Exploring the post-election landscape for reshoring to India

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India's advantages over Association of Southeast Asian Nations (ASEAN) and other regions from a reshoring perspective range from a large domestic market to government support for long-term export growth, demography and wage costs, and lower operational risks in some categories.

On top of a significant domestic market, the Indian government has been focused on building the country's manufacturing base to support long-term growth. That's included a wide range of sectors including electronics and pharmaceuticals.

Political stability and leadership

India's recent parliamentary elections have resulted in Prime Minister Narendra Modi's continued leadership, although the Bharatiya Janata Party (BJP) has lost its majority and now relies on coalition parties for stability and policy passage.

An assessment of initial vote share and seat share data following the parliamentary elections indicates employment availability has been a voter consideration. The impact of this issue on voter outcomes is likely to further drive government intent to promote policies that would help with employment generation, particularly via manufacturing initiatives and to transition labor away from agriculture.

From a supply chain perspective, key roles including ministers for industry, trade and infrastructure are unchanged. Still, the necessities of maintaining a coalition means cabinet reshuffles remain likely to accommodate coalition partners. Implementation of policies related to supply chain objectives will involve greater need for consensus-building with coalition parties and more prominent role of state governments, whose parties are crucial to maintaining central-level political stability.

India's supply chain policies have been designed to deliver manufacturing growth driven by both domestic market and export market considerations. While the election results are likely to affect the pace of domestic reform, there is broad cross-party consensus to prioritize manufacturing initiatives, and there is little to no change in India's attraction as a center for supply chain investments.

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The Production-Linked Incentive Scheme

India's Production-Linked Incentive Scheme (PLIS) provides subsidies to 13 sectors over a five-year period from 2020 to 2025. Covered sectors include electronics (including semiconductors and telecoms equipment), pharmaceuticals, autos (both conventional and EV), home appliances, steel and apparel. Payments are made as a percentage of incremental sales above the base year, designed to encourage investment in new manufacturing facilities.

One outstanding question is whether further tranches of incentives will be made available after 2025. The system's success — measured by increased exports in key sectors — will likely mean its continuation, though the needs of coalition government could mean a shift in implementation on a state-by-state basis.

The incentives-led growth has also allowed Indian phone producers to outperform the global peer group more recently, with total exports rising by 46% year over year in the past three months. The assembly of phones has led to a surge in imports of parts for phone production, too, with imports of phone parts having increased by 73% in the 12 months to April 30, 2024 versus 2021, according to our data. It's likely that future government policy will look to encourage the onshoring of components.

Domestic semiconductor development has been identified as a strategic objective in India. Indian manufacturers face competition for equipment from those in other countries which have significant state-backed investment programs including the US, EU, Japan and South Korea. There's also few choices available for the latest chip-making machines in terms of suppliers.

Trade policy and tariffs

The previous Modi administration was an active user of trade policy but had signed only limited free trade agreements (FTAs) in the past five years. This is likely to change in the new term with the government aiming to expedite FTAs with several countries, primarily in Asia-Pacific, the Middle East, and advanced economies like the US, the UK and the EU.

The prior government signed a free trade agreement with the European Free Trade Association (EFTA) members in March 2024, including Iceland, Liechtenstein, Norway and Switzerland. That includes removing duties on imports of industrial goods over the next 15 years; it took 16 years to negotiate.

The Indian government previously withdrew from negotiations to join the Regional Comprehensive Economic Partnership (RCEP) in 2019. The country cited concerns about its merchandise trade deficit with the other members — including mainland China — but could join the area at a later stage.

Indian wariness toward multilateral trade agreements is likely to continue, prioritizing bilateral agreements instead where Indian negotiators assess they have greater clout over details pertaining to trade in services, exporting India's digital infrastructure, and negotiating environmental and labor standards.

The active use of tariffs to support industrial policy has been prevalent during the last Modi administration, sometimes with mixed effects. Laptop computer tariffs had to be withdrawn, electric vehicle tariffs may need to be increased and food export controls' future will depend on the monsoon season. Losses for the BJP among farming constituencies probably indicate dissatisfaction with export restrictions.

Drivers of investment in infrastructure

Logistics networks globally have been disrupted over the past year by a mixture of economic and geopolitical factors. Shipping rates for Indian exporters to Europe and the US have been disrupted by shipping via the Red Sea. These disruptions contributed to shipping rates from India to the US east coast to rise to a peak $5,200 per forty-foot equivalent unit (FEU) in February 2024 versus $1,850 per FEU in September 2023, according to S&P Global Commodity Insights data.

The addition of new shipping services, noted by Journal of Commerce, more recently has subsequently led rates to slump to $1,900 per FEU as of June 17, 2024, while those on North Asia to US East Coast routes have surged. That may give exporters from India a competitive advantage — albeit short-lived given shipping lines tend to trim services when rates dip — versus those in mainland China. The reallocation of services, however, has led to a surge in intra-Asia rates, with shipments from North Asia to India having risen, greatly increasing costs for Indian importers.

On top of volatility, Indian exports of containerized freight are forecast to grow by 4.3% annually between 2024 and 2034, our forecasts show. The need to support ultra long-haul growth increases the need for investment in deep water ports and requires the availability of more shipping liners to India-outbound routes on a consistent basis.

Investments in ports have been a consistent policy for the prior Modi administration and appear unlikely to change given Sarbananda Sonowal remains Minister of Ports, Shipping and Waterways — and that coalition partners remain in favor of port expansion to support supply chain ambitions. Tangible outputs can be seen with new facilities at Kerala port reported to be close to opening, but coalition partners — especially from Andhra Pradesh — are likely to demand greater investments along their respective coastlines.

A newer policy comes in reports that the Indian government wants to support the building of 1,000 new container and other cargo vessels over the next 10 years under the auspices of a new, state-owned shipping firm. The existing container lines will provide stiff competition for India's nascent shipping firm, not least through their shipping alliances.

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This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.