Politics & News

Challenging China: Modi’s Plans to Make India Global Manufacturing Hub

Indian Prime Minister Narendra Modi plans to take business-friendly measures if he wins a third term, as part of his election pledge to transform India into a global manufacturing hub.

India’s general election final phase concluded on Saturday, with most exit polls projecting that Modi’s Bharatiya Janata Party (BJP)-led alliance, the National Democratic Alliance (NDA), could secure two-thirds majority when the results are announced on June 4, 2024.

Modi’s Plans

Modi’s planned measures aim to make it easier to hire and fire workers, and to offer subsidies for domestic production emulating recent packages for semiconductor firms and electric vehicle (EV) makers, Reuters reported citing two government officials familiar with the matter.

According to the officials, who spoke on condition of anonymity, Modi’s plans include reducing import taxes on key inputs for locally-manufactured goods, which have increased costs for India.

Challenging China: Modi’s Plans to Make India Global Manufacturing Hub
A manufacturing unit in India

The Indian Prime Minister partly built his reelection campaign on the promise of achieving continued economic development. He has promoted India as an alternative for global firms that seek to diversify their supply chains away from China.

Internal Challenges

Although India is the world’s fastest-growing major economy, “that includes its booming tech sector and a struggling old economy that doesn’t provide enough jobs for everyone else,” said Josh Felman, the former head of the International Monetary Fund’s office in India.

Felman added: “What can be done now to provide employment – good jobs for these people – is manufacturing.”

India has succeeded in attracting US major corporations’ suppliers, including Apple Inc and Alphabet Inc’s Google. However, the World Bank’s data shows India dominates less than 3% of global manufacturing, compared to 24% to China. However, the government plans to increase its share of global manufacturing to 5% by 2030, and 10% by 2047, according to an internal document seen by Reuters.

Observers identified three major obstacles that hinder India from becoming a manufacturing hub: restrictive labor laws, challenges to acquire land, and a rigidly inefficient tariff regime.

The Chinese Model

In the period between 2001 and 2014, when Modi was chief minister of his home state of Gujarat, he dreamt of establishing an investment zone in the Dholera region. In 2009, the legislation for setting up the Dholera Special Investment Region (DSIR) was passed, and local authorities began acquiring land for it in 2013.

During a visit to a Chinese port in 2011, Modi said his plan was to develop DSIR along the “Shanghai Model.” China, starting in the 1980s, established special economic zones along its southeastern coast.

Land reform was the main driver of China’s rise as a manufacturing hub. Henry Gao, a Chinese trade expert at Singapore Management University (SMU), said: “Starting in the 1970s, Beijing separated ownership from usage rights, making it easier for investors to acquire industrial land.” He added that Beijing’s industrial zoning policies facilitated the establishment of zones in areas with ready access to materials and facilities.

Industrial Zones

As a Prime Minister, Modi has put increased emphasis on industrial zones, describing facilities in DSIR as central to the establishment of an Indian semi-conductor manufacturing hub.

Challenging China: Modi’s Plans to Make India Global Manufacturing Hub
The construction site for the Dholera International Airport near DSIR

In this regard, Rahul Gupta, head of the Gujarat Industrial Development Corporation, said the DSIR provides leases of up to 99 years on government-owned land, hoping to lure more manufacturing companies.

Outside such zones, however, industrial groups will have to undergo a “very difficult process” to acquire the large plot of land they need because title deeds are often unclear and holdings are fractured, according to Richard Rossow of the Center for Strategic and International Studies.

Labor Restrictions

In many parts of India, hiring and firing processes need an authorization from state governments for firms with more than 100 employees. This prevents companies from adjusting their operations to meet demand. The BJP-controlled parliament has passed a legislation raising this number to 300, but state authorities have hampered the move.

The two government officials said that Modi hopes to score a big win in the election, that will give him the political capital to move forward with the legislation.

Tariff Regime

The third obstacle is India’s tariffs on imports, which increases manufacturing costs. In order to encourage smartphone production, India cut tariffs on components to 10%. However, its competitor, Vietnam, imposes a rate of between 0% and 5% on similar inputs.

Challenging China: Modi’s Plans to Make India Global Manufacturing Hub
A manufacturing unit in India

According to the World Trade Organization (WTO) data for 2022, India’s average import tariff on WTO’s members was 18.1%, compared to 7.5% for China. Additionally, customs processes in China are quicker and easier. Gao, from the SMU, said: “Imports can clear customs in China in about 20 hours.” However, it takes between 44 and 85 hours in India.

Another reason behind China’s efficiency is that it has focused its efforts on being a key part of the supply chain rather than owning it. In this respect, Christian de Guzman of Moody’s Ratings explained that Chinese exported products often contain inputs from other North Asian countries. But India “wants to have the entire thing come onshore,” Guzman said.

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