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iPhone breakthrough masks India’s struggle to become China’s next manufacturing hub

iPhone breakthrough masks India’s struggle to become China’s next manufacturing hub

iPhone breakthrough masks India's struggle to become China's next manufacturing hub

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On paper, India’s chances of attracting global manufacturers look good. Apple has begun assembling its latest iPhone models in the country in a significant break from its practice of reserving much of it for giant Chinese factories run by its top Taiwanese assemblers, a key win for the government’s “Make in India” campaign. Prime Minister Narendra Modi.

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Among India’s advantages are rising geopolitical tensions between Western nations and China, and a growing friendship with the United States, Australia and Japan, which are part of the Quad, a grouping of democracies to counter Beijing’s economic and military ambitions.

The country’s presidency of the Group of 20 this year could also boost investor confidence. India is poised to hold the title of the fastest growing major economy in the world for the next three years. Its gross domestic product is expected to become the third largest in the world before the end of the decade.

But experts warn that lasting gains to improve a sluggish manufacturing sector are still a long way off for India, which is expected to soon overtake China as the most populous nation. Modi’s Make in India campaign, which aims to increase exports and create jobs, has not quite succeeded. Manufacturing accounts for 14% of the economy, a figure that has barely budged in decades. And despite India’s massive demographic dividend, unemployment remains stubbornly high.

Since the launch of Make in India in 2014, the deadline for one of its main objectives – to raise the share of manufacturing in GDP to 25% – has been pushed back three times, from 2020 to 2022 to 2025.

Amitendu Palit, an economist specializing in international trade and investment at the National University of Singapore, said the decoupling with China was “not yet pronounced”. In other words, for any significant relocation of supply chains, Palit said Modi’s government will have to prove that India is a cheaper and easier place to do business, rather than just relying on political or security factors to attract business.

While recent financial incentives under Modi offered Apple a profitable route to set up shop in India, the California-based company still manufactures a fraction of its iPhones in the country. And for every success, many companies left India due to long-standing challenges such as dealing with the country’s bureaucracy, including General Motors, Ford Motor and Harley-Davidson.

Tesla, which previously said it would consider setting up a factory in India provided the country first allows the company to sell imported cars by lowering tariffs, is now set to strike a deal to a factory in Indonesia.

To meet the expectations of a transformed India, Modi must continue to cut red tape and streamline labor laws. Ensuring that businesses can obtain land is another hurdle.

Take the case of ArcelorMittal SA. The world’s largest steel producer attempted to build a steel plant in the eastern state of Odisha more than a decade ago, but scrapped the plan in 2013 because executives could not secure the land and facilities. permits needed to extract iron ore, a key raw material. The company has again returned to Odisha, with plans to build a 24 million tonnes per year plant in a joint venture with Nippon Steel Corp.

“It’s a difficult reform,” said Nada Choueiri, India’s mission chief at the International Monetary Fund. “But we have to move forward because when companies come to establish themselves, they need land.”

Employment is another puzzle. Delays in the revival of manufacturing and a wider decline in agriculture mean that the estimated 12 million Indians who enter the labor market each year must rely largely on services to seize opportunities. But India is struggling to create enough jobs even in this sector, despite growing at a pace that few major economies can match. China has solved the employment problem by moving from the farms to the factory of the world.
Jobs are an important piece of the puzzle if India is to increase its per capita income, which is currently below neighboring Bangladesh’s $2,723 (around Rs. 2.2 lakh). Higher incomes will stimulate consumption, encourage companies to invest even more and create new jobs, triggering a so-called virtuous economic cycle.

Although India continues to grab headlines as the fastest growing major economy, “it is disappointing in terms of progress on the ground,” said Shumita Deveshwar, chief economist for India at the consulting firm TS Lombard.

Deveshwar listed problems that are mostly self-inflicted: weak infrastructure, shortage of skilled labor and failure to implement policies that would attract enough investment. Even as India signs major trade deals – Apple being just one high-profile example – the consistency and type of investments are worrying some.

In recent years, much foreign capital has flowed into the service sector rather than production, according to Deloitte. Inflows have slowed in 2021, and as of 2020 India has dropped from the top 25 rankings in Kearney’s FDI Confidence Index.

The Kearney index measures the three-year confidence of companies investing in a certain market. China, UAE, Brazil and Qatar were the only emerging markets to make the 2022 list. “Since the outbreak of the pandemic, our index has shown a strong investor preference for developed markets over emerging markets,” said Terry Toland of Kearney. . “This may suggest a perception of security in developed markets versus emerging markets.”

Modi is betting that the G-20 presidency will create the right opportunity to change this perception and fend off competition from other Asian economies such as Vietnam and Malaysia.

“2023 will be different, assuming there are no unexpected new shocks – global or domestic,” said Abhishek Gupta, senior India economist at Bloomberg Economics. “The country has already basically put in place a structure that should help kick-start an industrial recovery and boost manufacturing,” he added.

Friend-shoring, in which allies invest in each other, and a broader pivot away from China could benefit India – although the speed of change is far from clear.

“There’s a lot of inertia,” said V. Anantha Nageswaran, India’s chief economic adviser. Leaving China is not a call companies will take lightly, he said, because “they have invested so much in a great market.”

Still, East Asian countries will eventually run into capacity constraints at some point. “So I think we have to wait for these things to happen,” Nageswaran said.


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