Washington DC, April 29, 2025 --  

Nationalist posturing might once again wreck a golden opportunity for India's economy.

When Apple hatched a plan to move US iPhone assembly from China to India it was a huge win for the world's most populous nation.¹ For over three decades, India has watched with envy at China's meteoric rise. As recently as 1990, India's GDP per capita was ahead of mainland China. Not anymore. China's manufacturing boom has grown its average income to over five times that of its southern neighbor.

America's tariff war provides a huge opportunity for India as Trump's primary target is China. Lower tariffs gives India a competitive advantage, giving it a chance at catch-up. Could India grow even richer than China three decades from now?

Seizing this opportunity is partly up to Indian Prime Minister Narendra Modi. Modi leads the Bharatiya Janata Party, which has ousted a coalition dominated by the independence-era Congress Party in 2014. Modi's rule has seen much needed reform. Modi's BJP ended the statist policies of Congress that created India's stifling bureaucracy and economic stagnation, moving toward more free market ways. But Modi also has an ugly nationalist streak. He has incited violence against India's Muslim minority and stoked tensions with neighboring countries. These two faces of the BJP are in conflict -- its free-market orientation could harness the tariff war opportunity, while its nationalism could wreck it.

Even as Apple was considering the move of iPhone production to India, militants were planning a massacre of tourists in a resort town in Indian Kashmir. An attack led to the deaths of 26 people and raised tensions with Pakistan, the host of militant groups seeking Pakistani control of the disputed region. India has since announced a withdrawal from a water treaty with Pakistan, allowing diversion of rivers supplying Pakistan's agricutlure.² Pakistan, which like its Indian rival is nuclear armed, warned that any diversion of water will be treated as an act of war.³

Risking nuclear war is a sure-fire way to kill a manufacturing boom. A wise statesman would work to reduce tensions and not wreck today's golden opportunity. But Modi is better known as a hothead nationalist than a wise statesman, so he may not do the right thing. Indeed, last time Modi faced such a decision point, he made exactly the wrong call.

Back in the summer of 2020, the Chinese smartphone brand Xiaomi was the one setting up factories in India.⁴ Other Chinese manufacturers saw this and eyed India for its far lower labor costs than China. Then as now, India faced a golden opportunity. And then as now, this was put into jeopardy by violence in the mountains of Kashmir.

The 2020 violence was on the barren "Line of Actual Control "where Indian and Chinese forces faced off along their disputed border. On June 15, hand-to-hand fighting broke out between hundreds of Indian and Chinese soldiers in the barren Galwan river valley and escalated to fights with iron rods and rocks, leading to dozens of deaths on the Indian side.⁵ Instead of quietly working to reduce tensions, the Modi government ramped up anti-Chinese rhetoric, banned Chinese apps like TikTok from India and expelled Chinese diplomats and industrialists.⁶ A golden opportunity to boost local manufacturing by Chinese business was lost for a fistfight over a desolate stretch of uninhabited rocks.

It is easy for outsiders to criticize, but Americans are in no position to act smug. The constituency of Modi's BJP has much in common with the constituency of the Trump-era Republican Party. Its supporters are divided between less educated people who are easily whipped up by nationalism and a thin veneer of educated businessmen willing to look the other way at ugly nationalist politics. Modi, like Trump, is prone to throw business interests under the bus when things get ugly.

Will Modi do so again this time? The good thing about the withdrawal from the water treaty with Pakistan is that it is nothing but a paper act. So long as the water remains flowing, Modi has placated his supporters by making the appearance of doing something without hurting Pakistan. A smart leader would leave well enough alone and go back to business as usual.

But even if Modi does resist his nationalistic urges (and pressure from his nationalist supporters), India's manufacturing ascendance is still not guaranteed. India faces major challenges in manufacturing growth. It has a shortage of skilled labor. It is dependent on imports of components for its supply chain, many from China. And China is unlikely assist India's efforts to displace it, especially given that relations have never recovered from 2020's gigantic fistfight.

These are the problems that Modi must solve in order to seize India's new manufacturing opportunity. The last thing he needs is another giant fistfight -- with either China or Pakistan. For the sake of India's economic future, let's hope that cooler heads prevail.

Notes:

1. Guardian, Apple ‘Aims to Source all US iPhones From India’, Reducing Reliance on China, April 25, 2025

2. NPR, After Kashmir Attack, India Downgrades Ties With Pakistan and Suspends Water Treaty, April 23, 2025

3. Islamabad Post, ‘Diverting Pakistan’s Water will be Treated as Act of War’, Islamabad Warns New Delhi, April 25, 2024

4. Forbes, Xiaomi Is Proudly ‘Made In India’, June 29, 2020

5. Business Today, India-China Border Clash: What Happened on June 15-16? June 17, 2020

6. South China Morning Post, Don’t Blame China for India’s Manufacturing Decline, March 31, 2025