30 May 2020 by Jigna Shah
China Plus One A Reality? - Research & Ranking

Let me talk to you about the Prime Minister Narendra Modi’s vision of ‘Self Reliant India’, the snags in the journey and the inherent advantages.

In his fifth address to the nation on 12th May 2020, Prime Minister Narendra Modi charted a plan to recover from the crisis, a Rs 20 lakh crore stimulus package and his vision to make India ‘Atma Nirbhar Bharat’. Read more about government’s dream of Self-Reliant India here.

In his exact words, “Friends, we have been hearing since the last century that the 21st century belongs to India. We have seen how the world was before Corona and the global systems in detail. Even after the infliction of the Corona crisis, we are constantly watching the situation as it unfolds across the globe. When we look at these two periods from India's perspective, it seems that the 21st century is the century for India. This is not our dream, rather a responsibility for all of us. But what should be its trajectory? The state of the world today teaches us that a (Atma Nirbhar Bharat) "Self-reliant India" is the only path. It is said in our scriptures – Eshah Panthah That is - self-sufficient India.”

Let me preface this story by stating that I truly believe that making India self-reliant is the only way. Now there are various ways to do it. If you listened to the entire speech of our Prime Minister, he signaled the plan to attract firms set up their manufacturing capacities in India that exit China.

But the question that arises is – Will India again miss this bus to becoming a major player? Will the 21st century truly belong to India just by turning the current pandemic crisis into an opportunity?

Well, let the time give the verdict. All we can do is fasten the seatbelt and analyze the probability of India becoming a humongous player.

Let’s rewind to the past

If you look into the past, India missed opportunities, where China won big. First in the 1990s and then in the 2000s. In 1990, China joined the World Trade Organization (WTO) and became a part of the multilateral trading system. We missed the bus here. The second was the growth of the internet which paved the way for manufacturing setup in the most competitive place. We lost here too somewhere.

And that led a strong foundation for China to become the biggest beneficiary with these two developments in place.

Please don’t take it from me. Let the numbers speak here.

In 1990, China’s and India’s GDP were more or less the same. Not much difference, right? In just 10 years, between 1990 and 2000, after China joined the WTO, China’s GDP grew 235%, while India’s GDP grew by only 46%. Also, post dot-com bubble, China grew by 403% between 2000 and 2010, whereas India grew by just 258%. The reasons can be attributed to weak labour laws, poor infrastructural growth, low productivity, which made it look like a hostile country for doing business.

But this is past. What about now, with many countries mulling the shift in the global supply chains? Considering the ongoing pandemic, many countries like U.S. and Japan are considering moving out of China or setting up ‘China plus one’ strategy. For starters, looking at ways to tap alternative supply chains to reduce dependence on one country is called ‘China plus one’ strategy.

But will India grab the opportunity and eat a major chunk of ‘China plus one’ strategy?

Well, to become a global manufacturing hub to attract firms that wish to move out of China, we need to put ourselves into the shoe of these companies that are willing to minimize their exposure to China and understand on how they take such decisions.

For that, two factors play of paramount importance.

  1. Risk vs reward: The number 1 criteria would be to consider the costs and benefits while shifting their manufacturing capacities. Firstly, do they want to shift, and if yes, where? The key parameter one would look at is the rate of return on their investments. The climb in ease of doing business ranking (63rd rank among 190 countries) and low labour wages as compared to China will work in favor of India. But that won’t be enough. To become an attractive FDI destination, India needs to lay out a plan to offer the best ambience for doing business i.e. low risk and low cost of doing business.
  2. The next is stability. With political stability and stable companies/institutions, India has an inherent advantage here to curate a strategy that is low risk, low cost while doing business here.

In fact, Secretary of State Mike Pompeo quoted, “The US is in talks with its "friends", including India, for restructuring the global supply chains.”

Even behemoth companies are already eyeing India

Recently, I came across the news with a title ‘Apple may take a bigger bite of India’s manufacturing pie.’, which talked about a possibility of Apple shifting nearly a fifth of its production capacity from China to India.

But till then, to capture a significant chunk of the supply chain that will move out of China, India needs to build a more secured environment, work on stability and transparency of labour laws and taxation policies, while doing away with the uncertainty and ambiguity in laws.

The Modi government has started working in this direction by adopting a plug-and-play model in industrial estates to enable investors to scout for plant locations. For this, the government to promote industry and internal trade is working on GIS-based model, which will cover dozens of locations for investors to compare.

With this, it is also working on sorting technological issues and deploying electronic tracking and monitoring system for central and state-level clearances, investment clearance cell, additional funds for creating new economic zones, leveraging the inherent advantage of the states to attract investments in the country.

Now this is just one part of the story of how government shall attract companies.

What makes India attractive as an FDI investment destination is thanks to our:

  • Urbanization
  • Demographic dividend
  • Digitization
  • Sheer scale

No matter how you dissect the market segment of India, you end with the size of another country. Today, there are approximately 300 million smartphone users in India, which is the population of the U.S. Maharashtra's population is 114 million which is slightly less than Japan's population of 126 million. Any company that can tap the majority of any market segment will witness humongous growth in the future!

With the sheer scale, consider this: 450 mn millennials, high internet penetration with propensity to spend. The eventual outcome would be buy, buy and buy. Considering the strong and rigid consumption growth story of India, any foreign company would want to grab a pie of this spending.

To cut the long story short - well, to put it in black and white, it is difficult to say whether India will board the bus this time or not.

But considering the advantages that would work in our favour, we have our fingers crossed. If this happens, India can become more self-reliant by decreasing its dependence on China. India's total imports from China was around $70 billion in 2018-19, with China’s share in the country’s total imports being about 14%, second after Middle-East. Also, if it is able to woo foreign companies, then nothing can deter India to emerge as a more powerful economy.

Until then, stay calm, stay patient, stay home and invest sagaciously. Not just India, this is your time as well to turn crisis into an opportunity. And you know it how.

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