19 Jul India vs China for manufacturing
Will the Trade War between US and China benefit India and its manufacturing sector? Is India ready to become a global manufacturing hub and can Modi’s government close the competitiveness gap between India and China? Following my recent visit to India, I share my views on the ‘India vs China’ questions that investors and businesses are asking.
Initiatives to kick-start manufacturing underway in India
With Modi’s landslide victory in India’s recent election, the reforms he started should continue to improve the country’s manufacturing competitiveness.
In its first of term of office, the government introduced several new initiatives to kick-start manufacturing in India. If all these policies work successfully together, India will become a highly competitive manufacturing base. The key initiatives are:
- The ‘Make in India’ and ‘National Manufacturing Policy (NMP)’ This aims to increase manufacturing sector’s share of GDP to 25% by 2022, thereby creating 100 million new jobs. Currently, the manufacturing sector in Indian GDP is around 16%, well below China. The NMP is based on the principle of industrial growth in partnership with the Indian states to create an enabling policy framework and incentivise infrastructure development.
- ‘Skilled India’ These programs aim to provide training and skill development to 500 million youth in every village by 2022. Their purpose is to raise confidence, improve productivity and enable proper skills development so that young people gain employment and improve entrepreneurship.
- ‘Digital India’ aims to provide all services electronically and promote digital literacy in India with the help of digital technologies including cloud computing and mobile applications which are emerging as the catalysts for express economic growth and citizen empowerment.
Comparison of India vs China for manufacturing
Five factors play into the India vs China question when considering each country’s attractiveness for manufacturing.
Both countries have populations numbering over one billion and can support staffing manufacturing facilities. Currently, Chinese productivity is five times more than in India but the cost of labour is also five times more than in India. While China’s wages are now comparable to some western countries, there is great potential for India to grow its manufacturing sector due to its relatively lower labour costs.
Competitive production costs are vital for manufacturing or sourcing from abroad, and China leads India in this area. A major factor keeping costs high in India is that electricity is both expensive and limited. It costs more to power a manufacturing plant in India than China, and there are fewer available hours to run it. Add to that higher (and often less productive) labour and a lot of bureaucratic red tape, and businesses usually find a better deal in China. However, this may change within a decade. The Indian Government is funding infrastructure projects to build Indian logistics, transportation and power plants to world class standards.
India is the largest English-speaking country in the world. English is widely spoken in India, especially by those in executive roles. British customs influence the business culture and there is very little gap to bridge compared to China.
Environment and market expertise
Under Modi, new regulatory reforms between states have resulted in a much less complex tax structure. The new Goods and Services Tax (GST) simplifies India’s elaborate tax structure and expected to increase efficiencies.
China is making similar efforts to ease doing business and already has an advantage over India. However China’s economy is cooling off and may slow further with US China Trade War. In contrast, India’s growth is steady with strong growth opportunities over the next 5-10 years including benefiting from US China Trade War.
India vs China industry strengths
India’s traditional industry strengths are diamonds, gems, jewellery, cotton textiles, bags, accessories, garments, footwear, furniture, building materials, and iron and steel products. The country’s other fields of expertise include automotive parts, wooden products and electronic appliances for medical purposes.
In contrast, China specialises in manufacturing consumer electronics and electrical products. It is also strong in manufacturing garments, furniture, footwear, paper products and automotive parts.
China wins now but change is on the horizon.
Taking these factors into account, it’s no surprise that China currently leads India as a global manufacturing base in most industries. However, if the Modi Government’s initiatives are successful in his next term, this is set to change.
Both myself and Accru Financial Planning Director, Greg Newbury, were impressed by the pace of development and growing opportunities for inbound investment and manufacturing on our recent visits to India. We hope the Indian Government will continue with reforms to improve the country’s manufacturing competitiveness to attract global investors.
Accru Felsers, through Accru Asia, helps companies do business throughout Asia, including in India.
Please contact us, or the author Vindran Vengadasalam, if you’d like our support to take advantage of manufacturing opportunities in India.