As global supply chains undergo a dramatic restructuring, India stands poised to emerge as a key beneficiary. The country’s sophisticated industrial base and skilled labor force offer a compelling alternative to businesses seeking to diversify beyond China. However, according to Franziska Ohnsorge, the World Bank’s Chief Economist for South Asia, India must address certain key challenges to fully capitalize on this opportunity.
Speaking to Mint, Ohnsorge highlighted that South Asia, including India, lags behind most emerging economies in terms of portfolio flows and loans from global banks. She also pointed to average import tariffs that exceed the global average and several restrictions on foreign direct investment (FDI). “India’s average tariff is well above 15%, placing it in the top quartile globally,” she stated, urging the country to expedite customs clearance through full digitization to improve its Logistics Performance Index (LPI). India currently ranks 38th out of 139 countries on the 2023 LPI, representing a six-place improvement from 2018 and a significant 16-place jump from 2014.
The “China Plus One” strategy, gaining momentum among Western businesses and governments, aims to shift manufacturing and sourcing away from China to mitigate over-reliance on the world’s second-largest economy. Rising labor costs in China, escalating trade tensions, and the supply chain disruptions caused by the COVID-19 pandemic have accelerated this trend, presenting India with an opportunity to position itself as a competitive manufacturing hub.
However, the World Bank’s latest report underscores that most South Asian nations, including India, remain among the least open to global trade and investment compared to other emerging market and developing economies (EMDEs). Ohnsorge cautioned that without increased openness, India could miss a rare opportunity to accelerate its growth and development. “This is a very small window of opportunity where all these global supply chains are being reshaped. But if the region is so close it’s very hard to take advantage of that opportunity,” she emphasized.
The World Bank anticipates South Asia to remain the fastest-growing region among EMDEs, but acknowledges that risks such as extreme weather events, social unrest, and policy missteps, including reform delays, could disrupt this positive outlook. While the region holds substantial untapped potential for enhanced productivity growth and employment, the report stresses the importance of accelerating job creation, removing barriers to women’s participation, and promoting gender equality.
The report further suggests that lowering the cost of doing business could enable South Asian nations to leverage their significant remittance inflows for economic growth. Ohnsorge highlighted the potential impact of even small policy changes: “With such restrictive policies in such a large market with so much potential, even just a little opening might make a big difference.”
Addressing the conflict in West Asia and its potential impact on India, Ohnsorge indicated that while oil prices have risen, they remain close to the World Bank’s baseline assumption of just under $80 per barrel. “So far, there is no reason to revise that South Asia forecast, including India,” she stated.
In September, the World Bank revised its FY25 growth forecast for India upward to 7%, from its previous estimate of 6.6%. This revision reflects the Indian government’s sustained capital expenditure on infrastructure, increased household investments in real estate, a better-than-expected monsoon and agricultural output, and a rise in private consumption.
India’s potential to capitalize on the global supply chain reshaping is undeniable. However, the World Bank’s recommendations for tariff reductions and FDI relaxation are crucial steps to unlock its full potential and ensure that India benefits from this significant global shift.