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Opinion | India’s distant dream of becoming the world’s big factory

Without market reforms and a clear path out of our lockdown, we may not be able to take China’s place

While the unfolding global covid-19 crisis has brought considerable hardship and downsides everywhere in the world, some emerging economies see in the current situation an opportune moment to increase their importance in global commerce. One such is India, which, if reports are to be believed, is attempting to woo 1,000 or more global multinational enterprises (MNEs) from their current production bases in China, in the hope of enticing them to relocate to India.

The aspiration is obviously worthy, although it comes a little late, given that the moment to have launched such a campaign was last year, when the US-China trade war really heated up. The iron then would have been hot. But, better late than never. The real questions are twofold: One, do major MNEs actually wish to leave China? And two, if some of them do, how many will actually migrate to India? Unfortunately, the evidence we have offers little scope for optimism on either question.

For instance, as noted by columnist Debashish Basu in Business Standard, a survey by the American Chamber of Commerce in China, conducted in March, suggests that 70% of firms claimed that they had no intention of moving out of China in terms of production or broader supply chain optimization. More recently, analysts at Morgan Stanley, an investment bank, came to similar conclusions, based, in part, on the reasoning that even large MNEs at present are conscious of keeping costs down, and making a big move out of China would be very costly and offer uncertain gains. This is the stance of MNEs. As for the Chinese government, recent news reports indicate that the authorities in China are giving foreign firms equal access to any state-support policies that are available to locally-owned firms. With a limited “push" factor from firms, this is a “pull" factor which, other things being equal, may induce firms to remain in China.

On question two, even assuming that some important MNEs may be planning to exit China, it is not at all obvious that India is a natural destination for them. The instinct of many firms will be to seek hospitable countries “in the neighbourhood", with Vietnam being an obvious likely beneficiary. Indeed, that country has already done well eating into some of the textile and clothing manufacturing from China that had already taken a hit as an early fallout of the US-China trade war. Even India’s neighbour, Bangladesh, captured a piece of the action, but India: very little. Data sets bear out the hypothesis that India is presently unattractive for foreign investors, judging by foreign direct investment (FDI), which would be the correct measure in this case.

Thus, as Basu notes, data released by the department of industrial policy and promotion shows that inward FDI in India declined in fiscal year 2018-19 for the first time in six years. This is not propitious for the prospect of a big uptick in FDI coming out of the current crisis. This is corroborated by anecdotal evidence and conversations with large investors, who are wary of getting into India in a big way at the moment—indeed, many are unwinding portfolio investments in the country, and a new large inflows of FDI seem extremely unlikely right now.

The reason for this reluctance is rather obvious. Despite some marked improvements over the years since the initial spurt of economic reforms in the 1990s and early 2000s, India remains an unattractive place for foreign investors, apart from the one obvious magnet, the large size of its domestic market, with the much-vaunted largest middle class in the world. Yet, even the force of this has weakened, as demand has collapsed in India as much or more than elsewhere. On current trends, the great Indian middle-class consumer is not going to be spending too much in the near future, and he or she is not, therefore, going to be a big draw for footloose MNEs looking to escape China.

What is more, global factors weigh down on the prospects of a big shift from China to India, or anywhere else for that matter. As earlier noted, MNEs are short of cash, and are not looking to make large and expensive—and risky—new investments at present. China may not be ideal, but it is a known quantity, and weathering the storm on Chinese shores may just be the least bad option for many at the moment. Indeed, many MNEs are contemplating a “China plus one" strategy—keeping a primary presence in China, and branching out their secondary operations elsewhere. If even some of this comes to India, it may be slim pickings indeed.

There are additional India-specific constraints to consider. India is about to enter its lockdown 4.0, and there is no prospect of any immediate return to normalcy. Under lockdown conditions, the notion that large MNEs will make substantial investments in productive capacity in the country is simply risible. This is especially so given that the protracted shutdown has failed to contain coronavirus—India seems nowhere near “flattening the curve" of infections.

India needs to intelligently prepare an exit from its lockdown, and must get serious about its unfinished reforms agenda. Temporary measures in particular states with sunset clauses are not a magic bullet. Until then, enticing large investments from China and breaking into global supply chains in a signifiant way will remain a distant dream.

Vivek Dehejia is a Mint columnist

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