TIOL - COB( WEB) - 939
SEPTEMBER 26, 2024

By Shailendra Kumar, Founder Editor

SINCE the COVID days, the global supply chain has ushered into a new but foggy, almost-gas-filled, orbit of dynamic change! Pre-pandemic, it was tightly tethered to the 'factory of the world' i.e. China. All routes used to take FDI carriers and multinationals to Beijing - to be precise, Zhongnanhai, a former imperial garden abutting the Forbidden Palace. Bizarro! Post-pandemic, the dark shadow of the imperial palace evidently enveloped the benighted Beijing establishment which upended its bilateral relations with its key sources of economic muscles. And a process of muscle atrophy set in with a vinegary tariff war breaking out with its key trading partner. The doubters in the White House successfully palmed off their conspiracy theory to the occupant of the Oval Office that the 'Wuhan virus' was an integral part of a germ-warfare-linked research which the PLA had sponsored, and the same was deliberately leaked to challenge the superpower mantle of America! A voodoo idea! or, was there a smidgen of truth, is not clear thus far! The aftermath of the 'Deep Doubt' theory coupled with the soaring trade deficit, was commercially so poignant that the then US President subjected the Chinese goods to a severe bout of tariff onslaughts. What magnified the adverse impact of the beginning of the decoupling process on the Chinese economy was the fratricidal policy of 'Zero Tolerance' against the rapidly-mutating virus. This virtually shuttered the economy for three years and snapped off all links with the civilised world!

These two potent drivers nudged the Western MNCs to think in terms of diversifying the global supply chain. That is how sprang up on the horizon the buzzword of 'China Plus One'! It basically meant that every large global company decided not to rely on China alone for supply of vital intermediate and final goods and go for a strategic alternative location, largely immune to the onset of geopolitical turmoil. Thus were born a new set of buzzwords such as near-shoring, re-shoring and friend-shoring. As per one American study, as high as 90% of the US businesses began exploring new locations, not to move complete production from China, but to do it partially or in a phased manner. China being a large consumption bowl, and also a deep and generous purse of subsidies, continued to mesmerise the Western companies, and then came the out-of-blue decision to dismantle the firewall of 'Zero Tolerance' overnight because of many compelling domestic reasons - a cringeworthy setback for the iron-fisted Chinese President. Most Western investors heaved a sigh of relief! But, voila, it turned out to be visceral and temporary as the Chinese economy failed to gather the widely-projected momentum. What emerged on the surface was a spiral of crises like the unimaginable collapse of the property sector, deflation, anaemic consumer demand, flight of foreign capital, wealth drain, slowdown in foreign trade, and bone-crushing debts - foreign and public, elbowing local governments to the edge of collapse.

Secondly, the new occupant of the Oval Office upped the heat and escalated the tariff battle to new areas such as exports ban on advanced technology like semiconductors and other vital ICT products. A gaggle of suffocating sanctions was quickly interpreted by the fence-sitting companies as the unmistakable sign of Sino-America commercial relations heading nowhere! All these developments further lent pace to wheels of the supply chain diversification efforts, and the major beneficiaries were Mexico, Vietnam, Indonesia, Thailand, Taiwan, South Korea and India. Carefully slicing into the geopolitical dynamics and nexus of the Asian and North American economies with the West, a large number of MNCs split their global production between China and the rest. This put the hopping-mad-Beijing on the edge! Not to be cowered by the G7-led de-risking doctrine, Beijing prodded its excess-capacity-riding companies to shift their production to all these Asian and other economies which are seen friendlier to the West. A flurry of new investments benefited Mexico, Vietnam, Thailand, Indonesia, South Korea and India. The avalanche of Chinese FDI was also to take undue advantage of tariff concessions available to these economies vis-a-vis the US. For instance, Mexico saw a sudden surge in FDI inflows and also exports shipments from China. It was to do minimal value-addition and then export the shipments to the US under the US-Mexico-Canada FTA. However, the Chinese subterfuge and rope of sand did not go undetected and the US has begun imposing higher tariff on such Chinese goods which are not subjected to major value-addition in the contracted trading partner.

These developments bring me to more gnarly question: Can India dominate the 'ONE' in the China-Plus-One strategy of the Western MNCs? In other words, can India afford to be the 'Next China'? And my geo-economic gut feeling is - YES! First advantage to India is its demography. Its population-size makes it the most eligible economy to replace China which is going to go down in the annals of history as the first country heading for an 'early night' even before it becomes rich! Interestingly, China's 'dependency ratio' (dependents vis-a-vis people of working age) is projected to double from 35% to 70% by 2050. Around the same time, India's dependency ratio is projected to decline from the present above 50% to a bit lower. India's population will peak around 2070 to 1.7 billion - 400 million more than today. Since fertility rate and prosperity are inversely related, it would diminish for India but would match the best by all but African standards. Undoubtedly, this will be a great foundational resource for the economy.

