India should score over Vietnam to emerge as a manufacturing hub

India wants to be the top manufacturer in Asia as companies shift away from China, but first it needs to lower taxes and improve supply chain efficiency if it wants to dethrone Vietnam. The Biden administration has encouraged American companies to move electronics and technology manufacturing operations out of China and inch towards friendlier nations, particularly Vietnam and India in the Asia-Pacific. Government initiatives like "Make in India" are acting as a catalyst, creating a more conducive business environment with streamlined regulations and attractive incentives for investors, which, in turn, are attracting both domestic and foreign companies to set up manufacturing bases in India. Automation, robotics, and the adoption of Industry 4.0 principles are enhancing efficiency and productivity within factories. Growing demand, coupled with a youthful and tech-savvy workforce, presents a unique opportunity for India to not only cater to its own needs but also become a major exporter.

However, challenges remain, including inadequate infrastructure and a skills gap that needs to be addressed to fully capitalize on its manufacturing potential. An advantage of Make in India is that it can generate myriad employment opportunities, which, over a period, can increase the GDP by expanding economic growth. When FDI inflows become more, the rupee will be strengthened. The build-up of R&D and innovation capacities has played a significant role for China. There are only 26 Indian companies in the list of the top 2,500 global R&D spenders in the world, while 301 Chinese companies figure in the list. Moreover, 19 of those Indian companies belong to just three sectors—pharmaceuticals, automobiles and software.

Even though the campaign has seen success in some quarters, there have been criticisms as well. There are also many challenges facing the country if she is to achieve the lofty targets set by the establishment. Foremost among the criticisms is that India has about 60% of cultivable land. The thrust on manufacturing is said to have a negative impact on agriculture. It can even cause a permanent disruption of arable land. Rapid industrialization (despite focus on ‘going green’) can also lead to a depletion of natural resources.

The good news is that more and more Indian companies in sectors ranging from IT and telecom, pharmaceuticals and biotech to electronics and FMCG are now taking up ambitious R&D projects, which are primarily aimed at serving the domestic market, while, simultaneously eyeing a piece of the global pie by innovating. While Vietnam is the biggest competitor to India (both come with lower labour costs), the former has a more robust electronics manufacturing sector. Moreover, Vietnam’s earlier trade agreements with the US and simpler policy landscape gives it a head start.

Another hurdle confronting India is its high import taxes vis-à-vis Vietnam. Sustainable advantages lie beyond taxes, focusing on ease-of-doing business aspects, where Vietnam currently also holds an edge. Infrastructure remains India’s Achilles’ heel given the significant delays in shipments and customs clearances. This implies that improvements in infrastructure, alongside strategic tax reductions and policy simplifications are needed to compete effectively on the global firmament. However, when one takes the geopolitical advantage as criteria, Vietnam’s close ties with China could work to India’s advantage. This offers India a geopolitical edge when it comes to companies wary of the China-Vietnam relationship.