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Businesses considering the great decoupling from China face the dilemma of finding a new manufacturing hub, with India emerging as a popular choice due to its large workforce, affordable labour, and investor-friendly leadership. However, a closer examination reveals complexities in India's economy, raising questions about its readiness to replace China as the world's factory and its ability to navigate challenges still hampering India's growth. Can India replace China in the global supply chain, we ask our panel of experts.
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EPISODE SUMMARY:
PART I: Opportune Optimism - (02:49)
with Velina Tchakarova
- Founder of FACE Consulting
- Member of the Strategic and Security Policy Advisory Board
- Board Member of Defence Horizon Journal
India's Growing Economic and Geopolitical Influence: Under Prime Minister Modi's leadership, India has consolidated its internal power and is increasingly influential globally. This is reflected in its expanding manufacturing capabilities, especially in the digital domain, where India is emerging as a significant competitor.
India's Unique Approach to International Relations: Unlike China, India is not expected to follow the same pattern in its relations with other countries. India aims to be an advocate for the Global South, focusing on developing products and platforms for a broader population, rather than catering to a wealthier minority. This approach, coupled with its non-colonial history, suggests a different trajectory for India in becoming a global power.
Energy Dependency and Strategic Opportunities: India's reliance on external energy sources, particularly in the context of the Russia-Ukraine conflict, has led to increased imports of cheaper Russian fossil fuels. This development has significantly boosted India's economic growth, especially in the manufacturing sector.
Future Political and Economic Developments: The upcoming elections and expected continuation of Modi's leadership may bring mature, self-confident political leadership and potentially unpopular reforms. India is likely to focus on infrastructure development, including transport, energy, and digital infrastructure, to uplift its population and improve connectivity.
India as a Key Player in Global Supply Chains: With the world splitting into two parts influenced by the United States and China, India is poised to benefit from both spheres. The country is expected to become a hub for alternative supply networks, leading to a significant shift in global supply chains towards India. This will contribute to India's unprecedented rise as a major economic and geopolitical player, comparable to the United States and China.
PART II: Fractured Foundations - (10:32)
with Ashoka Mody
- Visiting Professor at Princeton University
- Ass. Director of the IMF's European Department
- Technical Staff at the World Bank
China's Evolution in Manufacturing: China has transitioned from low-quality, labor-intensive manufacturing in the late 80s and early 90s to becoming a leader in high-end manufacturing, particularly in the automotive industry. This evolution has positioned China as the world's largest car exporter and a dominant force in electric vehicles, showcasing its status as a world-class economy.
India's Challenges in Competitiveness: Despite ambitions, India faces significant challenges in competing on the global stage. These challenges stem from a poorly educated labor force and persistent protectionist policies. India's primary and secondary education systems are underdeveloped compared to East Asian countries, impeding its ability to produce a labor force that is competitive in low-technology production.
Protectionist Policies and Economic Formalization in India: India's history of protectionist economic policies and the recent resurgence of such measures have hindered its global economic integration. Despite efforts to formalize the economy through a GST system, complexities and special interests have limited its effectiveness. This has resulted in a lack of job creation and underperformance in attracting foreign investment.
Agriculture's Role in India's Economy: A significant portion of India's workforce is employed in low-productivity agricultural jobs. While technology could improve agricultural efficiency, the challenge lies in creating vibrant urban sectors that can absorb labor transitioning out of agriculture. Without adequate job creation in manufacturing or services, agricultural workers have limited options for alternative employment.
Education and Female Labor Force Participation in India: Improving India's education system, particularly at primary and secondary levels, is crucial for its economic development. Additionally, increasing female labor force participation can lead to broad societal and cultural changes essential for sustainable economic growth. These reforms are necessary for India to develop a labor force capable of supporting labor-intensive, low-technology production and to move away from a patron-client political system that hinders long-term economic progress.
