon India

US$ 1 billion

To digitise small and medium businesses and create one million jobs by 2025

January 2020

Mastercard

US$ 1 billionover next five years

To double-up its research and development efforts for the Indian market

October 2019

Total S.A. (French oil and gas giant)

US$ 810 million

To acquire 37.4% stake in Adani Gas Ltd.

August 2019

Saudi Aramco

US$ 75 billion

To buy 20% stake in Reliance's oil-to-chemicals (OTC) business

August 2018

Warburg Pincus

US$350 million

To acquire 20% stake in Bharti Airtel’s DTH arm

May 2018

Walmart

US$ 16 billion

To acquire 77% stake in Flipkart

 

Top Reasons That Make India an Alternative Hub for Global Manufacturing

Some of the reasons that justify India as a leading global manufacturing destination replacing China are as follows:

·         Huge Market

With the population of 138.72 crores, India is one of the biggest consumer markets across the globe. As per the World Economic Forum, India is expected to rank as the third largest consumer market by 2025. Rising income levels, change in consumer behaviour and increased spending patterns further create ample opportunities for the Indian market.

·         Lower Corporate Tax Rate

The government has been very flexible with its corporate taxation in order to foster investments in the manufacturing sector. The corporate tax relief announced in the Budget 2019 was an encouraging move from the government and manufacturing sector was at the forefront of receiving the benefit from the slashed taxation rate. Further, lower tax rates encourage India to compete with other ASEAN countries in terms of foreign investment.

·         Promote Domestic Manufacturing

Government’s initiatives like ‘Make in India’ promotes domestic manufacturing of products. In order to encourage this initiative, the government also offers incentives to foreign companies eyeing to set-up their manufacturing units in India. This helps set up more and more manufacturing units in the country and take advantage of tax, incentives and FDI rules.

The bottom Line

As per the reports, a large number of companies are already in talks with the Indian authorities seeking to pursue manufacturing plans in India in sectors like textile, electronics and medical devices, among others. India needs to grab this opportunity and emerge as a global manufacturing hub leaving China behind.

We are hoping for a better tomorrow!

 

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