UBS Evidence Lab inside: Does India have a second chance to replicate China?

Research

23 Apr 2019

That India seems to have missed out on manufacturing is becoming the consensus view. This is despite the demographic dividend from 7m people entering the workforce every year. A shift of manufacturing away from China is likely a long-term trend. The ongoing US-China trade war is only a new catalyst; rising costs and tougher environmental norms are here to stay. Our analysis and UBS Evidence Lab CFO Surveys (in India, China, Japan, Korea, Japan, and the USA) suggest this is a real opportunity.

What you thought you knew about India could change

UBS Evidence Lab Surveys across Asia indicate that many CFOs are evaluating options for shifting manufacturing out of China, with India emerging as one of the preferred destinations. Of respondents to the UBS Evidence Lab India CFO survey, 85% had received meaningful enquiries for foreign direct investment (FDI). The UBS Evidence Lab CFO Survey in the United States also points to greater FDI into India.

GDP growth of 8%-plus is possible; in a blue-sky scenario, it could touch 9%

Given the scale of China's manufacturing, India's scale gives it an edge to gain from any shift, more so in terms of power generation, infrastructure availability, and local market size, but counter-intuitively less so in terms of skilled labour. Many key success factors may also be less negative than is widely perceived; this is backed up by a UBS Evidence Lab survey as well. We built a framework to analyse the potential impact on India's GDP growth from various scenarios of market-share gain by India in the US and the rest of the world. Together with multiplier benefits, this could help India move towards 8%-plus potential real GDP growth in our upside scenario, and touch 9% in our blue-sky scenario. In these two scenarios, the boost to direct job creation could be 1m to 4m per annum (and a similar boost to indirect job creation as well). Higher exports would also lower India's external stability risks, potentially being reflected in lower currency volatility.

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