Context: The NITI Aayog in its inaugural quarterly report ‘Trade Watch’ has highlighted that India’s has seen limited success in seizing ‘China plus one’ opportunity. Recently, the Chairman of the 16th Finance Commission has pointed out that India’s internal policies have acted as a significant constraint, hindering its ability to fully leverage the opportunity.
Relevance of the Topic: Mains: - Challenges in India hindering its ability to fully leverage China-plus-one opportunity.
What is the China Plus One Strategy?
- China Plus One is the business strategy to avoid investing only in China and diversify business or channel investments into manufacturing in other developing economies such as India, Thailand, Cambodia, Vietnam, Malaysia etc.
Shift from China:
- For the last 20 years, Western companies have heavily invested in China, drawn in by its low production costs, and vast domestic consumer market.
- However the companies are looking to diversify due to-
- US-China Trade disputes: Escalating trade disputes and reciprocal trade restrictions have disrupted global supply chains.
- Higher Tariffs and Trade restrictions: The cost of doing business in China is increasing due to higher tariffs on Chinese imports and export restrictions on essential resources.
- COVID-19 Pandemic: The pandemic exposed the supply-chain vulnerabilities of over-reliance on one country and the need to find alternative supply chains.
- Emerging competitors: ASEAN and other developing countries are presenting attractive alternatives to China owing to their lower tariffs, simpler tax systems, cheaper labor, and proactive free trade agreements (FTAs).
Why is India lagging behind Competitors?
In contrast to Vietnam, Thailand, Cambodia, and Malaysia, India has had very modest success utilising the China Plus One strategy. The reasons include-
- Internal Policy challenges:
- Policy uncertainty: Poor ease of doing business and greater amount of policy uncertainty deters foreign investors.
- Cumbersome land acquisition procedure and unavailability of cheap land.
- Delays in receiving permits, licenses, and approvals due to the involvement of multiple government agencies.
- Complex tax laws and limited Free Trade Agreements (FTAs) with major trade blocs.
- Infrastructure challenges: Deficient infrastructure including transportation, power supply shortages impacts the reliability of India’s manufacturing sector/prospects.
- Fragmented Labour laws: Variation of labour laws across different states and delayed implementation of New Labour Codes.
- Higher Logistics Cost: India’s logistics cost is 14% of India’s GDP, which is high when compared to developed nations (where it ranges 8-10%). This reduces overall competitiveness.
- Low R&D and Innovation: India spends hardly around 0.7% of its GDP on R&D, quite lower in comparison to the USA (2.1%), China (2.8%), Israel (4.3%) etc.
- Skilled Human Resources: Despite having almost 53% of the population in the working-age group, there is a lack of availability of skilled human resources, adept in complex manufacturing processes.
- Trade Facilitation Issues: In India, Trade facilitation as measured by "Trading Across Borders" is quite poor. Complex documentation processes and high export costs hinder trade facilitation.
Way Forward:
- Improve Trade Competitiveness by improving access to factors of production (Land, Labour, Capital), Reduce Logistics costs (14% of GDP) to global benchmarks (8% of GDP), improving Ease of Doing Business by streamlining regulations etc.
- Fast-track development of infrastructure projects under the National Infrastructure Pipeline (NIP). Leverage PM Gati Shakti Master Plan to integrate infrastructure planning and bring down logistics cost.
- Focus on large-scale skills development, leveraging Skill India Program and Pradhan Mantri Kaushal Vikas Yojana.
- Expedite signing of Free Trade agreements with key markets such as the European Union, United Kingdom & ASEAN.
- Protect domestic markets from the import of cheap foreign goods through (a) strong and effective technical regulations (b) trade safeguards such as Anti-dumping duties.
- Enhance digital governance and increase public and private spending on R&D to at least 1.5% of GDP by 2030.
Hence, to fully leverage the China Plus One strategy, India should improve the ease of doing business, enhance manufacturing capabilities and actively engage in global trade agreements.