The second factor which would make India a titan growth engine is its sustained capital investments in infrastructure - another vital pillar to power a galloping economy. India has been investing 30% of its GDP unlike 50% of China but it can catch up in less than a decade provided its blinkered run is not derailed by the political forces or even geopolitical upheavals. The 'Make in India' scheme needs calibrated policy and resource reinforcements to amp up production and increase the share of manufacturing from 20% to 30% of the GDP. The third pillar is the availability of skilled workforce to sustain a modern and technology-driven economy. India has ushered in an ambitious reskilling and upskilling mission which needs greater participation of the state governments and the private sector and, of course, more resources for speedy innovation cycles. Industry-linked education programmes and imparting of skill would begin bearing fruits sooner than one may project as India has huge English-speaking and science-driven youth which many competitors in the 'China-Plus-One' race do not have! To top it all, India has a vibrant democracy unlike others, largely one-party ruled. Democratic forces would keep the pressure on the elected parties to stick to the growth path or get slapped in multi-layered elections.

While running in the marathon race to get sucked in the alternative global supply-chain-in-the-making, India needs to act wiser, geopolitically. For instance, the Chief Economic Adviser in the Ministry of Finance, recommended in the Economic Survey that India should facilitate Chinese investments in the economy! I would prefer to disagree with such a recommendation for some kosher reasons. First, fact-checking of Chinese investments in many emerging economies reveals that Chinese companies follow their satanic national strategy to do minimal value-addition in the 'adopted' countries and rely more on 'Made in China' components and take advantage of either FTA or geopolitically-cordial commercial relations between a Global South economy and the West. Sacré bleu! Another facet of 'trade weaponisation' strategy of China! The IMF study underscores that China has as many as 5400 subsidy policies in place which makes Chinese production cheaper and attractive! Being in the know of such a toxic practice, the EU and the US have begun raising tariff rates on all such exports. India may also fall victim to it in the coming years if too much of Chinese investments are permitted! Not to be LOLed! Let's cull out some insights from the latest IMF data - as many as 2500 restrictive industrial policies were put in operation by 2023. About 71% of them are trade distortive - virtually protectionist! Red light is blinking fast as more such policies would be tailored in the coming years! Secondly, Chinese companies barely generate potential employment opportunities. They prefer to bring in their own skilled hands from China. To help them, India has relaxed its visa restrictions but it should be only a short-term measure. India should not forget that involving too many Chinese companies would end up raising national security concerns which keep roiling the West today!

As per Nomura's latest study, India's merchandise exports is going to peak around USD 850 billion by 2030. Such a projection also means India's growing integration into the global value chain. Interestingly, in the long-run, India's competitor like Vietnam, Thailand, Indonesia and others, would lose out as they depend too much on guileful Chinese investments and a major chunk of its manufactured goods is exported to the US. Secondly, their domestic markets are not big enough for gigantic-scale manufactured goods. A good example is Thailand where BYD set up its EV plant, which now imports everything from China and the local businesses have kicked in drumbeats of organised protests as the price-war has tossed out other players from the market, impacting businesses and jobs of hundreds of thousands of workers. The lesson to be learnt is that the Chinese satanised investments are 'multiple-edged' sword - Minimal value-addition in foreign land; elimination of local companies; minimal job creation, no technology transfer; no imparting of advanced tech skills to the locals and, finally, be laced up for devastating pushback from China's geopolitical rivals.

Though India's resolve to deepen its manufacturing capability is laudable but it needs to rely no less on its services. As per WTO data, services exports have skyrocketed by 60% in the past decade and it now accounts for 7.5% of the global GDP - USD 8 trillion. China is a merchandise exports tiger and if India aims to put it on the ropes, it would need to balance its phalanx of policies. India has some natural advantages to scale up services exports which today hinges perilously on just one pillar - the IT sector. Services basket has to be widened and deepened as new technologies may upend the prevailing economics enriching the kitty of our IT sector. Though the IT sector richly chips in to our forex kitty but it does not generate mass-scale jobs. With AI stepping into the scene, its job-creation potential may further diminish. In a nutshell, India's imports may have grown manifolds and its trade deficit has skyrocketed against China but these are market imperatives which would survive till the alternative global supply chain comes into being. It is not India alone but also the Western economies depend on China-dominated supply chain for their vital inputs and finished goods - about 40% to 50%. Therefore, one need not recoil in angst and forlorn hope that since India's dependence on China has leapt significantly post-2020, it may not survive the rigour of global competition! The kernel of the seismic movements in the global supply chain is - It is a short-term bubble and the fluid geo-economic forces would finally tilt towards India as a powerful, reliable and predictable 'ONE' in the China-Plus-One global value chain! Amen!