PART III: Limping Logistics - (38:45)
with Arjun Ramani
- Global Business and Economics Correspondent at the Economist
- Emerging Markets Trader at Citadel
- Winner of the Kennedy Prize
India's Economic Growth Trajectory: India's economic growth has been around 6% annually over the past decade, slightly lower than in the previous decade. This period corresponds with the leadership of Prime Ministers Manmohan Singh and Narendra Modi. Despite high growth rates, India's GDP per capita remains significantly lower than China's, indicating a substantial gap in economic development.
Comparative Analysis of India and China's Economic Liberalization: India only began its economic liberalization in 1981, later than China, which started in the late 1970s under Deng Xiaoping. China's earlier and more aggressive approach to opening up its economy, investing in infrastructure, and improving ease of doing business contributed to its rapid economic growth and overtaking India. India's late start and gradual approach to liberalization have been significant factors in its slower economic progress.
Challenges in Indian Manufacturing: India struggles with competitiveness in manufacturing due to less capital-efficient factories, lower worker productivity, and a lack of sophisticated infrastructure and supplier networks compared to China. Despite low labor costs, India's overall production costs remain high. Subsidization policies to boost manufacturing may create inefficiencies and dependency, further hindering competitiveness.
Infrastructure and Logistical Challenges: India faces significant infrastructure and logistical challenges, including inefficient land use policies, slow public infrastructure projects, and weak local government systems. These issues lead to delays in transportation and higher costs in the manufacturing and export processes, making India less competitive globally.
The Need for Diversified Economic Focus and Human Capital Development: India's path to economic growth may not solely rely on manufacturing, given the current global competitiveness and automation trends. Instead, focusing on service sectors where India already has strengths, like IT services, and investing in human capital such as education, design, and marketing, could be more beneficial. Developing strong human capital and global Indian brands in various sectors is crucial for sustainable growth and competitiveness.
PART IV: Inadequete Intrest - (1:00:56)
with Michael Kugelman
- Dir. Wilson Centre's South Asia Institute
- Writer for Foreign Policy Magazine
- Renowed Theatre Expert
Energy Policy and Transition to Cleaner Sources: India faces the challenge of balancing the growing demand for energy with the transition to cleaner sources. Coal remains the country's primary energy source due to indigenous availability, despite the push towards clean energy. India's dependency on coal illustrates the difficulty of transitioning away from fossil fuels for developing economies with immediate energy needs.
Economic Policy Evolution: India has significantly evolved from a focus on import substitution and self-sufficiency to liberalizing its economy, particularly since the critical economic reforms of 1991. These reforms, initiated by then Finance Minister Manmohan Singh, marked a significant shift from India's previous stance of minimal engagement with the Western commercial sector.
Infrastructure Challenges: India's outdated and often fragile infrastructure, including roads, bridges, and railways, poses a major constraint to its economic growth. Despite being a significant source of employment, the state-owned rail service exemplifies the challenges of supporting economic growth with inadequate infrastructure. Rural areas, where a significant portion of the population resides, are particularly affected by these infrastructure shortcomings.
Political Challenges in Economic Reform: The political landscape in India, characterized by democracy and the need for consensus among various stakeholders, slows down the process of economic reform. This is evident in the difficulty of implementing controversial policies, such as agricultural reform bills, which faced significant opposition and had to be withdrawn. The devolution of powers between federal and state governments adds another layer of complexity to implementing large-scale infrastructure projects.
Limitations on Becoming a Global Economic Superpower: India's path to becoming a global economic superpower like China is hindered by several factors, including limited technical and financial capacity, persistent unemployment, and challenges in attracting foreign investment due to bureaucracy and regulatory issues. India's large GDP does not translate into high per capita income, indicating a gap in economic development and individual purchasing power. India's potential to launch global infrastructure initiatives similar to China's Belt and Road Initiative is constrained by these limitations.
Can India Replace China in the Global Suppy Chain?
(Released January 23rd 2024)
THE RED LINE'S EPISODE 113 READING LIST:
I: Why Nations Fail
- By Daron Acemoglu
II: India is Broken
- By Ashoka Modi
III: Indian and Asian Geopolitics
- By Shivshankar Menon
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This episode is dedicated to our Patreon members: Sam, Alexander Wollgarten, Adrian Smith, Jens Nordberg, Josh Knight, and Hello There 007.
