China plus one, not really minus China

World Bank president Ajay Banga’s point that the post-pandemic search for resilience in global supply chains provides India a window of between three and five years to cash in on the opportunity will be well received in policy circles. India has been preparing for this eventuality for a while now. It has, over the past decade, cleaned up bad debts in the banking system, lowered corporate tax rates to internationally acceptable levels, diverted increasing chunks of the government budgets at building physical and digital infrastructure, and has rolled out incentives for local manufacturing and exports in select industries. India has the policy framework in place. It also offers a sizeable domestic market to swing corporate investment decisions in its favour.

But that is just half the story. The other half revolves around the US-China dynamic. US treasury secretary Janet Yellen described it as ‘healthy economic competition that is not winner-takes-all but that, with a fair set of rules, can benefit both countries over time’. Companies seeking to build manufacturing capacity outside China will use this as a yardstick: the US is seeking diversification, not disengagement. Global supply chains will, thus, have deep linkages with Chinese manufacturing.

India has, however, become more protectionist in an attempt to build its domestic manufacturing base. New Delhi has turned its back on a regional FTA implemented by Beijing. It has also raised import duties. Both actions make it difficult to seize the ‘China Plus One’ opportunity within a narrow window. Apple‘s experience with exporting mobile handsets made by its contract manufacturer in India brings out this difficulty. It has had trouble seeding the ecosystem without help from Chinese vendors. To make the most of a structural shift in global manufacturing, India needs both trade and investment from China. The US is comfortable sharing technology with India. Converting itself into a manufacturing base would require another helping hand from its northern neighbour.