Rapid technological advancements, infrastructure-led development and focus on improving domestic manufacturing capabilities have placed India in a global vantage point. The energies and aspirations of its industries and citizens, coupled with increasingly open economy and a strong technology sector, has demonstrated the potential to operate at scale with skill.
The disruptions in supply chain, which was a result of the Covid-19 pandemic and the subsequent geopolitical crisis, has forced global economies to search for alternatives to ensure uninterrupted supply of raw materials and finished goods. India, which has been, for long, considered as a global consumption economy has today emerged as a promising trading partner for most of the developed economies.
Going by statistics and various reports, India has already emerged as the fifth largest economy by GDP, putting behind Brazil, UK, Russia, Italy and France since 2015 till now. India’s GDP is currently estimated at over USD 3.5 trillion. Nearly two-thirds of India’s GDP is driven by domestic demand.
What is driving India’s growth?
India has always been a resilient economy. However, lack of adequate infrastructure and rigid policy regimes had adversely impacted India’s trade potential. Interestingly, in the last few decades, the scenario has changed almost 360-degree, thanks to the various policy initiatives taken by the government that focus on improving infrastructure, eliminating trade barriers and allowing foreign investments in practically every sector.
A report released by Morgan Stanley, last year, stated that India is set to surpass Japan and Germany to become the world’s third-largest economy by 2027 and will have the third-largest stock market by the end of this decade. It noted that three megatrends—global offshoring, digitalization and energy transition—are setting the scene for unprecedented economic growth in the country of more than 1 billion people.
Infrastructure development
India has set an ambitious target of reaching a USD 5 trillion economy by 2025. And, in order to meet this goal, infrastructure development is crucial. Among the various programmes launched by the government to augment the growth of infrastructure, the Union Cabinet launched the National Infrastructure Pipeline (NIP) combined with other initiatives such as ‘Make in India’ and the production-linked incentives (PLI) scheme. More than 80 per cent of the country’s infrastructure spending has gone towards funding for transportation, electricity, and water and irrigation.
Some of the major infrastructure projects announced so far are – Prime Minister GatiShakti National Master Plan, Bharatmala, Sagarmala, Udan scheme, industrial corridors, and freight corridors, among others. Besides, there is a lot of emphasis on creating digital infrastructure.
As a part of its digital transformation programme, the government introduced Unified Logistics Interface Platform (ULIP), which is expected to bring all the digital services related to the transportation sector into a single portal. The implementation of ULIP is expected to become a game changer as it will free the exporters from a host of very long and cumbersome processes.
All these projects are aimed at reducing India’s logistics costs, which currently stand at around 14 of GDP to nearly 9 per cent, and improve the competitiveness of Indian goods both in domestic as well as export markets.
As a result of all the initiatives taken on the infrastructure front, India has climbed six positions on the World Bank’s Logistics Performance Index to 38th position from 44th rank, three years ago. According to the report, the improvement was significantly driven by technology adoption that improved supply chain visibility and reduced delays.
“Since 2015, the government of India has invested in trade-related soft and hard infrastructure connecting port gateways on both coasts to the economic poles in the hinterland. Technology has been a critical component of this effort, with implementation under a public-private partnership of a supply chain visibility platform, which contributed to remarkable reductions of delays,” the report stated.
Foreign trade ties
While on one hand the government has taken several measures to develop infrastructure and improve domestic production, on the other hand, India is forging ties with global economies to position the country as a strong trade partner and manifest India as ‘Brand India’.
In 2021, the country concluded a free trade agreement with Mauritius, and in 2022 one with the United Arab Emirates (UAE). In the same year, it agreed on a fast-track interim “Early Harvest” agreement with Australia to pave the way for a comprehensive free trade agreement. India is currently negotiating free trade agreements with the Gulf Cooperation Council, the United Kingdom, Israel, and Canada. It is also a partner in the US Indo-Pacific Economic Framework Initia¬tive (IPEF).
After almost a gap of 9 years, India re-launched negotiations for Free Trade Agreement with European Union in June 2022. It is also in talks with European Free Trade Association (EFTA) states – Iceland, Liechtenstein, Norway, and Switzerland – for Trade and Economic Partnership Agreement (TEPA).
