India File: Picking the right fights in manufacturing

Reuters

07-05-2025

Car panels are welded using robotic machines at the manufacturing plant of Maruti Suzuki in Manesar, in the northern state of Haryana, India, September 26, 2023. REUTERS/Anushree Fadnavis/File Photo Purchase Licensing Rights , opens new tab
(This was originally published in the India File newsletter, which is issued every Tuesday. Sign up here to get the latest news from India and how it matters to the world.)
As global supply chains start to break apart and reassemble under new tariff realities, could India set itself up to be among the winners? Which sectors could draw global manufacturers? That's the focus of our analysis this week.
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And in the aftermath of the Kashmir attack, India begins to raise the capacity of hydroelectric projects in the Himalayan region after suspending a 1960 water-sharing treaty with Pakistan.
THIS WEEK IN ASIA
SEMICONDUCTORS VS SMARTPHONES
India's age-old but as yet unfulfilled hopes of building up its manufacturing sector have another window of opportunity, as long-established global supply chains snap under the strain of U.S. President Donald Trump's tariff wars.
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India is working to close an early trade deal with the U.S., offering rare concessions but also seeking favourable tariff treatment for labour-intensive sectors, Shivangi Acharya and Manoj Kumar reported. Read here for the details.
Against this backdrop, two unrelated developments drive home that India will have to choose its manufacturing battles carefully to lock in gains from a once-in-a-lifetime trade and supply chain reshuffle.
The first is a setback to India's attempt to become a semiconductor manufacturing hub. Billionaire Gautam Adani's group has paused talks with Israeli partner Tower Semiconductor for a $10 billion chip project after concluding it did not make commercial sense . Indian software firm Zoho's plans to expand into chip manufacturing have also fallen through.
Despite the government's attempts, including 760 billion rupees ($9.00 billion) in state subsidies to set up new factories, India has yet to get any real traction in semiconductor manufacturing.
But in smartphones, it's a different story.
Apple Inc. is considering moving to India all its iPhone production for the U.S. market. Indeed, it has already been accelerating India's output and exports in the lead-up to the tariffs' implementation.
ROOM FOR OPPORTUNITY
India has not been spared from U.S. tariffs but the rates are far below those imposed on China, and the shift of output to India may already be showing up in macroeconomic data.
In April, India's export orders grew at the second-fastest pace in 14 years. Whether this reflects a " tariff front-run " during the 90-day pause in Trump's hefty "reciprocal tariffs" or the beginning of a full-on shift in production will be judged as more detailed export data flows in, Capital Economics said in a note on Friday.
But India is well-positioned to become an alternative to China as a supplier of goods to the U.S, said Shilan Shah, deputy chief emerging market economist at Capital Economics. "More than 40% of India's exports to the U.S. are similar to those exported by China," he said.
According to Nomura, there is growing anecdotal evidence of trade diversion and supply chains shifting to India due to higher tariffs on China and other competitor nations. For now, this is visible in low- and mid-tech sectors such as consumer electronics, textiles and toys, economists Sonal Varma and Aurodeep Nandi wrote in a note on April 30.
But there are spoilers that could trip up this opportunity.
One is the need for reforms that would make doing business in India easier, such as simplifying customs processes and speeding up the clearance of shipments through Indian ports. Another, which would be tougher to overcome, is India's dependence on imported components from China in major sectors such as electronics and solar equipment.
Are you seeing signs that India is moving fast enough to capture the opportunity created by the global trade shuffle? Write to me at [e-mail]
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MARKET MATTERS
India's weighted average call rate easing towards RBI's SDF rate
The Indian central bank's plan to buy 1.25 trillion rupees in government bonds in May, following similarly large purchases in April, has pulled down overnight interbank lending rates below the policy rate.
This, analysts say, is acting as a de facto interest rate cut over and above the 50 basis points in cuts announced by India's Monetary Policy Committee so far this year.
There is room for further rate cuts , but with caution, an external member of the committee told Reuters.
The liquidity infusions have brought down borrowing costs, leading to a rush of bond issuance
THE WEEK'S MUST-READ
India has begun work to boost holding capacity of reservoirs at two hydroelectric projects in the Himalayan region of Kashmir. Last month, New Delhi suspended the 1960 Indus Waters Treaty with Pakistan after an attack on tourists in Kashmir.
Read more in this Reuters exclusive
Pakistan has denied India's accusation that it was behind the attacks and is preparing to challenge the suspension of the treaty, which ensures water for 80% of Pakistani farms.
($1 = 84.4190 Indian rupees)
By Ira Dugal; Editing by Edmund Klamann
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