India’s manufacturing sector has failed to capitalize on multinational companies’ efforts to diversify supply chains away from China, foreign direct investment (FDI) data shows, even as manufacturing continues to shrink at the northern neighbour.
Expectations of higher inflows into Indian manufacturing had taken root as China’s purchasing managers’ index (PMI) for manufacturing contracted in seven of the last 12 months, as Beijing struggles to reopen its economy after exiting its controversial zero-covid policy early this year.
India’s PMI for manufacturing did not contract in the past year, but against expectations, FDI inflows fell 22% to $46.03 billion in FY23 amid high inflation and recessionary trends in developed economies.
“The ‘China plus one’ story is not confirmed from the investment data. FDI is still pretty subdued,” said Biswajit Dhar, professor at Jawaharlal Nehru University. “What we see this year is lower than what we were attracting a few years back. At a time when China is slowing, if we cannot attract higher FDI, it is a source of concern.”
‘China plus one’ refers to global companies’ strategy to expand manufacturing and supply chains to a location in addition to China, where much of it is concentrated now.
Madan Sabnavis, chief economist of Bank of Baroda, said India is witnessing industrial stagnation and that companies won’t invest because they are not going to China.
The ‘China plus one’ story looks very compelling, but it will take some time before they are convinced, he added.
India cannot take it for granted that the multinational companies will direct a big chunk of their planned ‘China plus one’ investment to India, Sabnavis said. “Besides, FDI in India is concentrated in a few sectors. A lot of FDI goes into IT and financial services. If you look at the banking sector, I think the limits are already exhausted. There is definitely an opportunity which is there, but more than the pull factor, there is also the push factor,” Sabnavis added.
According to Upasana Bharadwaj, senior economist at Kotak Mahindra Bank, the growth in Indian manufacturing has been led by domestic and global demand and private consumption, which have ensured that it remained in the expansion zone.
“At the moment, their (China’s) public investment cycle, property sector, are all underutilized. The credit and the leverage system are also not in place,” Bharadwaj said.
She said many companies began moving away from China after the US-China trade war erupted in 2019 and the pandemic surfaced in China, highlighting the need for diversification. “And at the same time, if China is not able to keep pace (in terms of growth), their ability to deliver at the moment may not be adequate.”
India’s manufacturing growth has gained momentum supported by rising demand for factory products and edging past its major competitor China, whose manufacturing has barely expanded during May and June after contracting in April.
While India’s manufacturing PMI fell to 57.8 in June from 58.7 in May, China’s fell to 50.5 from 50.9, according to data from S&P Global Market Intelligence. A figure of 50 separates expansion from contraction.
China’s sudden abandonment of its zero-covid policy had raised hopes of a sharp recovery in growth driven both by demand and easing supply bottlenecks, said a recent research report from HDFC Bank titled Enter the dragon – what the ‘new’ China is all about. “However, while the service sector has seen momentum, manufacturing is still sputtering, youth unemployment is at a record high (20.4% for May), and its real estate sector is facing new problems,” the report said.
“To top this, the financial system is under strain, and companies are busy deleveraging while households are holding back on consumption of big-ticket items such as cars and houses. China’s massive tech sector looks moribund and is not picking up the labour slack, particularly in the younger age groups,” it added.
During June, China’s production growth slowed notably from May’s 11-month high, while new order growth remained mild overall. Meanwhile, during the same period in India, surging demand for goods translated into higher sales figures for manufacturers, which underpinned another robust expansion in input purchasing as firms actively procured resources to support production growth.
In China, optimism around the 12-month outlook for production waned to an eight-month low in June, as some firms expressed concerns over relatively sluggish market conditions, S&P Global Market Intelligence said in a recent survey.
Queries sent to the ministry of commerce and the ministry of finance remained unanswered till press time.
Source : mint
