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Can India Benefit from Disruptions in Global Supply Chains?

By Finserv MARKETS - Dec 31,2019
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Can India Benefit from Disruptions in Global Supply Chains

India’s economy is well-positioned to take a commanding position in a largely slowing world. Currently, India is set to be the second-fastest growing economy in the world, taking on the fifth-position after outperforming the UK and France in 2019. While India hopes to become a $5 trillion economy in the next five years, it has tailwinds in the form of global supply chain disruptions and trade wars which can help India capitalize and consolidate opportunities.

One of the foremost signals for this opportunity came in the form of the breakdown of the Trans-Pacific treaty between the United States and China. As the two giants have escalated a trade war by putting tariffs on imports of each other’s goods, developing economies with a big market such as India stand to benefit.

Labour charges in Manufacturing Sector - Country Wise

Source: ET

While the government has been working on a reform path by improving the ease of doing business in the country, it went a step ahead and gave direct financial incentives to firms setting up operations in India. In October, Finance Minister Nirmala Sitharaman reduced the corporate tax rate in India from 30% to 22%.

With the statutory tax rate of 22%, the corporate tax rate in India is below the global average.

For the current year, the statutory tax rate is 25% in Myanmar, 24% in Malaysia, 25% in Indonesia and Japan, 25% in Korea and 28% in Srilanka. Even Chinese companies spit more – they pay 25% tax and Brazil 34%.

The average global corporate tax rate is currently 23.79%, and the Asian average is 21.09%.

The tax cut has come at an opportune time. It positions India as a potential hub for manufacturing and setting up high-quality companies because of the lower financial burden due to the reduced tax rates. It’s been reported that companies are looking for better pastures as the US-China trade war has escalated tariffs and there seems to be no end in sight.

By July 2019, 50 of the major firms like Nike, Panasonic, had indicated that they would want to move away from China because of the ongoing trade war. A report by Credit Suisse estimated that $350-550 billion worth of exports from major companies is set to move out of China. While the firms in China are looking at countries like Vietnam, Taiwan and Mexico also, India can offer a lucrative opportunity given its 1.3 billion people strong market and a labour surplus economy.

Export Market Share - India Access to Global
Currently, India dominates in exports of jewellery, metals, precious stones, minerals, pharmaceuticals, textiles, and refined petroleum. These categories account for nearly half of India’s exports whereas China dominates the world the export of manufactured items. This equation can change with the government’s Make In India initiative and the global supply chain disruptions which will nudge firms to move to countries like India and set up units here.

There is the fact that China exports nearly more than ten times of India’s exports and any change in China’s exports can create a lot of new opportunities in India. India global manufacturing export is $27 billion, whereas China’s is nearly $1.2 trillion. So, even if China’s exports in manufacturing move by 10% to India, Indian exports will rise by $100 billion.

Export Market Share - India Access to Global

Source: Bloomberg

Lately, some policies by the Government of India have helped in the improvement of ease of doing business rankings and growth in investment climate over the years. India has gradually opened up its economy too by liberalizing the Foreign Direct Investment regulations but manufacturing facilities will have to be created through Special Economic Zones etc to fully capitalize on this opportunity.

A report from SBI suggests that India has benefited from the trade war and exporting more items to China. According to the SBI Ecowrap report, exports from India to China grew much faster after the trade war than India’s exports to the United States. While total exports to the US rose 9.46% to $ 52.4 billion in 2018-2019, growth in exports to China was 25.6% to $ 16.7 billion. This report also added that the textile import to the US is shifting from China to India.

However, India is facing significant competition from countries like Vietnam and Bangladesh to capture this shift in global trade. But, considering the sheer size of the US and China trade, there are opportunities for everyone as shown by the cotton exports to the US which have declined from China but increased from both Brazil and India.

At the same time, India is already exporting more of plastic, inorganic chemicals, cotton and fish to China because of higher tariff on these products imposed by the US.

According to UNCTAD, in the first half of 2019, India gained more than $755 million from the additional exports. In the first half of 2019, India exported other chemicals ($ 243 million), metals and ores ($ 181 million), electrical machinery ($ 83 million) and various machinery ($ 68 million) to the US, a part of which has clearly come from China’s pie. Industries such as food, furniture, office equipment, precision instruments, textiles, clothing and means of transport are next in line to benefit.

The current ongoing trade war also brings the possibility of China stopping its import of US crude oil and if that happens, the US will find it hard to develop an alternative market as big as China’s oil guzzling economy. This bears a possibility that the price of crude will come down in the global market and benefit India immensely.

There are numerous possibilities that India can take advantage of the ongoing trade war between US-China, the slowdown in Europe and struggling Asian economies like Japan to boost its manufacturing capacity. However, to do so, the government will have to move beyond the corporate tax rate cuts and introduce labour and land reforms as well as further liberalization of FDI policy. If that happens in the coming months or years, India will be well on its way to become a $5 trillion economy and the new global hub for the industry.

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