Reforms and incentives are attracting international investors looking to diversify away from China amid its intensifying rivalry with the US. But India still has a way to go – on trade ties, education and infrastructure, among others – if it wants to catch up to its giant northern neighbour

Warm weather’s early onset isn’t sapping the spirits of officials in Tamil Nadu this year. Instead, the mood is upbeat as one high-profile overseas investment after another has flowed into the southern Indian state over the past few months, reported SCMP a China based web portal.

The state, whose capital Chennai has been dubbed the “Detroit of Southern Asia” because of its new-found status as a car making hub, has quickly expanded its global footprint by hosting three of iPhone-maker Apple’s top contract suppliers: Foxconn, Pegatron and TATA Group.

Shipping and logistics giant UPS also established a global technology hub in the city, beginning in August last year, while leading renewables energy firm First Solar has invested in a manufacturing facility.

Chennai is just one of many Indian industrial hotspots that have started expanding as global firms look to diversify their manufacturing base amid intensified US-China rivalry and faltering growth in the world’s second-largest economy.

Two decades ago, China and India’s economies were neck and neck, and would famously often be compared as the Dragon and Elephant at investors’ meetings, where attendees would dwell on their relative merits. Over the years, the Dragon beat the Elephant hands down to emerge as the world’s factory.

But India now looks set to make a pivot, analysts say, and could soon challenge China’s manufacturing pre-eminence amid a changed world order.

Tamil Nadu is one of the country’s success stories. Home to more than 130 Fortune Global 500 companies, India’s southernmost state recently outlined an incentive programme aimed at encouraging investors to go beyond assembling low-value products, and manufacture high-value goods.

“What we have seen over the last two years is very, very strong interest in establishing advanced manufacturing facilities. Companies are also very keen to establish global capability centres here in India,” said Vishnu Venugopalan, managing director and CEO of Guidance Tamil Nadu, the state government’s investment promotion agency.

Global interest in India has grown since Prime Minister Narendra Modi’s government launched production-linked incentives for sectors such as electronics and renewable-energy equipment to boost the economy four years ago amid the pandemic.

These were recently expanded in an attempt to usher in investments in sophisticated technologies like making satellites and space-launch vehicles.

A raft of reforms has also been introduced to cut red tape, such as a simplified tax code that has sped up logistics, and revamped infrastructure including arterial highways, brand new airports and a modernisation programme for the country’s antiquated railways.

Further changes are expected, sending the stocks of many Indian companies soaring in anticipation – as Modi and his government seek a third consecutive five-year mandate in national polls between April and June.

“Is India like China [was] 15 years ago?” asked Kevin Carter, founder of the Emerging Markets Internet and ECommerce ETF, which has a specialised India-focused fund called INQQ. “The answer is yes.”

More than half of the country’s population is under 30, he pointed out. India, which surpassed China as the most populous country last year, is also the world’s fastest-growing major economy.

“When you combine demographics and growth, India will surpass China in terms of number of consumers,” Carter told an investment webinar this month titled “The Rise of India: Investing in the Perfect Emerging Market”.

One of the cornerstones for optimism about India, he added, is its world-beating public digital infrastructure that has enabled millions to open bank accounts and transfer money instantly, swelling the nation’s base of middle-class consumers.

This digital infrastructure is soon expected to bring e-commerce into the fold – allowing consumers to get deliveries such as groceries from family-run shops within minutes, likely bringing more opportunities, Carter said.

Reforms And Opportunities

“Without question, there is an opportunity for India. It is coming not only from the US-China rivalry and global firms’ ‘China plus one’ strategy, but from two other sources,” said Naushad Forbes, a former president of the Confederation of Indian Industry.

“China’s internal policies are really deterring foreign investors and making them seek other locations. Rising wages in China are also making it more economical to start simple assembly operations in places like Vietnam, Bangladesh, the Philippines and India.”

US officials have pointed to fines, raids and other actions against foreign companies that have made it risky to do business in China, despite efforts to reassure investors. But India’s ability to make the most of rising diversification varies from sector to sector, Forbes said.

“Medium-technology sectors are the ones where India is showing the greatest promise,” he said, adding that industries like speciality chemicals, engineering products and ready-to-eat foods are among the biggest areas of strength.

But Forbes rued the fact that India was not grabbing opportunities in labour-intensive sectors such as garments. “India should worry about [this] because of the potential for employment creation,” he said, pointing out that neighbouring countries like Bangladesh had better positioned themselves.

Delhi is also missing a trick, Forbes said, by not joining trading blocs such as the Regional Comprehensive Economic Partnership – a free-trade agreement that includes China, Japan, South Korea, Australia, New Zealand and the 10 member states of ASEAN.

Despite strong ties with Western nations, he said “India is not being a part of key free trade where a lot of products exist”.

“I hope we have a more moderate approach to how we define our self interest. China is a huge market and it’s not just a large exporter but also the second largest importer,” he said.

Delhi, which recently signed several new free-trade deals and is negotiating others with Britain and the European Union, should also look to lower import duties across the board, observers said.

“India’s import tariffs are among the highest across emerging markets, which acts as one of the deterrents to improving India’s market integration,” said Upasana Chachra, chief India economist at multinational investment bank Morgan Stanley.

High import tariffs fuel concerns about Delhi being too protectionist of its domestic industries, analysts say – even though isolated sectors may have benefited. The government did recently signal it would readjust some taxes to boost manufacturing, however.

Earlier this month, Delhi said it would lower import taxes on electric vehicles, committing to at least US$500 million in investment and a manufacturing plant within three years, potentially allowing Tesla to enter the market.

“India has not been very open to trade. Exports, for instance, are slightly more than 20 per cent of Chinese exports,” said Pushan Dutt, an economics and political-science professor at INSEAD business school.

“The geopolitical tensions and the China-plus strategy provides India with a unique opportunity to become an integral part of global value chains and use exports as an engine of growth.”

Simultaneously, India should look to boost jobs in labour-intensive sectors like tourism to cater to its young and growing population, experts said.