By Vinay Ramesh & Ronak Pol, Respectively COO and team lead, Foundation for Economic Development
Our nation aims to become viksit by 2047, so that the average Indian can enjoy a standard of living equivalent to that of the developed world. As we set about achieving this ambition, it would be helpful to look at a peer which has, in just over 15 years, travelled much further. In 2008, India and Vietnam were at almost the same GDP per capita (approximately $1,000). In 2023, Vietnam, at ~$4,400, was closing in on double our per capita GDP of ~$2,400.Most of the difference can be explained by Vietnam’s manufacturing exports story, especially in electronics.
In 2008, its exports were much lower than ours, at ~$65 billion relative to our ~$200 billion. Vietnam’s merchandise exports in 2023 were only slightly lower than ours, at ~$355 billion, relative to our $430 billion. To give a sense of relative scale, Vietnam’s population is only 10 crore compared to our 140 crore. And while export-led growth is the only successful model demonstrated by any country, with Japan, Taiwan, Korea, China, and India being other notable examples, the Vietnam story is most useful now because the opportunity it represents remains available to us.
As wages and geopolitical risks in China have gone up over the last decade and a half, supply chains, particularly labour-intensive ones in sectors like electronics, apparel, footwear, and other light manufactures like furniture, toys, etc., have started moving away from there. Vietnam has been one of the biggest beneficiaries of this shift, increasing its exports substantially. However, its most stunning success has been in electronics, which, at $140 billion, accounts for almost 40% of its exports. Vietnam’s electronics industry has created over 1.3 million jobs, with women’s employment in the sector growing 5x since 2012 to 600,000 and driving female labour force participation in the country to 62%.
What helped Vietnam achieve this miracle in electronics manufacturing and, consequently, better living standards for its citizens?A big part of it has been the government’s responsiveness to the needs of anchor investors and a collaborative approach. In 2008, it removed local content requirements for electronics and convinced Samsung to open its first factory with tax holidays. It rolled out the red carpet for large anchor investors like Apple, Nintendo, Microsoft, Foxconn, and many others. Highly competitive tax rates and tax holidays helped lure many of these.
Much of the initial investment in Vietnam was in assembly, but it adopted a collaborative approach with large investors to try and find local suppliers and deepen the ecosystem. Together with Samsung it held sourcing fairs, technical consultation programmes, and the government in 2016 announced a Supporting Industry development programme. At the end of 2023, Samsung alone contributed nearly $70 billion to Vietnam’s electronics exports, and there were 257 Vietnamese suppliers to Samsung, compared to fewer than 25 in 2013.
Value addition today is to the tune of 25-30%. The second part of the story has been openness and integration with world markets and investors. Electronics manufacturing requires a constant flow of goods across borders and any tariff or non-tariff barriers impose high costs on participants. Vietnam has very low tariffs on electronics imports and its extensive free trade agreements with almost all trading partners enable near-zero effective tariffs on inputs for its exports. Rather than resorting to tariff protections to encourage domestic value addition, which would have interfered with supply chain movement, it took the collaborative approach. Vietnam has also been very open to foreign investment.
According to a study by Nomura, in 2019, most of the investors there were US firms. More recently, despite its difficult historical relationship with China, Vietnam has welcomed many investors, recognising the need for Chinese investment to help shift the supply chains out of there.
The third part has been enabling competitive clusters and regulation — delivering industrial parks, infrastructure, and incentives in regions where manufacturing was concentrated. The Northern Key Economic Region — it includes Bac Ninh province, where the first Samsung factory came up — contributes roughly 32% of Vietnam’s GDP. Bac Ninh accounted for over $40 billion in electronics exports in 2022. Flexible labour laws allow up to 10 hours per day and 60 hours a week of work. This is important for competitiveness since electronics demand is seasonal and manufacturers need more working hours during periods of high demand.
This also suits workers who would rather earn more in concentrated bursts and take more time off during a lean season. A low overtime premium, 150% vs 200% in India, also helps companies add hours at a relatively lower cost while increasing aggregate earnings for workers. No restrictions are placed on women in night shifts, improving their participation in the workforce.
What does all this mean for India? The shift in supply chains away from China is ongoing, and while it is likely to speed up, there is no guarantee that we will be the ones to benefit. The production-linked incentive scheme shows the intent to bring in large anchor investors and encourage them to make in India for the world. As a result, India’s electronics exports have grown to $29 billion in just five years. But to attain the ambitious goal set by the PM of $500 billion in electronics production by 2030, India needs export volumes of $200 billion or more. To get there, we will need to apply the lessons of global integration, competitive clusters, and regulations from Vietnam. If we do so, given our inherent advantages in workforce, India can surpass Vietnam’s performance in exports and enable substantially better lives and livelihoods for our people.