China-centric global supply chains are being disrupted and countries such as Vietnam have grabbed the China+1 headlines more than India. However, the announcement at the G20 Leaders’ Summit on the Partnership for Global Infrastructure and Investment of a landmark India-Middle-East Europe Economic Corridor (IMEC) can make India an Asian hub in global supply chains.
The recent bilateral meetings between Prime Minister Narendra Modi and President Joe Biden show that supply chains are at the centre of the latest chapter in India-U.S. relations and India is being viewed as central to new supply chains and its inclusion in the shift of existing ones away from China.
Recent eye-catching investments in India for the production of Apple’s iPhone 14 and the Mercedes-Benz EQS electric luxury sedan suggest that supply chain pessimism about the country has started to fade since the pandemic.
What are supply chains?
Supply chains are variously described as global production networks, production fragmentation or global value chains. It refers to the geographical location of stages of production (such as design, production, assembly, marketing, and service activities) in a cost-effective manner.
Global supply chains have emerged as the leading model of industrial production since the 1980s influencing the pace and nature of globalisation and regionalisation. The shift in industrial production from local and regional supply to global supply took place gradually over the last 100 years. Global supply chains can be found in a wide range of simple industries (e.g., textiles and clothing, food processing and consumer goods) and complex industries (e.g., automotives, aircraft, machinery, electronics and pharmaceuticals).
Why are supply chains moving from China?
Even before the Covid-19 pandemic, Western firms had begun de-risking strategies to reduce their reliance on China, and its popularity as a sourcing market among Western buyers receded. Some production stages in China’s supply chains particularly labour-intensive ones — are migrating from China to lower-cost locations.
This trend is partly attributed to factors internal to China like rising wages, supply chain bottlenecks within China, and investor concerns about tighter regulation of foreign firms.
The global risks of supply chains concentrated in mainland China and Hong Kong are underlined by recent data. Exports from the two markets, which together represent 20% of world exports of intermediate goods, decreased 15% and 27% year-on-year, respectively, during the last quarter of 2022. Shipments from the U.S., which accounted for 8.1% of world exports of intermediate goods, fell by 3% while those of Japan, with 4%, fell by 13%.
The downturn, coupled with internal risks in China and the country’s trade war with the U.S., is forcing multinational companies to rethink their global sourcing strategies.
It is costly to shift supply chains as new plants need to be set up and new workers need to be hired and trained which makes it difficult to undertake a wholesale relocation of production from China. Nonetheless, profitability considerations are influencing a trend of relocating production either to friendly countries or back to the U.S.
Why is India now being considered as an attractive supply chain hub?
Southeast Asia has beckoned foreign companies with cheap wages, fiscal incentives and improved logistics. Vietnam and Thailand are big winners in supply chain shifting. But over time, India too can become a complementary Asian manufacturing hub to China by reaping gains from foreign technology transfers and creating value-adding jobs. This is seen by Apple ramping up its manufacturing of iPhones in the country; early technology transfer in the product cycle of the technologically advanced Mercedes Benz EQS to India and Foxconn Technology Group developing a chip-making fabrication plant in Gujarat. Manufacturing sectors in India such as automotives, pharmaceuticals and electronics assembly are already sophisticated and likely to emerge as winners in this race.
India’s attractiveness to foreign investors is linked to geopolitical and economic factors. The World Trade Organisation (WTO) lists India as the world’s 5th largest importer of intermediate goods imports in 2022Q4 with a 5% share suggesting that supply chain pessimism on India may be altering since the pandemic. The countries ahead of India are China (23.4%), the U.S. (16.2%), Germany (9.1%), and Hong Kong (6.0%). In the future, India could double its present 1.5% share of world exports of intermediate goods. Indian service can also be a winner, including in information and communications technology, back-office work, financial and professional services, and transport and logistics. 
Since 2022, the Modi Government’s trade policy is placing renewed emphasis on preferential trade opening with trading partners through a flurry of bilateral trade deals. The UAE-India Comprehensive Economic Partnership Agreement entered into force in May 2022. An early harvest was reached in April 2022 for the Australia-India FTA and talks are on-going to conclude the full FTA by the end of 2023. Negotiations for a U.K.-India and EU-India FTA are in process.
These new deals are significant because they are with Western trading partners and reflect plans for deep economic integration going well beyond India’s previous FTAs which focused solely on the goods trade and related measures.
What must India do?
India can learn much from China’s experience.
First, the promotion of export-oriented foreign direct investment is key to participating in supply chains.
A gradual stance of trade liberalisation dictates maintaining an open-door policy toward FDI in manufacturing and facilitating investment at a high level, with competitive fiscal incentives and the creation of modern special economic zones as public-private partnerships. The reduction of business hassles through digitalisation of tax, customs and business administration and high-quality free trade deals will be essential.
Second, local companies need smart business strategies to join global supply chains. Big companies naturally have advantages in supply chains due to a larger scale of production, better access to foreign technology, and the ability to spend more on marketing.
Conglomerates can cross-subsidise investments and other costs among business units. Small and midsized enterprises therefore should work as industrial suppliers and subcontractors to large exporters.
Hence, business strategies like mergers, acquisitions and alliances with multinationals and large local business houses are all rational approaches in India. So is investment in domestic technological capabilities to achieve international standards of price, quality and delivery.
Third, industrial policy remains a controversial area and caution should be exercised before India attempts to copy China’s state interventionist template wholesale, as there is a significant risk of government failure and cronyism. It may be prudent to actively engage with think tanks to gain insights into what might work.
Nonetheless, some aspects of China’s industrial policy may be relevant to India, including better targeting of multinationals in new industrial activities in which there may be a potential comparative advantage and better coordination between the central government and state administrations. Equally important is upstream investment in tertiary-level education in science, technology, engineering and mathematics.
How will South Asia benefit?
India has a historic opportunity to promote industrialisation in its South Asia, thereby stabilising the region, increasing jobs, and making it less vulnerable to Chinese enticements.
Market-led spillovers from India’s supply chains through outward-foreign investment in labour-intensive manufacturing are a natural transmission channel to Bangladesh and Sri Lanka. India’s dynamic start-up culture, venture capital financing and fintech capacity can be used to draw in young entrepreneurs from other South Asian countries. The Indian government should consider two policy initiatives to promote regional supply chains. First is upscaling the Make in India Programme into a Make in South Asia Programme. India can provide fiscal incentives to Indian manufacturers to expand into its near neighbourhood of Bangladesh and Sri Lanka which are in apparel supply chains. Food processing, textiles and apparel, and the automotive sector might be candidates for this given India’s neighbors’ factor endowments and industrial experience.
Second, India should conclude a comprehensive bilateral FTA with Bangladesh and upgrade the Indo-Lanka FTA to support regional rules-based trade and investment.
These policy initiatives can help to integrate these two countries into supply chain activities centred on India as the assembly hub and bring mutual welfare gains in terms of industrialisation, real income growth and job creation.
Unless India creates channels for South Asia, it has no offer for the Global South. The fresh supply chains opening up with the U.S. and IMEC partners are a good place for India to start its global integration journey, Neighborhood First.
Dr. Ganeshan Wignaraja is Professorial Fellow in Economics and Trade, Gateway House.
This article was first published in The Indian Express.
The article draws on the author’s paper, The Great Supply Chain Shift from China to South Asia?, supported by Konrad Adenhauer Stiftung (KAS), Japan. You can download the PDF version of this paper here.