How India can steal China’s lunch

Good morning. This is Robin Harding, the FT’s Asia Editor, standing in for Veena while she enjoys a well-deserved break. The downside of that is I’m deeply ignorant about India, so you’re going to miss Veena’s wisdom. But the — rather dubious — upside is that I’m deeply ignorant about India, so I can at least offer an outsider’s perspective.

The crackdown on household credit is clearly an important reason for slower growth in India recently, and the FT has just published a big piece. But first, the topic of the moment: where are the opportunities for India in Donald Trump’s tariffs on China?

iPhones or vacuum flasks?

As of right now, Chinese exports to the US face a “reciprocal” tariff of 125 per cent, while India — along with everyone else — is exempt for 90 days. Smartphones, semiconductors and some other tech goods are also excluded, along with pharmaceuticals, at least for now. This is a remarkable moment: the world’s biggest manufacturer has been hamstrung in the world’s biggest market, so how can India turn the situation to its advantage?

A good place to start is with this excellent FT infographic, showing US reliance on imports from China by industry and market size. The best sectors to think about, I would suggest, are those where the US is heavily dependent on China and where the supply chain is not too complex. That throws up products such as vacuum flasks, festive goods and various low-end household appliances, but do spend a little time playing with the data yourself. There are hundreds of small factories in China producing for the US market, many of them foreign-owned, and right now they are considering whether and where to relocate. India should aim to be their most attractive alternative.

It is tempting, of course, to go after the big, prestigious industries such as smartphones, semiconductors and computer manufacturing — but I think there are reasons for caution. To start with, the tariff exemption will, if it lasts, increase China’s comparative advantage in these sectors. Look at it this way: a lot of Chinese labour is going to become available from tariff-stricken firms and that will lower costs in the sectors that are exempt. India has made some strides in attracting Apple’s supply chain and the US tariffs are an opportunity to build on that progress, but it took the Chinese industry decades to get to its current level of sophistication, so I don’t think the tech sector is the immediate prize.

Rather, it is all those other, smaller, less glamorous industries that are up for grabs. Their value-added may be lower, yes, but they are footloose, easy to relocate and they were already getting priced out of China even before tariffs.

Bluntly speaking, when I talk to manufacturers they say that Vietnam is their favoured alternative to China, but if I were the Indian authorities, I would be offering free tours to any business owner — American, Chinese or other — who’ll consider setting up in a local Special Economic Zone. Why not throw in some subsidies to cover the relocation? This is a once-in-a-lifetime opportunity and any costs will pay for themselves many times over.

Is targeting the lower end of China’s exports to the US the right strategy? Hit reply or write to us at indiabrief@ft.com

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Household debt ≠ economic growth

The Reserve Bank of India’s crackdown on unsecured lending was clearly one of the big factors behind the slowdown in India’s economic growth rate over the past 12 months or so, and my colleagues Chris Kay and Krishn Kaushik have some grim stories about loan sharks harassing debtors in yesterday’s excellent Big Read. Yet India’s ratio of household debt-to-GDP stands at a modest 39 per cent, compared with 64 per cent in China and up to 100 per cent in some advanced economies, so is there really anything to worry about? I think so.

Household debt is poorly correlated with wealth. It stands at 110 per cent of GDP in Australia but 38 per cent of GDP in Italy, 87 per cent of GDP in Thailand but 16 per cent in Mexico, according to the IMF. The best economic evidence suggests that increasing it pulls consumption forward in time at the expense of long-run economic growth. For example, the Bank for International Settlements estimates that a one percentage point increase in the household debt-to-GDP ratio tends to lower growth in the long run by 0.1 percentage point.

That makes intuitive sense. Easy credit tends to support consumption, not investment, sucking in imports, and once households have used up their borrowing capacity, they’re stuck with the repayments and have to cut back. There are no easy wins to be had by deregulating this part of the economy. The RBI seems to have got a firm grip on the problem and I hope it’s not tempted to relax it in pursuit of a consumption boom.

Go figure

The size of India’s economy will soon overtake Japan’s . . . but not quite yet.

My mantra

“I measure productivity on any given day by how happy my clients are with the advice I’m giving. It’s a feeling, not a figure.”

Devarajan Nambakam, co-head, India investment banking, Goldman Sachs

Each week, we invite a successful business leader to tell us their mantra for work and life. Want to know what your boss is thinking? Nominate them by replying to indiabrief@ft.com 

Quick question

Donald Trump has promised tariffs on pharmaceuticals in the next month or two. But will he go ahead? Take part in our poll.

Buzzer round

On Friday we asked: Which is the world’s best-selling spirits brand that rode to fame on the back of TV dramas and pop music?

The answer is . . . Korean soju, Jinro, which is riding the K-wave to cocktail bars and supermarket shelves around the world.

Aniruddha Dutta was once again quickest with the correct answer, though Yaman Singhania came in a close second and Lu Yin got it right as well. Congratulations to all.

Thank you for reading. India Business Briefing is edited by Tee Zhuo. Please send feedback, suggestions (and gossip) to indiabrief@ft.com.