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Supply chain diversification could help India and other emerging markets: Fitch Ratings

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NEW YORK : Supply chain diversification will help economies like India contribute more to global trade, Fitch Ratings said in a report released Wednesday, as it projected near shoring and friend-shoring to improve prospects for emerging market economies.

“India is the only country with a large and rapidly growing consumer market and vast labour force on a scale that rivals China for growth potential. Companies are likely to be attracted to access this market, with supply-chain considerations acting as a secondary benefit,” it said.

In its report last month, Fitch projected the Indian economy would grow 6.3% in FY24 and maintain a 6.5% growth rate until FY28.

It had also revised India’s potential growth outlook upwards, given the improvements in employment rate and higher labour productivity.

“Many Southeast Asian countries have competitive labour forces, where wages are considerably lower than China, including India, Malaysia, Indonesia, Thailand and Vietnam,” Fitch noted.

It also lauded India’s efforts to attract manufacturing via its production-linked incentive scheme, trying to leverage the China+1 strategy.

“Such investments hold potential for establishing India as part of global supply chains if companies see success in their initial investments in India and if it helps to foster an ecosystem of upstream manufacturing and industry,” it said, pointing to success stories like Foxconn and Apple.

The rating agency also lauded the government’s efforts in upgrading infrastructure to address gaps, which have been a concern for foreign investors.

While India’s share in imports to the United States has already risen to 2.7% in the first eight months of 2023, compared with 2.1% in 2017, and China’s share declined eight percentage points during this period, Fitch noted that further gains would be predicated on the success of factor market reforms in India.

“A number of factors may constrain India’s supply-chain ambitions, including a challenging business environment, protectionist tendencies, and skill mismatches,” it said.

Fitch also blamed India’s relatively high tariff system and labour skill gaps as concerns.

India has a highly skilled workforce in the burgeoning high-tech services exports sector. But in terms of broader educational quality and manufacturing technical skills, India lags behind many other prospective China +1 candidates,” it pointed out.

India competes with Southeast Asian economies on infrastructure quality but is far behind Vietnam regarding mean years of schooling and lower than Indonesia and Vietnam on productivity.

Fitch stated that states could play a more significant role in attracting higher FDI.

“Reform progress in India is likely to be gradual, but we expect the pace at the state level to accelerate and be an important factor in bringing greater FDI to India,” it said.

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