Is It Time For Indian Manufacturing To Rise In The Face Of Geoeconomic Tensions :- An Economic Analysis

Image courtesy- ETBFSI

Introduction -

Over the past few months, the psyche of Indian consumers, producers and other economic agents has been captured by what many in the world call as "Trump Tariffs". The Trump tariffs and the quick fall in the otherwise stable relations between India and USA and more specifically the reckless statements made by Trump's economic advisor Peter Navarro has led India to explore other avenues of cooperation in the world. Compounding the problems between India and the USA, the 50% trump tariffs along with the one time processing fee on new H1B visas, have renewed calls between Indians to geo-economically diversify away from the USA. 

It was in this backdrop that the visit of Indian PM Narendra Modi to Tianjin for the SCO summit and a possible revival of the RIC grouping sent shockwaves amongst the broader diplomatic community of the world. These events coupled with the meetings of Indian Prime Minister Narendra Modi with the Japanese, Singaporean & Phillipines presidents over the past 3-4 months, has set rumor mills buzzing about the possible alignments in India's geopolitical space. While many economists, diplomats & politicians have suggested reforms for service & trade sector, the manufacturing sector which can be a possible protagonist in the face of ongoing geopolitical uncertainities, has featured sparsely in conversations.

Is It A New Trend ? 

While in the hindsight it can be said that, this is a new trend in Indian foreign policy of moving away from USA, it must be noted that, this is a process that has been ongoing from many years. India and the USA over the years have sparred publicly over contentious issues like that of - Indian farm laws, India - Russia ties, involvement of "deep state" in Indian electoral politics, amongst others have led to a rise in tensions. While, the tensions have not translated into loss of bilateral trade between the 2 countries, it has resulted in calls for swadeshi in India.

India negotiating for separate FTAs with countries like UAE, Australia, EU, Switzerland, Leichenstein and United Kingdom have all pointed to a policy of India diversifying away from the USA. The diversification policy from the USA also makes sense, because of 3 major reasons - One, USA is India's lagest trading partner which makes it risky in a world where, the USA is increasingly taking tough measures due to its domestic political compulsions. Second, almost 50% of FIIs in Indian share markets are coming from the USA which again opens up a weak spot for the Indian markets in the longer run which increases chances of capital flight and finally, it is in India's interest to diversify away from the USA to more greener pastures like - European Union, West Asia, Russia, Southeast Asia, Latin America and Africa, which offer a stable geo-political environment & where India is likely to benefit by virtue of it being the bigger economy.

Possible Effects On Indian Economy - Manufacturing The Protagonist

Source - World Bank

The effects of such steps and FTAs are immense on the economy. The FTAs signed recently by India in the backdrop of the tumultous state of global politics, can be seen as a good step which will increase Indian options, but, since the FTAs have been signed very recently, how exactly will these FTAs materialise is still a big question that needs to be addressed. The other possible effect to what the Indian policymakers are looking is perhaps the path of reforms, which can actually unleash the Indian economic potential. The good thing for India is that, despite the structural challenges in its economy like:- low agricultural productivity per worker, the GDP numbers have remained strong over the past 3 quarters, which can push the policymakers to introduce more reforms. In this case, the shift from supply side economics to demand side economics in budget 2025 , via reforms like - GST slab rationalisation, IT reforms and a renewed push for manufacturing, can actually end up helping the Indian economy in the short run, till the above mentioned FTAs can start showing effect.

Source - Lukmaan IAS

However, more needs to be done, India needs to urgently, look at increasing the manufacturing ecosystem of tier-2 & 3 cities, which can be the next growth engines of Indian economy. India's PMI numbers of 63.2 in August was the highest in 17 years, but more needs to be done in this sector. Even today, agriculture is employing almost 60% of Indian workforce which is genuinely not a good indicator as agriculture incomes tend to be usually less than that of the manufacturing sector, which does not lead to expanding the Keynesian based demand economics.

Labor force participation in India

With close to 80% literacy rate, India definitely has the push to employ at least semi-skilled workers in the manufacturing sector which can improve the per capita productivity of India's agriculture sector as well. The scheme announced in the Union Budget about, developing India's periphery cities should be focused on manufacturing sector, where more incentives are given to industries such as - textiles, dairy processing, agro processing and heavy industry sectors like machine tools, semiconductors, heavy electrical & automotive industries can benefit from the disguised unemployment that is prevalent in the laggard agricultural sector of India. At present as of 2025, manufacturing contributes just 15% to the Indian economy, which is also a major reason why India's trade in goods with countries such as China has stayed limited over the years, with India often not enjoying a trade surplus with them.

The National Manufacturing Mission was supposed to make manufacturing contribute to 25% of Indian economy by 2025, which is still very much behind that today's projections. In order to get the reforms successful, the focus has to increase over this sector so that, the country records an excess of 10% growth rate in the upcoming fiscal years. In this case, even the role of state policies becomes very critical, as argued by the author in a previous policy article on bringing back SEZs and EEZs in Indian economy, this is a reform that must be carried out by the states & the center in the mid economy states like - Odisha, Bihar, Andhra Pradesh, Telangana, Rajasthan, Haryana and Assam,which can benefit from the renewed push towards manufacturing. This is something that even PM Narendra Modi indicated in his speech yesterday. The country must also look into reforming the successful - Startup India & Standup India policies in a way that boosts manufacturing sector of the country in the longer run.

Furthermore, even the history of international economics has pointed that - geopolitical strength of countries have increased only when they had massive manufacturing, in fact the major reason why British enjoyed a massive empire was because of the Manchester mill innovation that occured in the 1800s. Even ideologies of Karl Marx, along with a host of other economists in that era came in primarily because of the push towards manufacturing that was existent in the European countries back then. Though, the state of economies have changed in the world, but, still the manufacturing sector is any country's best bet to translate short term gains into long term victories. The other reason why manufacturing sector can be a sunrise sector is primarily because that there are very few evidences in the world, where due to geoeconomic tensions manufacturing sector as a whole has been affected. 

Conclusion-

Furthermore, India must also rethink about the status of the current trade deal negotiation with the USA today. USA is undoubtedly a very critical partner for India, but, whether India should go for a FTA or whether it must revert to a PTA on select products, as advised by the author in the previous blog, is something that the Indian economists should seriously consider.