As India took a step towards its dream of becoming the "world's factory", the United States and China suddenly announced a trade "reset" agreement that could dampen New Delhi's manufacturing ambitions.

Last week, both sides in the U.S. and China reached an agreement in Switzerland. Trump sharply reduced tariffs on Chinese goods overnight, dropping from as high as 145% to 30%; while tariffs on India remained around 27%.

Ajay Srivastava of the Global Trade Research Institute (GTRI) in Delhi believed that manufacturing investment shifting from China to India might "stall" or "reverse".

"India's low-cost assembly lines may survive, but the growth of added value is at risk."

This sentiment contrasts sharply with the booming vitality in Delhi last month when Apple said it would transfer most of its iPhone production destined for the U.S. from China to India.

The transfer of production may still continue. Even though President Trump revealed that he had directly told Apple CEO Tim Cook not to set up factories in India because "it is one of the countries with the highest tariffs in the world."

In an investment report before the U.S.-China agreement was announced, Capital Economics economist Sharang Shah noted that "in the short term, India does indeed have the conditions to replace China as a supplier of goods to the U.S." He pointed out that as much as 40% of India's exports to the U.S. are "similar to those exported by China."

Early signs show that Indian exporters have already begun filling the gap left by Chinese producers. According to a survey of Indian manufacturers, new export orders surged to a 14-year high.

Nomura Securities also noted that increasing "indirect evidence" suggests India is gradually becoming a "winner in trade diversion and supply chain restructuring," especially in mid- to low-tech manufacturing sectors such as electronics, textiles, and toys.

Some analysts believe that although the U.S. and China recently announced a trade "reset", the deeper strategic decoupling between the two countries in the long run will be beneficial to India.

Firstly, after years of implementing protectionist trade policies, the Modi government is now more willing to open its doors to foreign companies, which may bring tailwinds.

In addition, India and the U.S. are negotiating a trade agreement. This agreement may position India, the third-largest economy in Asia, favorably to benefit from the so-called "China Exodus"—as global businesses shift their operations to diversify supply chains.

Meanwhile, India has just reached a trade agreement with the UK, significantly reducing tariffs on protected industries including whisky and automobiles. It is widely believed that this may signal that New Delhi will also make concessions in the India-U.S. negotiations.

However, this optimistic atmosphere needs to be approached cautiously for more than one reason.

In an early report, Nomura Securities economists Sonal Verma and Aurodeep Nandi pointed out that China's return to competition, coupled with markets not fully abandoning other Asian competitors, means Vietnam and other countries remain in consideration.

"Therefore, if India wants to seize this opportunity, it must promote serious business facilitation reforms beyond tariff advantages."

For a long time, India's harsh business environment has deterred foreign investors, with its manufacturing sector accounting for about 15% of GDP, showing little breakthrough over the past twenty years.

The actual effectiveness of policies like the Production Linked Incentive (PLI) scheme implemented by the Modi government remains limited.

The Indian government think tank, the National Institution for Transforming India (NITI Aayog), admitted that India has achieved limited success in attracting foreign investment withdrawn from China. The organization pointed out that countries such as Vietnam, Thailand, Cambodia, and Malaysia have expanded their export scale due to lower labor costs, simplified tax laws, lower tariffs, and proactive free trade agreements, while India has lagged behind.

According to Nomura Securities' analysis, India's continued reliance on China for raw materials and components needed for electronic products like iPhones limits its ability to benefit from this wave of supply chain shifts.

Ajay Srivastava of the Delhi-based Global Trade Research Institute told the BBC, "Only when more mobile phone parts are manufactured locally will India's gains from producing iPhones increase."

According to him, for each iPhone sold in the U.S., Apple can earn over $450, but India only earns less than $25, despite the export statistics listing the full price of the iPhone (around $1,000) as India's export value.

"Simply assembling in India is insufficient unless Apple and its suppliers also start producing parts in India and engage in high-value work. Without this, India will only have a small share, and the export figures will only increase on paper—instead, it may invite more scrutiny from the U.S., and India will not gain real economic benefits."

The Delhi-based Global Trade Research Institute also pointed out that these assembly plants create jobs of poor quality.

Unlike the situation in 2007 when Nokia established a factory in Chennai, southern India, and suppliers moved in simultaneously, "today's smartphone manufacturers mostly import parts and seek to reduce tariffs rather than build supply chains in India," Srivastava explained.

He stated that in some cases, the investments made by companies may be less than the subsidies received under India's Production Linked Incentive (PLI) scheme.

In addition, there are concerns that Chinese exporters may use India as a transit point to ship goods to the U.S.

The Indian government seems not to reject this direction.

The country's chief economic advisor said last year that more Chinese enterprises should be encouraged to establish export-oriented factories in India to promote local manufacturing—a recognition to some extent that India's industrial policy has been less effective and failed to achieve its goals.

However, experts warn that this may further weaken India's ability to develop local technology and strengthen its own industrial base.

All this shows that, beyond the attention-grabbing announcements by major companies like Apple, India still has a long way to go to become a true "world factory."

"Reduce production costs, improve logistics, and establish regulatory stability," Srivastava urged policymakers on social media.

"Let us make one thing clear: the reset between the U.S. and China is merely damage control and not a long-term solution. India must prepare for the long haul, or it risks being marginalized."

Source: BBC

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