India needs more than tax cuts to become a global manufacturing hub

India needs to remove trade barriers and improve infrastructure if it wants to benefit from movement of supply chains from China, a former European trade commissioner said.

“India is still driving along with its hand brake on,” Peter Mandelson, Chairman of strategic advisory firm Global Counsel, said in an interview in New Delhi on Thursday. “If it doesn’t do enough, other countries such as Malaysia, Indonesia and Vietnam will take advantage of this switch, leaving India behind.”

A shortage of skilled workers, bureaucracy and lack of adequate road and port infrastructure are key impediments investors face in India, he added. The south Asian nation needs to liberalize its trade, particularly on e-commerce, and “exploit the export potential” being offered by China-led Regional Comprehensive Economic Partnership.

India has so far lost out to the southeast Asian economies in attracting investments as companies look for new manufacturing destinations to skirt tariffs in the trade war between China and the US. 

Prime Minister Narendra Modi has reduced corporate tax rates to one of the lowest in the region with an aim to make India a manufacturing hub. That’s a “smart move”, Mandelson said, but “insufficient” to attract investors as rivals are offering a “better base for production”.

Modi’s overhaul of archaic bankruptcy laws improved India’s position in the World Bank’s latest rankings for doing business. The $2.6 trillion economy jumped 14 places to 63rd spot, but still lags behind competitors in staring a business, registering property, and enforcing contracts.