Indian manufacturing may not benefit from US tariffs on China: Experts

‘Tariff tantrum’ could lead to global recession, demand slowdown : Analysts

China on Wednesday imposed 84% tariffs on all imports from the United States. This came in retaliation to tariffs imposed on China by US President Donald Trump at 104%, threatening to topple supply chains globally. Already, shifts are being observed as Apple is reportedly looking to diversify its production from China, including to India, given that it already has manufacturing units here. 

While on the face of it, this appears to be an opportunity, both for Indian manufacturers exporting to the US as well as multinationals looking for alternatives to China, analysts warned against complacency. Rather than a winner taking it all, this global war may have no winners at all.

For one, the cost of manufacturing and products in China across sectors is cheaper than that in India. But that is not all.

“Currently, China’s exports to the US is around $448 billion, whereas that for India is around $87 billion. We are at one-fifth of what China has been exporting to the US. Does an Indian manufacturer really have that spare capacity to immediately start producing and exporting to the US? The answer is probably no; building up capabilities itself will take some time to get into that sizable portion of China’s exports to the US,” said Hardik Shah, Director, CareEdge Ratings.

China also has a significant hold over several critical minerals such as rare earth ores needed for manufacturing. “This dominance means that even if manufacturers want to move production out of China, they might still be reliant on it for the supply of essential raw materials. This creates a bottleneck and limits the feasibility of complete decoupling,” said Feroze Azeez, Deputy CEO, Anand Rathi Wealth Limited.

While some companies may attempt to boost their manufacturing in countries apart from China, only ones with an existing presence in India may end up benefiting, as per experts. This could be for electronics, semiconductors, textiles and auto components.

“If we want to substitute China, we need to start producing things like it, for which we need investments - and the present situation does not provide enough confidence for it. Even if India were to benefit from this in the short-term, that can only be done if we have China's economies of scale,” cautioned Jayant Dasgupta, former ambassador to the World Trade Organisation (WTO).

Analysts said that if demand goes down in the US due to a possible recession, this would impact economies globally. It is important to note that as the situation remains turbulent, long term impact is difficult to predict. 

From India’s perspective, if manufacturers do choose to move out of China, it is not just due to the tariffs but has been a long time coming with China’s trade challenges, said Mukul Goyal, co-founder of Stratefix Consulting. For this to accelerate, India’s moves to incentivise businesses is crucial. 

However, that may not be the route it is taking as the government reportedly considers phasing out the production-linked incentive (PLI) scheme.

“India is not there on the semiconductor manufacturing map yet but the current imbroglio does offer an opportunity if there’s faster speed of manufacturing investment. Policies and clearances need to change dynamically given the rapidly changing world order,” said Manjunath Jyothinagara, Managing Director, KAS Group of Companies.