India Finally Gets Untracked to Seek FDI, Maybe

But leapfrogging into manufacturing is a long and difficult jump 

By: Neeta Lal

After three decades since the close of the License Raj with little to show for the effort to woo multinationals to relocate their supply chains from China to India, Prime Minister Narendra Modi, who has been steadily loosening investment restrictions over the past five years, may finally find at least some success.  

Facebook's US$5.7 billion investment in Reliance Jio, an Indian telecommunications company, in the midst of the coronavirus pandemic has raised hopes amid the country’s flagging industrial sector that the crisis could help India attract foreign investors and stirred Modi last week to exhort India to “rise to that occasion” and make the country “the global nerve center of multinational supply chains in the post-Covid-19 world.”

According to US India Strategic and Partnership Forum President Mukesh Aghi, this is India’s chance. “At the moment, not only US companies but other companies too are looking for an alternative to China,” Aghi told local media. “If India plays its cards right, a lot of companies can move into India.”  

Hundreds of foreign companies from sectors such as diverse as mobile phones, electronics, medical devices, textiles, and synthetic fabric are said to be considering plans to shift manufacturing operations from China to India as China’s cost of doing business continues to rise and continuing US government antipathy shows no sign of letting up, particularly over products that could be vulnerable to the insertion of spyware, an industry source told Asia Sentinel.

That may be fanciful. But if this pans out, the sudden appearance of foreign companies on India’s doorstep bearing investment dollars is a welcome relief for a country dogged for decades with red-tape, a suspicion that foreigners are trying to empty Indian pockets and a pugnacious bureaucracy that has defeated the most avid foreign investors.

And just as the party seemed to get going, as usual, the government took away the punchbowl with an announcement as of April 17 that it would change its foreign direct investment policy to protect domestic companies from "opportunistic takeovers/acquisitions” due to the pandemic. The policy appears to be aimed primarily at China, whose own manufacturers are seeking a way out from under the US magnifying glass.

Although the new policy doesn’t restrict markets, the Ministry of Commerce and Industry, with a long and depressing record of discouraging investment, is now in charge of approvals.  

Nonetheless, “discussions are on at various stages between global CEOs and Indian authorities,” an industry ministry source told Asia Sentinel. “More global companies are looking to diversify their manufacturing and production dependencies to cushion themselves against any future emergencies.”  

For many companies, the shift from China to other parts of the world was already underway in the pre-pandemic period thanks to rising input and labor costs exacerbated by US-China trade tensions although investment into China remains formidable. In December 2019 alone, FDI totaled US$56.3 billion. To put that into perspective, by contrast FDI for the most recent entire quarter for India was US$26 billion.

The virus seems to have catalyzed the transition. Japan, for instance, announced a US2.2 billion incentive program for Japanese companies to shift production from China to third countries like India. The Japanese office automation firm Ricoh moved its production of printers from Shenzhen to Thailand last July. Japanese carmaker Mazda partly shifted its production from Jiangsu in China to Guanajuato in Mexico in the midst of the pandemic outbreak to ensure a smoother production line. Panasonic is also seeking alternatives to produce electronic devices outside of China while Nike is contemplating shifting its bases to Vietnam, Thailand, or other South-East Asian nations.

A recent survey of American CFOs by the UBS Evidence Lab found that 76 percent of its respondents had either started diversifying manufacturing away from China or were planning to because of protectionist policies. The same survey also found that India is among the top potential destinations in Asia for this manufacturing shift. Hinting at greater commercial synergies with Delhi, US secretary of state Mike Pompeo also told journalists last month that India and the US “want to mesh the supply chains … that are important for our national security.”

According to the Swiss Bank Corporation, India’s foreign direct investment pipeline has doubled to US$175 billion versus $87 billion last year from sectors like construction, electronics, infrastructure, textiles, food processing, and pharma. And though the Modi government is still to announce any concrete new measures to woo firms planning to move operations from China, in March a production-linked incentive scheme was announced for the electronics sector with an outlay equivalent to US$5.281 billion.

Be that as it may, many firms find the lack of support for their manufacturing processes in India irksome including Apple, which announced the manufacturing of iPhones in 2016. It has since been producing four models in the country, albeit only the older models. The new models are still manufactured in Shenzhen, which scores over India in terms of labor, with higher skill sets as well as an extensive network of suppliers instrumental to the logistics process involved in manufacturing.

India is battling other demons too to fully leverage opportunities thrown up by a currently dysfunctional China. The Indian economy, already struggling pre-pandemic, now faces its lowest growth in 40 years, a possible doubling of its fiscal deficit and job losses that, by one estimate, could exceed 100 million.

“Despite intentions to scale up manufacturing, the industry's contribution to the GDP has plummeted,” said Prateek Khandelwal, former associate professor Economics, Delhi University. “Cumbersome regulations and policy, be it labor, land or environmental clearances have been big bottlenecks for foreign firms operating out of here,”

The academician adds that India has also struggled to implement vital taxation and customs policies while also lacking a culture of manufacturing that characterizes more developed nations like Germany and South Korea. “This severely compromises our manufacturing competitiveness,” he said.  

In an article for Bloomberg, “Why factories leaving China aren't going to India.” Irene Yuan Sun wrote that the fantasy, most common in India, that a country might somehow “leapfrog” from a rural, agriculture-heavy economy straight to a services-based economy is just that: a fantasy….India must abandon its overconfidence that investors will come simply for its large population.”

While India needs foreign investors to bring capital, technology, and markets with greenfield projects as well as private equity that funds start-up firms now more than ever, it still has to get its act together to emerge as a strong competitor to China, say analysts.

“The country has simplified its corporate tax structure, yes, but its labor laws and land reform leave much to be desired. A level playing field for foreign investors, as well as lack of transparency and stability in policy-making, are major handicaps still,” said Rohini Jhangiani, a corporate lawyer.  

It would also help if the government stops publicly belittling foreign investors as well as bilateral/ multilateral trade and investment agreements. In January, a day after Amazon announced its intention to invest a fresh US$1 billion in India, the Union commerce and industry minister Piyush Goyal implied that the company indulges in predatory pricing and unfair trade practices.

“It is not as if they are doing a great favor to India when they invest,” Goyal said. It mattered little to the minister that the company’s CEO was in India at the time.

A new global manufacturing landscape is already starting to take shape, and will gather further momentum post-pandemic given the urgency global companies are exhibiting to scout for more viable and sustainable manufacturing hubs other than China. But will India be that answer? The jury is still out on this one.

Neeta Lal is a longtime Asia Sentinel contributor and Delhi-based Editor and senior journalist. She tweets @Neeta_com