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India may be a winner in the US-China trade war



The largest national flag by Rajiv Chowk on March 7, 2014 in New Delhi, India.

Ramesh Pathania | Hindustan Times | Getty Images

India could benefit from the fallout in the US-China trade war, experts told CNBC – but much-needed land and labor reforms can prove challenging for companies trying to do business there.

Tensions between Washington and Beijing have prompted some manufacturers to move production out of China to avoid higher tariffs.

As a result, Southeast Asian countries, such as Vietnam, have often been cited as winners in trade shifts. India can also be a beneficiary.

"India could increase its trade footprint in the midst of the US and China trade conflicts, especially under the categories that the United States has imposed duties on China," Radhika Rao, an economist at Singapore Bank DBS Group, wrote in an August

"Apart from trade, diversion in investment flows is an opportunity that India could benefit from as manufacturers seek alternative destinations of origin," Rao added, suggesting that it could attract foreign investment in the country.

India's share of it global export market is relatively small.

Although Germany's population is almost 1

6 times smaller than India's, German exports accounted for 8.17% of the world's total trade flows in 2017. Compared to that, Indian exports accounted for only 1.68% of world trade.

Winning sectors

The three best sectors in India that could benefit from the trade war are: pharmaceuticals, chemicals and ch technology, R told CNBC in an email.

India is already competitive in these industries globally and will probably be well placed to meet additional demand in these areas, she noted.

India must move fast, through innovative policy and clearly focus on infrastructure development … But much more remains to be done and urgent.

Kunal Kundu

economist, Societe Generale

The South Asian nation's pharmaceutical industry supplies over half of the world's vaccine needs and 25% of medicines in the UK, according to a July 2019 report from the India Brand Equity Foundation (IBEF).

On the engineering side, India was the world's 12th largest machine tool manufacturer in 2017, said a separate IBEF report. The country also exports more than 60% of its technical goods to the US and Europe.

The manufacturing sector may also benefit – especially the textile, footwear and electronics industries, said Rajiv Biswas, Asia-Pacific Economics Manager at IHS Markit, in an email.

This is because US and China exports will become more expensive as customs kick in, and some manufacturers may move production to other Asian countries – including India.

"India may benefit from this trend in the medium term, with global manufacturers increasingly focusing on the rapidly growing Indian consumer market, Biswas said.

For example, Taiwan's Foxconn – the world's largest electronics contract manufacturer Apple products – moved production to India from China this year to "diversify their manufacturing chain away from excessive Chinese dependence," Biswas said.

The Indian economy could benefit from $ 11 billion from these trade changes , Rao wrote in the report, citing estimates from the United Nations Conference on Trade and Development.

Challenges for Companies

Companies in India face two major challenges: land laws and labor regulations.

Land laws are the "biggest obstacle" for manufacturing and infrastructure development, says Sociale Generale economist Kunal Kundu in a note to C NBC.

Current land laws make it difficult for the private sector to have room for manufacturing units, he said.

This is because land ownership is fragmented across several states, and companies need longer periods to obtain land or circumvent legal issues that may emerge.

Indian technicians check cell phones at Chinese manufacturing Celkon on the outskirts of Hyderabad, India on June 26, 2015.

Noah Seelam | AFP | Getty Images

Another problem is that labor laws in India are "extremely complex", Kundu noted. They comprise about 40 acts and companies must comply with them all. This makes it difficult for manufacturers.

Land and labor reforms are two of the "most important factors of production" needed, according to Kundu.

Therefore, he recommended, a national employment policy should be formulated – especially one that allows manufacturers to make labor redundant during the downturn.

Attracting investors

The lack of proper infrastructure can also be a problem, Nomura economist Sonal Varma told CNBC.

It includes connecting manufacturing facilities to suitable roads and ports, as well as ensuring that power is available.

The government has tried to improve some of these policies, but it will take some time before they can be fully implemented. It also seeks to boost infrastructure and foreign investment in India through a multi-billion dollar budget.

New Policy Reforms August was seen as a step forward for investment. For example, the government approved 100% foreign investment in coal mining and eased the rules for contract manufacturing and retail.

"India must move fast, through innovative policy and clear focus on infrastructure development … But (a) a lot There remains to be done and done more quickly," Kundu said.

More amendments to existing laws are needed before India can reap the full benefits of these investments to boost the economy.

As India is a large country, many laws are controlled by the state government – not by the central government, Varma said. "The changes need not only be … from the top of the central government but also from different state governments."


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