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The China Plus strategy, initially seen as a potential game-changer for India, has yet to deliver the anticipated economic benefits. While many countries and companies have aimed to diversify their supply chains away from China due to geopolitical tensions, trade imbalances, and pandemic-induced disruptions, India’s economy hasn’t seen the substantial boost it expected. Below are some key reasons, supported by data, explaining why the China Plus strategy hasn’t been as effective in propelling India’s growth.

1. Infrastructural Deficiencies

India’s infrastructure, while improving, still lags behind countries like China and Vietnam. This includes transportation networks, electricity supply, logistics, and ports. Despite efforts to modernize, India ranked 47th in the World Bank’s Logistics Performance Index (2023), while China ranked 26th. Poor infrastructure increases the cost of doing business, making India less attractive for companies looking for a smooth transition from China.

2. Complex Regulatory Environment

India’s regulatory framework is often seen as cumbersome. Multiple bureaucratic layers and a lack of transparency in administrative procedures slow down the pace of business, discouraging foreign investment. However, foreign companies find it challenging to navigate India’s regulations compared to more streamlined competitors like Vietnam and Thailand.

3. Labor Market Challenges

India’s labor laws are often cited as rigid and complex. Though reforms have been undertaken, they have not fully addressed the concerns of large manufacturers. In comparison, countries like Vietnam and Bangladesh offer cheaper and more flexible labor. India’s formal sector remains relatively small, accounting for only about 20% of the workforce, according to government reports, compared to China’s robust labor force in large manufacturing hubs.

For example, while India’s median labor cost is around $0.92 per hour, China’s is around $6.50, making India an attractive alternative. However, labor productivity in India is much lower, negating the cost advantage. India’s manufacturing sector contributes only 16% to its GDP, compared to 27% in China.

4. Supply Chain Ecosystem Gaps

China has a well-established, vertically integrated supply chain, which makes it easier for manufacturers to source materials and assemble products in one location. India, on the other hand, lacks this deep supply chain network. According to a report by McKinsey, India’s fragmented manufacturing supply chains lead to increased costs and delays. For example, critical components for electronics and auto parts must still be imported from China, reducing the potential benefits of relocating factories to India.

5. High Trade Dependence on China

Despite efforts to reduce dependence, India remains heavily reliant on Chinese imports. As per government data, India’s imports from China surged by 45% in FY2022 to reach $97.5 billion, mainly in sectors such as electronics, pharmaceuticals, and chemicals. Indian exports to China, meanwhile, were much lower, around $17 billion during the same period, leading to a significant trade deficit.

The dependency on Chinese imports for key sectors means that merely shifting manufacturing facilities won’t substantially reduce this reliance. For example, India imports 60-70% of its active pharmaceutical ingredients (APIs) from China, making it difficult for the local pharmaceutical sector to break free from this dependency.

6. Rise of Other Alternatives

Countries like Vietnam, Thailand, and Indonesia have rapidly positioned themselves as alternatives to China, making India’s path to becoming a manufacturing hub more challenging. Vietnam, for instance, saw its exports to the U.S. surge by 40% in 2020, while India’s grew only by 4% during the same period. Vietnam’s trade deals, favorable labor conditions, and focus on building robust supply chains have drawn many companies that might have considered India.

For example, Samsung has shifted a significant portion of its smartphone production to Vietnam. Apple, despite setting up production facilities in India, still relies on Vietnam for a large share of its supply chain needs.

7. Policy Implementation Delays

While the Indian government has introduced initiatives like the Production Linked Incentive (PLI) scheme to boost manufacturing, execution delays and unclear policy guidelines have stunted their effectiveness. As per a report by Credit Suisse, only 30-40% of the approved funds for these schemes have been utilized, leading to delays in results.

Additionally, the “Atmanirbhar Bharat” (Self-reliant India) initiative aims to reduce dependence on foreign countries, including China. However, experts argue that this might discourage foreign investors looking for a more open market, further limiting India’s potential to benefit from the China Plus strategy.

8. Skilled Labor Shortage

India’s vast labor force is often seen as an asset, but the lack of adequately skilled workers presents a challenge. The Global Skills Index (2023) ranks India 76th out of 100 countries, indicating that despite its demographic dividend, the workforce lacks critical skills in areas like high-tech manufacturing, logistics, and automation.

While India produces around 1.5 million engineers annually, only about 20% are employable in sectors like high-tech manufacturing, according to NASSCOM. This makes it difficult for global firms to find skilled labor in India compared to China’s experienced manufacturing workforce.

9. Geopolitical and Trade Tensions

India’s ongoing geopolitical tensions with China, including border disputes, have created uncertainty for foreign investors. While companies are looking to diversify away from China, the perceived instability and unpredictability in India-China relations act as a deterrent. China’s retaliation in areas like trade and investment also plays a role. For instance, China restricted imports of Indian pharmaceuticals after the 2020 border clashes, impacting India’s export potential.

While India has undoubtedly made strides toward becoming a viable alternative to China under the China Plus strategy, significant challenges remain. Infrastructural bottlenecks, labor issues, regulatory complexities, and supply chain limitations are some of the main obstacles that need to be addressed. India can still capitalize on this opportunity, but it will require robust reforms, better implementation of policies like the PLI scheme, and sustained efforts to improve infrastructure and skills.

To truly benefit from the China Plus strategy, India needs to focus on fostering an environment conducive to business, with clear, consistent policies, world-class infrastructure, and a skilled workforce. Only then can it position itself as a manufacturing powerhouse capable of absorbing the shift away from China.

References:

World Bank, Logistics Performance Index 2023

Ministry of Commerce and Industry, Government of India (2022)

McKinsey Report on Global Supply Chains (2023)

NASSCOM Skill Report (2023)

Credit Suisse Report on PLI Scheme (2023)