COVID-19: How India sees economic opportunity in anti-China wave

Pranav Jalan
Wednesday, 20 May 2020

India is looking forward to seizing this opportunity and have reached out to over a thousand US companies. The Indian government has offered incentives for manufacturers considering moving out of China.

“All the world now, they have hatred for China. Is it possible for us to convert it into an opportunity for India?” Nitin Gadkari, the Union Minister for MSME, Road Transport and Highways, was quoted last month.

In April, India approached over 1,000 US companies, luring them to move their manufacturing unit out of China. The world’s biggest manufacturing country China has been vehemently criticised by the US for COVID-19 pandemic. The coronavirus outbreak that has infected around five million people globally has led to over 93,500 deaths in the country. The pushback against China has prompted many US companies to consider moving out their manufacturing units.

India is looking forward to seizing this opportunity and have reached out to over a thousand US companies. The Indian government has offered incentives for manufacturers considering moving out of China.

Among the businesses that India is trying to lure are medical devices giants Abbott Laboratories and Medtronic plc. Foreign investments can help the Indian economy to get back on its feet after an eight-week extended countrywide lockdown. The manufacturing sector in India contributes 15 per cent to the GDP. Attracting the American companies to shift bases to India is PM Modi’s attempt to lure the US companies to push the manufacturing sector pie to 25 per cent of the GDP.

The US is not the only country seeking to move manufacturing units from China. Japan is spending US$2.2 billion to help companies move out their units from China. European Union members are also planning to cut their dependence on Chinese suppliers.

“My read is that the network, if it pans out, will look to India and Vietnam to replace China in the global supply chain network,” Derek Grossman, a researcher at the Washington-based RAND Corporation, told Bloomberg. Grossman, who has held positions in the US Intelligence Community, believes it would be a rough fit in terms of replacing China’s immense capacities in terms of manufacturing and the US would hope India and Vietnam can quickly upgrade to match their dominant neighbour.

The economic impact of the coronavirus pandemic in India has been hugely disruptive. World Bank and credit rating agencies have downgraded India’s growth for the fiscal year 2021 with the lowest figures India has seen in three decades since India’s economic liberalisation in the 1990s. Goldman Sachs says India will suffer its worst recession since 1979. It said that the Indian economy would shrink by 45 per cent on an annualised basis this quarter and its GDP will slump 5 per cent this fiscal year.

The pandemic has exposed vulnerabilities in global supply chains; businesses have learned the risks of over-reliance on a single manufacturing network. So, the businesses not only from the US and Japan, are planning to expand their manufacturing units to various countries.

According to a recent report from Tokyo Shoko Research Ltd. found that roughly 37 per cent of more than 2,600 companies surveyed said that they were planning to move at least a part of their manufacturing to a country outside of China. As China’s manufacturing begins to shrink and every other nation around the world begins to look to other countries to source their goods from, who will be the biggest beneficiaries of this shift out of China?

Obviously, India has been trying its best to lure these companies, but the question is why India? Why would companies prefer India over any other country?

The Bloomberg report quotes Ajay Sahai, director general and CEO of the Federation of Indian Exporters, “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.”

Why cherry-pick China?

In the 1970s, China began shifting its economic policy away from communism and more towards capitalism. They soon began building special economic zones that would maximise productivity and efficiency. Once these zones were opened for foreign trade and investment, China’s economy began exploding. By the 1980s many companies started manufacturing products in China because it could make their product with a similar level of quality but with substantially lower prices if compared to manufacturing in the west. And this was mainly because of the extremely low wages that the Chinese workers made along with other factors like tax laws and import-export efficiencies. So, that is when everything began getting made in China.

By 2010, one-third of all products on the planet were manufactured in China.

According to the data on tradingeconomics.com, the average yearly wage of a Chinese worker in 1995 was 5,500 CNY, in 2010 it was 37,147 CNY, and in 2018 it raised to 82,461 CNY. So, this clearly means the cost of making products in China has become a lot more expensive than it used to be.  

Unlike China and Vietnam, India’s growth has not come from manufacturing; rather service-based companies like banking, retail and information technology. Except there is one economic experiment that began to run in 2014, and that was cell phone manufacturing. At the start of 2014, India was manufacturing around 10 million cell phones a year. By the end of 2019, India was producing roughly 115 million cell phones per year and quickly became the second-largest cell phone manufacturer in the world after China.

Taxes:

Corporate tax rate -

India

Vietnam

China

30% if gross turnover is more than 250 crores

20%

25%

 

The first reason why Vietnam will give a tough fight to India in luring the US companies is its corporate tax rate, which is even lesser than that of China. But obviously, 5 per cent won’t be the only deciding factor of setting up a manufacturing unit.

Opportunity:

 

The opportunity of a business is determined by the population and the income level of the country. Hence, it’s clear that Vietnam has a better GDP per capita which makes it come even closer to becoming the biggest manufacturing countries.

Infrastructure:

Vietnam spends 1.5 times more than India on their public infrastructure. Despite the opportunities in India, the massive challenge will be the investments in infrastructure and governance. The foreign policies and the political scenario will play a major role too.

GDP Growth Rate:

 

The GDP growth rate is a unit to measure the growth of the country's economy. Which in other words, means that it should show an upward trend, but in India's case, it's the opposite. Since, 2015 India's GDP has grown only in 2016, apart from that, every year, India has seen a decline in its GDP growth rate. This is not a good sign for an investor to step in such a market.

Labour Laws:

Labour laws play a very crucial role when foreign investments are considered. Labour laws in the west are far sterner as compared to that of Asian countries.

Not only Vietnam but Mexico is also a possible threat in attracting these companies. It is already becoming a more prominent manufacturing hub of the world. In 2017, Mexico's export to the US had increased by roughly 14 per cent, that is US$ 320 Billion. This is about 42 per cent of what China exports to the US. For Mexico, the proximity also plays a role.

One key advantage that India has is a young workforce and an extremely low cost of labour. Currently, in India, the average labour makes about US$5/day; meanwhile, the average Chinese labourer makes approximately $28/Day. This has made India a more attractive place for some companies to take a risk and manufacture their products in India, even if they run into some infrastructural problems along the way.

If India were to fix its infrastructure and capitalise on manufacturing in the same way China did in the 90s, India can emerge as an economic superpower of the world.

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