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India Closer To Competing With China, But Still Has Long Way To Go

Updated: Jan 22

India moved a tad closer to becoming an alternative to China this weekend.

The world’s sixth-largest economy surprised everyone late Friday when the Finance Ministry said it would cut the corporate tax rate from 35% to around 25.2%, putting India’s C-Corp taxes on par with China’s. That, coupled with Prime Minister Narendra Modi’s appearance at a Trump rally in Houston on Sunday has put the two countries firmly in each other’s orbit now. Lots can be done.

A 22% corporate tax rate will apply to established, domestic companies. The rate cut is retroactive, going back to the start of India’s fiscal year on April 1.

But the better news is the 15% rate for manufacturers that start operations between October 1, 2019 and March 31, 2023. That’s close to Singapore’s tax rate and lower than Vietnam’s, one of the clear beneficiaries of the trade war to date.

In addition, Finance Minister Nirmala Sitharaman reduced the minimum alternate tax to 15% from 18.5% on profits.

India’s stock market rallied on Monday thanks to the stimulus plan. India’s high-tech white-collar work force is in better shape. But factory workers and lower skilled manufacturing laborers face unemployment rates of around 14%.

India’s Parliament is currently in recess. The order was signed by the Modi government, but even if it was to go through Parliament, there is no way the opposition parties would vote against it as they would risk appearing against blue-collar workers.

The tax policy opens the door to India siphoning off some of China’s manufacturing business.

Modi made domestic manufacturing a signature policy in his first term but never had a majority. He does now. He has a mandate. And he’s widely popular, as was evidenced at the Houston rally on Sunday.

Moreover, given the fact that Washington is trying to increase the risk of doing business in China, and given India’s solid relationship with the U.S. and Europe, the timing could not have been better.

“This is a tilt in India’s economic policy towards blue-collar labor,” says Shan Nair, president of Mumbai-based Nucleus, a consulting firm working primarily with foreign and Indian companies. “My guess is: Watch this space over the next two to three years. The Modi event in Houston was another step in that direction. As an Indian living in the U.S. for many years now, I for one was very happy to see that. I have been hoping for this probably for the last two decades.”

U.S.-India trade negotiators are reportedly closing in on a “breakthrough agreement.” Specifics aren’t expected to be announced until November. Presidents Trump and Modi shared the stage at a political campaign rally in Houston on Sunday.

The USA Today called the Modi-Trump relationship a “bromance.” In the best case scenario for both leaders, India becomes an alternative to China. If China becomes a little vacuum cleaner sucking out Chinese manufacturing, then Washington would be on its way to forcing American multinationals to diversify their supply chain risk outside of China.

India needs to do a lot more to compete with their powerful northern neighbor. They have the tech know-how and stronger intellectual property laws than China, but they do not have comparable logistics. India is nowhere near ready to replace China even a little bit as an exporter.

The country has only one major port, the Jawarharlal Nehru Port in Mumbai. It’s ranked as the 29th largest port in the world and is one of two Indian seaports that rank in the top 50.

Combined, the Nehru and the Mundra Port are four times smaller than the port of Shanghai, based on 2018 shipping container volume.

Of the top ten ports in the world, seven are Chinese. China has spent much of the last 20 years setting itself up as the indispensable nation in the global supply chain. Now there is bipartisan consensus in Washington to change that, with the belief that China’s manufacturing prowess puts it on uneven footing with the rest of the world, not just the United States.

Sadly, as an export option for multinationals, the only area where India dominates the top 10 rankings is in air pollution. This is as much a potential blessing as it is a curse.

It’s a blessing because, like China, India should enact policies forcing companies to improve air quality. China, for instance, has higher taxes on coal companies and has put higher taxes on diesel fuel used in air travel.

China is also the world’s largest producer of electric vehicles and high-speed rail. While India may not be able to wave a magic wand and produce miles and miles of high-speed railroad tracks for maglev-quality trains, it does have the technological chops to make electric vehicles and produce solar panels and wind turbines, to name a few options.

India is also a more trustworthy partner on the tech side than China, giving the U.S. a solid partner in developing alternative sources of energy before China corners the market as it has already on wind turbines and solar panels.

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