Experts told CNBC that India could benefit from the trade war between the United States and China, but much-needed land and labor reforms could prove difficult for companies doing business there.
As a result of the trade war between Washington and Beijing, several companies have moved production out of China to escape higher tariffs.
As a result, Southeast Asian countries such as Vietnam have often been named as trade winners. India can also reap the benefits.
In an August survey, Radhika Rao, an economist at Singaporean bank DBS Group, said: “India could increase its trade footprint amid the US-China trade struggle, particularly in categories on which the US has imposed tariffs on China.”
“Aside from trade, diversion of investment flows is an opportunity India could capitalize on as manufacturers seek alternative sources of origin,” Rao continued, noting that the country could attract international investment.
India has a small share of the global export market.
Despite the fact that the German population is about 16 times that of India, German exports accounted for 8.17 percent of global trade flows in 2017. In comparison, Indian exports accounted for just 1.68 percent of that year. global trade.
Sectors that have performed well:
Pharmaceuticals, chemicals and engineering are the top three industries in India that could benefit from the trade war, Rao said in an email to CNBC.
India is already competitive in many industries on a global scale, and she believes it will be well positioned to meet future demand in these areas.
According to a study published in July 2019 by the India Brand Equity Foundation, the South Asian country’s pharmaceutical industry supplies more than half of the global vaccine demand and 25% of the United Kingdom’s medicines (IBEF).
India was ranked 12th in the world for machine tool manufacturing in 2017, according to a separate IBEF survey. In addition, the United States and Europe account for more than 60% of the country’s tech exports.
According to Rajiv Biswas, chief economist Asia-Pacific at IHS Markit, the industrial sector could also benefit, especially the textile, footwear and electronics sectors.
As tariffs will increase the cost of exports from the United States and China, some companies may move production to other Asian countries, such as India.
“In the medium term, India could benefit from this trend,” Biswas added, “with foreign manufacturers increasingly targeting the fast-growing Indian domestic consumer market.”
For example, Foxconn, the world’s largest contract manufacturer for electronics, moved production from China to India this year. According to Biswas, this was done to “diversify their manufacturing supply chain away from over-reliance on Chinese manufacturing.”
According to forecasts by the United Nations Conference on Trade and Development, these trade movements could boost the Indian economy by $11 billion.
Entrepreneurial challenges include:
Land laws and labor regulations are two major obstacles for Indian businesses.
In a note to CNBC, Societe Generale economist Kunal Kundu said land regulation is the “biggest impediment” to industry and infrastructure growth.
He claims that current land restrictions make it difficult for the private sector to find space for factories.
This is due to the fact that real estate ownership is spread across many states and companies have to wait a long time to get land or avoid possible legal complications.
Another problem, Kundu says, is that labor rules in India are ‘very complex’. They consist of about 40 acts, all of which must be followed to the letter. This will make it more difficult for manufacturers to compete.
According to Kundu, land and labor reforms are two of the “most crucial determinants of production” to be implemented.
As a result, he proposed developing a national employment policy, one that would allow manufacturers to lay off staff during corporate recessions.
Attraction for investors:
Sonal Varma, a Nomura analyst, told CNBC that a lack of adequate infrastructure could be a problem.
This includes making sure that production units are connected to the correct highways and ports and that they have sufficient power.
Some of these policies have been improved by the government, but they will take time to fully implement. A multi-billion dollar budget is also being used to improve India’s infrastructure and attract international investment.
The August policy changes were seen as a positive step forward for investment. For example, the government allowed 100 percent foreign investment in coal mines and relaxed restrictions on contract manufacturing and retail.
“India needs to act quickly, using creative policies and a laser-like emphasis on infrastructure development… However, much more needs to be done, and it needs to be done quickly,” Kundu said.
Before India can take full advantage of these investments to strengthen its economy, more adjustments to existing laws are needed.
Varma explained that because India is such a large country, many rules are regulated by state governments rather than the central government. “Change has to come from the bottom up, not just the federal government.”
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