The Roar of The Indian Tiger: Can It Tame The Chinese Dragon?

Following the Azadi ka Amrit Mahotsav, India enters its golden era, leapfrogging the UK to become the world’s fifth-largest economy. Despite the gloomy global outlook, India will be the third-largest economy with a 15 trillion Dollar GDP by 2047.

According to a recent Goldman Sachs report, India will become the second-largest economy in the world by 2075, surpassing Japan, Germany, and the US. According to the investment bank report, as India's population of 1.4 billion people becomes the world's largest, its GDP is forecast to expand dramatically. Going by the trend we witness, this report does not seem far from reality. 

The recent developments in India's tech-driven manufacturing and contract outsourcing are incredibly encouraging. Amazon announced an investment of US$15 billion in India, creating 2 million jobs by 2025. Google announced the opening of its global Fintech operations center in India. Such initiatives of Amazon and Google will see India emerging as a global innovation hub, having already occupied the third spot in the number of Unicorns produced yearly, followed by US and China. 

As we advance, we see a strong collaboration with global majors in emerging technology like Biotechnology, AI and Quantum, advanced materials, and telecommunications. Let us briefly go back to the nineties to take lessons from the past.

Following the Y2K opportunity in the nineties and the subsequent IT outsourcing opportunity, India emerged as a preferred destination for IT outsourcing. But India has yet to see the likes of Oracle, SAP, Microsoft, Google, and such product companies coming out from India. India came to be known as a cost arbitrage outsourcing destination.

In the sixties, India missed the bus for manufacturing and export-led growth as China emerged as the world's factory. But that China story cannot be repeated now since the manufacturing’s golden age is not there anymore, going through the same process that agriculture witnessed in the 20th century, i.e., when productivity increases faster than the demand for an extended period, industry shrinks in terms of job growth. 

Eduardo Porter once wrote in one of his articles that it needed 45,000 workers to pluck 2.2 million tons of tomatoes in California about 50 years ago. Then a new Oblong tomato was developed that could be plucked much faster with the help of harvesting machines. The unions protested, and the jobs in the sector saw a drastic fall. The introduction of MNREGA in India resulted in an increased pace of farm mechanization and a consequent fall in farm labor. 

Manufacturing in a Productivity-enhancing situation is a zero-sum game where any gain by one country will be at the expense of another country, whether the gain happens through higher productivity, currency recalibration, or creating a moat around the economy with protectionism, etc. They require substantial policy-level interventions considering the new texture of the global socio-economic priorities.

Similarly, India’s Silicon Dream was dashed due to a lack of vision by the Government in the eighties. In 1987, India was only two generations behind in semiconductor technology, and today we are 12 generations behind. 

Major tech companies sought to set up Semiconductor Research and Development Centres or fabrication plants in India, but India faltered. India’s public sector company, Semiconductor Complex Ltd (SCL), started making ICs and developed its process in 1984 when China and Taiwan were nascent. An unfortunate fire at the plant in 1989 pushed back India’s Semicon story by decades. 

Ultimately it was bought by ISRO for scraps. In the late 1980s, Metkem Silicon, in partnership with BEL, designed and made polysilicon wafers for solar cells and electronics. Due to a lack of vision and competition from cheap ICs from China and Taiwan, BEL could not take off. India failed to enact the electronics revolution.

We are at a significant inflection point today to rescript the India story. After decades, many best-in-class global chip makers are interested in setting up their shops in India. Taiwanese electronic manufacturer Foxconn intends to establish a semiconductor manufacturing facility and build a semiconductor and display fab ecosystem. Such an initiative can catapult India to the next level to complement the world majors' supply chain. 

Tata is gearing up to manufacture Apple’s products in India, with Apple’s intent to shift 18% of its production to India. Google is looking to produce phones in India. After Apple and Samsung, Google will be the third major global device maker to use India as an export-oriented manufacturing hub. India is also becoming the global SaaS hub driven by homegrown world-class enterprises like Zoho. International players like NTT are investing billions of dollars in building an enabling ecosystem.

This study is driven by the comparative advantage theory, which is now the most relevant of the eight globalization theories. According to this theory, India can produce at a lower opportunity cost than other emerging economies. So, electronic manufacturers are keen to bet on India's advantage due to its skilled labor force, favorable business environment, and growing consumer market, which allows them to enjoy the comparative advantage in producing and selling electronic products in India and its nearby countries. 

The geopolitical issue is another major factor influencing electronic companies like Google and Apple to set up manufacturing hubs in India, adding a new terminology like ‘Friendshoring.’ The FDI inflows have increased 20-fold in the last 20 years. FDI equity in the manufacturing sector has increased by 76% in FY 2021-22, even during the covid pandemic period, and post-covid, the FDI inflows have already increased by 23%. The first fortnight of July saw a massive investment by FPIs in Indian equities.

The current geopolitical impact and China plus policies add a new moderator to the theory of comparative advantage. India’s Make in India movement and the new bonhomie with advanced nations like the US, France, UK, and Japan make a perfect texture to stage a new age technology-led manufacturing revolution, shedding the image of a low-cost software services nation. India saw a unique growth trajectory. 

The services sector grew rapidly over the past two decades without a manufacturing boom, unlike other countries where manufacturing growth precedes services. IP transfer and co-production with global giants, India’s democratic dividend, digital readiness, a thriving start-up ecosystem with numerous Unicorns in the pipeline, a stable and committed union Government, and a federal structure with states competing with each other to improve their business ranks will now change the India narrative. No wonder ‘India strategy’ is a common board room topic across all significant global corporates today. Will the Indian Tiger roar?

About Authors:

Dr. Asit K Barma, Director and Professor and Dr. Mafruza Sultana, Assistant Professor at Bharathidasan Institute of Management