There is no doubt that India is poised to benefit from the diversification of supply chains as foreign companies seek to de-risk their exposure to the dragon due to worsening US-China geopolitical tensions. The US is pushing for a friendshoring strategy with allies to reduce risks to supply chains which it relies on. India’s attractiveness to potential investors in this regard is its “strong and stable economy”, access to a large labour supply with relatively cheap wages for skilled labour and infrastructure development underway that will lower logistics costs, a taxation regime that is becoming “less complex and cumbersome to navigate,” according to the Economist Intelligence Unit. To some extent, this process has already begun. Despite its heavy dependence on the mainland, Apple has already rolled out its made in India iPhone through its preferred Taiwanese contract manufacturers, Foxconn, Pegatron, and Wistron. Apple contributed nearly 46% of the country’s booming exports of smartphones in the first 11 months of this fiscal. Looking to a future beyond Apple, Foxconn has unveiled plans to expand its operations in a couple of southern states in the country. The world’s largest contract manufacturer also has a joint venture with the Vedanta Group to manufacture semiconductors in Gujarat.
But there are several challenges ahead for this supply chain rejig to acquire critical mass. There is a warrant to dampen expectations that India will turn out one out of four iPhones globally or that one out of four Apple devices produced outside China by 2025 will be made in the country. For India to be an automatic choice in this regard, it will have to be more competitive vis-a-vis Asian rivals. Although the country’s business environment is now competitive with China and Southeast Asia—a point also underscored by EIU—foreign companies who have opted to move out of the mainland have preferred fast-growing Vietnam, which has steadily built up its competitiveness over the last 15 years. India’s manufacturing labour costs may be nearly half of Vietnam’s at $0.8 an hour, but investors prefer to relocate to the latter because of its manufacturing ecosystem and rapid improvements in logistics performance indices. Apple, for its part, is in no tearing hurry to diversify out of the dragon considering the profits its making as the leading luxury brand in the world’s biggest consumer market. Foxconn, too, will invest more in China.
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The biggest challenge is on the policy front. To attract supply chains shifting out of China, the most efficacious response is to maintain an open and unrestrictive trade policy and a higher level of ambition in inking deep free trade agreements with mega regional groupings. To compete with the likes of Vietnam, supportive policy inputs include a phased reduction in average applied most-favoured nation tariffs in manufacturing and for inputs in sectors of supply chain dynamism in line with levels prevailing in the Association of Southeast Asian Nations. In contrast with India, Vietnam has shown a dramatic improvement in the foreign value added component of its gross exports and hence global value chain integration, according to Professor Amita Batra of the Jawaharlal Nehru University. The need is for including a higher number of tariff lines, especially of inputs, in the duty free category or lowest tariff brackets. Instead of promoting supply-chain integration through a more outward-oriented trade strategy, the government, however, is only seeking greater import substitution.