Time for Indian manufacturing to step up as Trump tariffs reshape trade

How much impact will the US President Donald Trump’s so-called “Liberation Day” tariffs, set to be announced on April 2, have on the Indian economy, the economies of other countries such as Canada, Brazil, Mexico and China, and the global economy overall? This will probably be quantifiable only after some time — perhaps a year or more. Certainly, the consensus is that the short-term and long-term impact will be quite bad, not just for the US’ trade partners but also for the US itself and even countries that do not trade with the US in a major way. This is because manufacturing nations cut off from the US market will inevitably seek alternative geographies to compensate for part of the shortfall.

 

While all nations are bracing themselves for the impact, leaders of different countries have reacted differently. Some have chosen to play hardball — announcing counter-tariffs on US goods and services. Others, including India, have chosen a more placatory path — opting for negotiations and voluntarily reducing some tariffs as an opening gambit.

 

Mr Trump’s stated goal is to use tariffs to bring manufacturing back to the US and make the country’s industrial base stronger. And while his shock-and-awe tactics seem more destructive than constructive, one cannot argue with the overall intention.

 

In fact, it is time for all nations to look at the actual global competitiveness of their manufacturing (and services) in the new economic era. It is in manufacturing that China particularly stands out, while India has faltered despite multiple attempts to become a global hub for manufacturing that can compete on cost and quality. While China will also be affected by the US tariffs, it is likely to weather the storm better because it has spent decades improving its competitiveness.

 

India’s problem has been that its manufacturing has never quite managed to be globally competitive in most industries, despite programmes announced by different Indian governments over the decades — and this has been reflected in its non-petroleum merchandise export performance. India’s gross domestic product (GDP) growth has been more domestic private consumption-led than export-led, and its inability to get its manufacturing sector firing has been a big reason for this.

 

The National Manufacturing Policy (NMP), announced during Manmohan Singh’s tenure as Prime Minister, as well as the much-touted Make in India and Atmanirbharta programmes announced by Prime Minister Narendra Modi, all had the stated aim of increasing manufacturing’s share to at least 25 per cent of India’s GDP and improve its goods export performance. Yet after all these years, manufacturing accounts for merely 13-14 per cent of the GDP, and India’s goods exports remain less than 2 per cent of global exports.

 

Why has India failed to become a dominant force in global manufacturing in any sector, despite its many advantages — from the huge supply of youth joining the workforce every year to the large market it offers for global manufacturers? Why has it not become the most preferred destination for global manufacturers, despite China’s higher labour costs and the China + 1 strategy adopted by multiple global buyers for several years now?

 

The blame can be laid on both the Indian governments (Union as well as state governments) and Indian business houses. The latter have typically lacked scale thinking and global ambitions. Many have also been tardy in adopting cutting-edge technology in their manufacturing facilities. Most big domestic manufacturers have shown little ambition to be world beaters, choosing the easier path of selling in India and lobbying to protect their domestic turf. This is why, while we have huge global-scale business conglomerates with fingers in multiple sectors, they mostly focus on the domestic customer base rather than striving to become export powerhouses. We do not have global-scale domestic manufacturing champions known for their quality and cost competitiveness. Big Indian business houses have often acquired manufacturing companies abroad, but they are still not dominant in global markets — not even in relatively low-technology goods. It is only in mobile phone assembly that we are close to being globally cost-competitive, and that too only with the help of the Union government’s generous Performance-Linked Incentives (PLIs).

 

The lack of scale thinking was perhaps understandable till the end of the last century — after all, Indian industry tasted economic liberalisation only in that century’s last decade. But it is harder to justify now, two and a half decades into the new millennium.

 

The bigger share of the blame though lies with both Union and state governments. Despite slogans and announcements, manufacturing is not easy in India — one reason why relatively few global manufacturers have found big success in the country. From land acquisition to the cost of electricity, and from time taken for various clearances to the logistics costs and tax dispute resolution, India has proved hostile ground for both domestic and global manufacturing firms. Most of the rules and regulations heavily favour entrenched big domestic firms that know how to manage the system.

 

The biggest problem though has been a lack of clear focus on specific sectors where India could become a global manufacturing hub. In both pharmaceuticals and automobiles, India made good progress after the economic reforms — before settling for mediocrity.

 

If India really wants to be an economic powerhouse, these are problems it cannot afford to ignore. The Union and state governments need to work closely together to fix the many issues within their control.

 

The author is former editor of Business Today and Businessworld, and founder of Prosaic View, an editorial consultancy