As a result of these initiatives, despite the challenging macro-economic conditions and inflationary pressures, India’s overall exports are estimated to exhibit a positive growth of 13.84 per cent over FY 2021-22. According to the Ministry of Commerce and Industry, India’s domestic demand has remained steady amidst the global slump, and overall exports are projected to scale new heights, growing at 13.84 percent during FY 2022-23 over FY 2021-22 to achieve USD 770.18 billion worth of exports.
India at global vantage point
A recent study by KPMG in India and AMCHAM India pointed out that the emergence of US as India’s largest trading partner marks an important shift from historical trading partners at the back of an integrated value chain that both countries share with each other across industries.
“The Indian economy has been on a constant upward trajectory. Having weathered the turbulence during the past year, the country is on firm ground and is expected to be the fastest-growing major economy in the world. This growth trajectory is aided by strong domestic demand, impetus on infrastructure development, and proactive policy measures which are increasing confidence among investors and crowding in capital. Factors like a skilled workforce, technology proliferation, a flourishing start-up ecosystem, record exports, and a slew of tax reforms to drive competitiveness are expected to further drive this growth trajectory,” it said.
It noted that the vibrancy of the Indian economy presents US companies with unparalleled opportunities to trade, invest and grow — and the jobs they create in India act as a multiplier to the economy, be it in manufacturing or the services sector.
“US-India relationship today is bigger, bolder, and better than ever before. With economic partnership now beginning to mirror the trajectory in defence, security, and strategic domains, there are newer avenues to trade, invest and grow, especially across deep tech, supply chain, global captives, amongst others. US industry will play a critical role in driving competitiveness, innovation, and gainful employment across sectors, as India embarks on the journey of becoming the 3rd largest economy by the turn of this decade,” Naveen Aggarwal, Office Managing Partner – Delhi NCR and US-India Corridor Leader, KPMG in India said.
Positioning India as an alternative to China
The Covid pandemic was an eye-opener for the entire world. During the peak of the pandemic, due to the rising number of coronavirus cases, economic activities across developed and developing economies had come to a screeching halt. China, which has been enjoying a dominant share in supplying some of the most critical raw materials, had to shut operations for a longer period. This led to supply chain disruptions forcing nations to find alternative trade partners to keep fuelling their economic activities.
US is turning to India for help as it is working on shifting critical technology supply chains away from China and other countries that it says use that technology to destabilise global security.
Meanwhile, India has also reduced its imports from China. A recent government data revealed that China’s share in India’s merchandise imports have declined to 13.79 per cent in 2022-23 from 15.43 per cent in 2021-22. Imports of electronic goods from China has seen a decline of around USD 2 billion in 2022-23 (April-February) compared to same period last year. Import share from China in electronic goods has also declined from 48.1 per cent in 2021-22 (April-February) to 41.9 per cent in the corresponding period in 2022-23.
Recently, Union Finance Minister Nirmala Sitharaman expressed that India could be an alternative to China in world supply chains. Speaking at the Peterson Institute for International Economics, the minister noted that the production-linked incentive schemes (PLI), covers 13 manufacturing sectors including semiconductors which are bringing global value chains into India.
“Disruptions in supply chain shocks justify the need to have more than one location for resources. Countries like India could be the best option in terms of the skill sets that Indians, particularly the youth, have. So, there is every reason for businesses to invest in India,” she said.
Conclusion
India is seeking to become more involved in world supply chains and serve as an alternative to China. Even the world is looking to India to become the second support to them in manufacturing, especially after the supply chain disruptions. That said, it is unrealistic to think that manufacturing activities will completely move out of China.
“Recent developments made clear that dependency on only one supplier is rather risky. Supply chain managers worldwide are looking to diversify their purchasing strategy in order to spread those risks. India has many trump cards to be part of that strategy. But needless to say, China is and will remain a crucial factory to the world,” Luc Arnouts, Vice President International Networks and Relations, Port of Antwerp-Bruges.
While there is a significant decline in imports of various products as the Indian manufacturing industry is meeting most of the domestic demand, but if India is aspiring to be one of the largest global suppliers and make ‘China+1’ strategy as ‘India’ strategy, it will have to increase its manufacturing capabilities manifold and also make the products globally competitive.
Prime Minister Narendra Modi has announced his government’s vision to scale up the share of India’s manufacturing sector to 25 per cent of the GDP by 2025. However, currently, the sector contributes nearly 17 per cent to the GDP. If India has to position itself as a manufacturing powerhouse and an alternative to China, it will have to achieve its targets sooner than later.
