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India vs. China: Modi’s Market Reforms Propel India as New Global Hub

Daniel Kim Views  

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As Indian Prime Minister Modi is expected to secure his third term, the current Indian government’s pro-market economic policies are anticipated to continue. Research suggests that India is set to replace China as a global manufacturing hub.

According to a report titled “Diagnosis of Modi’s Third Term and Investment in India,” released by the International Trade and Commerce Institute of the Korea International Trade Association (KITA, Chairman Yoon Jin Sik) on Tuesday, India is replacing China amidst the decoupling from China phenomenon. The report indicates that the rate of India’s backward participation in the Global Value Chain (GVC) is increasing, which means an increase in the proportion of manufacturing export goods after importing overseas intermediates. The trend of backward participation can measure the role of a global manufacturing base.

As of 2022, India’s GVC backward participation rate is 23.1%, up 2.6% from 20.5% in 2014 when Modi took office. In contrast, China’s rate increased by only 1.4% as its self-sufficiency rate for intermediates rapidly increased, while its forward participation rate increased by 2.4%. This suggests a shifting role for India and China within the rapidly changing global supply chain.

Industry-wise, India’s backward participation rates in primary and processed metals (54.9%), coal and refined petroleum (50.6%), and transportation equipment (34.3%) are all above 30%. From South Korea’s perspective, which primarily exports intermediates, these are the key industries to focus on when targeting the Indian market.

South Korea is also paying more attention to India as an overseas manufacturing base. In a survey conducted by the Korea International Trade Association, 7 out of 10 South Korean companies (68.1%) operating in India predicted that India would replace China as the world’s factory within the next five years. Furthermore, 74.5% of respondents believed Modi’s third term would positively impact the business environment.

As the appeal of the Indian market increases, foreign direct investment (FDI) in India, particularly in renewable energy, construction infrastructure, and pharmaceuticals, is also growing significantly. Japan’s investment in India is particularly noticeable. However, South Korean companies’ entry into the Indian market has been somewhat slow, with India accounting for only 0.7% of South Korea’s total overseas direct investment last year.

Jo Eui Yun, a senior researcher at the Korea International Trade Association, commented that while India actively promotes policies to increase foreign investment, it is simultaneously tightening protective trade measures such as anti-dumping and mandatory certification by the Bureau of Indian Standards (BIS). He emphasized the importance of alleviating the burden of tariffs and non-tariff barriers for companies through continuous improvements in the South Korea-India Comprehensive Economic Partnership Agreement (CEPA), particularly as India emerges as a significant global manufacturing hub.

Daniel Kim
content@viewusglobal.com

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