The economic paralysis in the pandemic has reinforced the idea that an economy is driven by market forces which are the direct responses of consumer behaviour. With the world giving a second thought on making one specific country a manufacturing hub, many South Asian countries are up for the grab of this opportunity to expand their trade policies and attract multinational corporations. Deloitte predicts that the economies of Malaysia, India, Thailand, Indonesia, and Vietnam, will inherit China’s crown of “world’s factory”. Before that, a plethora of reforms and provisions have to be introduced to host them. The ongoing border tussle between India and China works as an external push of sentiments, in Indians, which are very irrational if not patriotic.
A change in land-
India is running neck to neck with other Asian nations to grab as much as it can from this supply chain dislocation. Clearly, many of our competitors are way ahead of us in terms of infrastructure and ease of doing business, but all in all our competitors put together do not have a domestic market as large as India’s.
Pre Indo Sino border conflict, in March, India’s cabinet announced a production-linked incentive (PLI) scheme for the electronics sector with an outlay of over ₹40,000 crores.
“There is a clear negative sentiment against China. We have received requests for supply from India, if we play our cards right, we could double our exports (of electronic products) in three years’ time”
– Amrit Manwani, the President of Electronic Industries Association of India
The global firms that have shown interest to invest in India include US-based producers of medical electronics products Teledyne and Amphenol, and medical equipment makers such as Johnson and Johnson.
With brands like Puma, Asics, Lotto and Power, etc increasing talks to move their production from China to not just India but also ASEAN nations, and Shoemaker Woodland India showing positive signs looking at newer sourcing avenues including India- “The cost of production may go up by 5-10%, but we will absorb it” the government has reached out to more than 1,000 companies in the U.S. and through overseas missions, to offer incentives for manufacturers looking forward to exit China. With this push, India tries to redeem itself after many companies chose countries like Vietnam over India as an alternative destination when Trump started his trade war with China.
As the US is determined to disrupt the emerging red capitalist, Secretary of State Mike Pompeo said the U.S. was working with India, Australia, Japan, New Zealand, South Korea and Vietnam on how to “restructure these supply chains to prevent something like this from ever happening again.” Apparently, the administration was “turbocharging” an action to remove global supply chains from China.
Favourable policy regime and robust business environment has ensured that foreign capital keeps flowing into the country by taking impactful initiatives in recent years such as relaxing FDI norms across sectors such as defence, PSU oil refineries, telecom, power exchanges, and stock exchanges, among others.
2020 has witnessed crucial modifications in FDI norms- giving a mixed feeling of both contractive and expansive policies- from increasing FDI in Defence manufacturing under the automatic route (from 49% to 74%) to amending FDI policy for restricting opportunistic takeovers or purchase of Indian companies by neighbouring nations. The government got heavily criticized on the latter, as the MD of Volkswagen India comments “Putting restrictions or delaying the imports from China is a retrograde measure and an old socialist model held good in a closed economy”.
Survey conducted by Emerging Market Private Equity Association (EMPEA) on “market attractiveness” predicts that India is going to be the most attractive emerging market for global partners (GP) investment for the coming 12 months. This prediction stands dwindled with the economic disruption caused by the pandemic. India’s aim to achieve its goal of US$100 billion worth of FDI inflow, as of Budget 2019, out of which US$51 billion has come our way in 2019, is uncertain as of now.
Ease of doing business-
“This is the third year in a row that India makes to top 10 in Doing Business, which is a success which very few countries have done over the 20 years of the project, Without exception, the other countries that have done this are very small, population-wise, and homogeneous,”
Simeon Djankov, Director of Development Economics at the World bank, 2019
India was ranked 142nd among 190 nations “in ease of doing business” when Prime Minister Narendra Modi took office in 2014 and in 2019 it has jumped to 63rd position, as ‘Make in India’ campaign lays eyes on attracting foreign investment, boosting the private sector manufacturing in particular and enhancing the country’s overall competitiveness.
The following changes, according to the world bank, have had a significant impact on the entrepreneur spirit-
- Successful implementation of the Insolvency And Bankruptcy Code.
- Abolishing filing fees for the SPICe (Simplified Proforma for Incorporating a Company Electronically) company incorporation form, electronic memorandum of association, and articles of association, thus preventing delays of bureaucracy and bottlenecks.
Indian Economist, Kaushik Basu says that since 2004, whether owing to tax structures on imports of intermediaries, poor management of an open economy or a combination of these and more, Indian industries had begun to increasingly depend on foreign (read: Chinese) inputs for their final products. Thus, from the fan above you to the toy train your kids are playing with, has Chinese components as basic as plastic.
To make a mark in global supply chains, serious investments in infrastructure and governance is needed in India as it faces tough competition from elsewhere in South and Southeast Asia.
For Modi, a surge in investment would help shore up an economy facing slowdown and demand-curb, hence making up to the ground hitting a target to grow its manufacturing sector to 25% of GDP by 2022 from 15%. There is an urgent need to create employment after the pandemic has left 122 million people jobless and forced India to shut down all metropolitan cities.
India’s trade ministry has sought detailed feedback from U.S. companies on changes needed to make the country’s tax and labour laws more favourable to companies. Apparently, Modi’s federal government is working with the States to ensure long term solutions including developing land banks to ensure a quick start for units.
“India is a bigger market than Vietnam or Cambodia so it should be a bigger draw for investors looking to move operations out of China, but apart from ensuring land, water and sewerage, the most important change India needs to make is to give a clear guarantee that the government will not introduce retrospective tax amendments.”
-Ajay Sahai, director-general and chief executive officer of the Federation of Indian Exporters.
Despite Prime Minister Narendra Modi’s efforts to improve the ease of doing business, India still poses obstacles due to practices relating to both land and labor. Foreign companies wishing to build their own factories occasionally feel discouraged by these factors. It is crucial for India to act now to ease business prerequisites, reduce tax, regulate bottlenecks and aid foreign companies who are leaving China. Thus, the government has to take a more expansive stand in order to house the companies who enter India.
The road ahead-
“India needs to develop the art of visualisation… It’s not easy to uproot all of the current investment from China to India overnight,”
-Nishith Desai, Founder and Partner at Nishith Desai Associates.
The onus to boost the economy lies in our hands, though most of it is not recognised. It is because end consumers are solely responsible for market forces to act the way it does. Getting rid of Chinese products seem tempting but rubbishing the inventory/final goods is definitely not a viable option. We need to give the time the process needs, in order to do away with Chinese imports. Caught up in the changing relations between India and China, companies are also considering “China plus one”-select some low-risk or high-reward programs to try out in India, while maintaining your Chinese base. Partner with Indian firms as you get started. And sooner you can fine-tune and amplify your successes.
Simultaneously, the domestic market has to cope up with the foreign firms in terms of adaptation of technology and flexibility in training skills. For this, the educational institutes and skill training programs should be in tandem with the shifting structures.
All in all the economy is expected to gather pace once the pandemic is over and we might witness upsurge in foreign investment in the coming years as India offers a huge domestic market and cheap labour.
– Utsari Gupta Bhaya, Writer