![Luring manufacturing from the dragons den](http://media.assettype.com/iglobalnews%2Fimport%2Findiaglobalbusiness%2F2023-05%2F76d92fbb-7fae-4f20-8213-055fced457b3%2Figb_logo.jpg?w=480&auto=format%2Ccompress&fit=max)
India needs to improve infrastructure and address investor concerns over high taxes in order to attract global manufacturing companies that are looking for alternatives to China.
India received its highest ever foreign direct investment (FDI) inflow of $64.37 billion in 2018-19 but the government has set its sights much higher - FDI inflows of $100 billion within the next two years. A significant portion of this is expected to come from manufacturing companies looking for alternatives to their existing factories in China. The government has clearly declared its intent of taking advantage of the US-China trade war to present India as a viable destination for investments by multinational companies looking to shift their manufacturing hubs from China. Presenting the Budget for 2019-20, Indian Finance Minister Nirmala Sitharaman proposed transparent competitive bidding for international companies to set up mega-manufacturing plants in sunrise and advanced technology sectors in India. These investors will be provided investment-linked income tax exemptions and other indirect tax benefits, she said. This is an opportune time to open up and attract foreign direct investments in hi-tech sectors such as aviation, insurance and media, she added. “I propose to further consolidate the gains in order to make India a more attractive FDI destination: a) The Government will examine suggestions of further opening up of FDI in aviation, media (animation, AVGC) and insurance sectors in consultation with all stakeholders. b)100 per cent foreign direct investment (FDI) will be permitted for insurance intermediaries. c) Local sourcing norms will be eased for FDI in single brand retail sector.” Other sectors in which such investments will be encouraged include semi-conductor fabrication (FAB), solar photo voltaic cells, lithium storage batteries, solar electric charging infrastructure, computer servers and laptops, among others.
As multinational companies as well as large contract manufacturers look to rejig their sourcing options and their global supply chains to reduce their reliance on Chinese factories in the wake of US President Donald Trump's trade war against China, the US India Strategic Partnership Forum (USISPF, a leading US business advocacy group) has said there is a fantastic opportunity for companies looking for alternatives to China to invest in India.
A report in the Economic Times, India's leading financial daily, said about 200 US companies are seeking to move their manufacturing bases from China to India.
USISPF President Mukesh Aghi said, it was imperative for the Indian government to speed up the reforms process in a transparent manner. “I think that′s critical. We would advise to bring more transparency in the process and to make it more consultative because in the last 12 to 18 months, we are seeing US companies look at some of the decisions being made, either e-commerce or data localisation, as more domestic-oriented than global,” he told PTI. “We need to understand how we can attract those companies. And that means all the way from land issues to customs issues to being part of the global supply chain. Those are critical issues. There′s a whole plethora of reforms that need to go further down, and I think that is also going to create a lot of jobs. If you look, our member companies have invested over $50 billion in the last four years,” he added.
The trade war is making companies jittery about their over reliance on Chinese factories to feed their customers across the world and this is forcing them to look for alternative destinations to de-risk their supply chains. Hasbro, the world's largest publicly listed toy company, currently sources just less than two-thirds of all its toys from factories in China. Expectedly, Trump's tariffs have hit it hard. The company, which has licenses for popular franchises such as Frozen and Avengers, has said it is looking at reducing its reliance on Chinese-made goods to 50 per cent by next year. “We're increasingly spreading our footprint and adding new geographies for production globally,” Hasbro Chief Executive Officer Brian Goldner was quoted by news agencies. “So we feel very good about where we're going.” The company is looking at India and Vietnam as alternative sourcing bases for some of its popular toys. The jewellery sector, which sources billions of dollars worth of finished jewellery from China is also looking to shift its manufacturing base to India. “Some major global players in gems and jewellery are pausing to re-balance the business on account of the trade tensions. The natural shift in the manufacturing business will be to India from China,” Romesh Sobti, Chief Executive Officer at IndusInd Bank, a leading Indian lender, said in an interview. “India is a natural destination for the shift in business from China because of skilled labour and decades of experience in cutting and polishing diamonds,” added Colin Shah, Vice Chairman of the Gem & Jewellery Export Promotion Council, the apex industry body for jewellery in India.
India has for long tried to emerge as a global manufacturing hub but without much success. A combination of bureaucratic red tape, poor infrastructure, opaque systems and the absence of sufficient linkages with global supply chains were cited as major hindrances to India's manufacturing ambitions. Then, India also missed out on several waves of globalisation that drove the integration of East Asia, South East Asia and then China into the world economy. The US-China trade war, thus, offers India another opportunity to catch up with its Asian peers.
Over the last one year, the Trump administration has imposed three rounds of punitive levies on good worth $250 billion imported from China. Another round of levies, of about 10 per cent, on goods worth $300 billion will kick in on September 1 unless the two sides find a way out of this impasse, but that seems unlikely at this point. That means companies have to prepare for the worst. The dispute is already showing up in trade figures. Exports of goods and services from China to the US have fallen 12 per cent in the January-May 2019 period. This also makes "decoupling", the unravelling of economic ties between the US and China, and a division of the world economy into hostile blocs a real possibility.
Several companies with large manufacturing footprints in China are looking at Vietnam as the alternative. “We need permanent measures to avoid the risk of tariffs and be eligible for US government procurement,” A very senior executive of Japanese PC maker Dynabook was quoted as saying in the media. A subsidiary of Sharp, the company now plans to assemble all personal computers bound for the US - about 10 per cent of its total production - at a plant in Vietnam. Dynabook currently makes almost all its personal computers at a plant near Shanghai. Likewise, Japan's Nintendo will shift some of its production of its Nintendo Switch game system from China to Vietnam. Even HP and Dell, two large US brands that currently source their notebooks from factories in China are considering shifting a third of this production to Vietnam. Vietnam is, thus, stealing a march over its South East Asian peers in becoming home to many electronic and electrical equipment manufacturers. Apple is planning to move its headphone manufacturing set up to Vietnam while South Korean major Samsung Electronics has begun making smartphones in the country. Vietnam's shared border with China offers the country a major advantage. For one, it makes it easier to ship components from China to factories in Vietnam and vice versa. Then, having manufacturing units in Vietnam enables companies to also service a part of the Chinese market from these factories.
But Vietnam is a relatively small economy with only a limited availability of skilled workers. This will cap its ability to absorb massive amounts of FDI inflows. “Vietnam is full, completely full,” Spencer Fung, CEO of Li & Fung, the world's largest supplier of consumer goods, told Bloomberg.
And Eclat, a leading South East Asian textile manufacturer, thinks the era of 'Made in China' was over five years ago because the young Chinese people no longer like working in factories. This offers a massive opportunity for India. But Asia's third largest economy lags its South East Asian neighbours when it comes to winning the confidence of foreign investors. Consider this: Although it receives among the highest FDI inflows in the world, the figure is only 1.5 per cent of its gross domestic product. A World Bank comparison from 2017 shows Malaysia receives 3 per cent of its GDP as FDI while Vietnam receives 6.3 per cent.
Despite a smart jump of 65 places to the 77th rank in the World Bank's Ease of Doing Business Index, India remains a very difficult place to do business in. It is much more difficult to start a business in India than in any South East Asian nation. For example, it's a lot easier to start a business, register a property and enforce a contract in Vietnam, which is only about a tenth the size of the Indian economy.
Then, poor infrastructure, high logistics costs, rigid land and labour laws and a complex and adversarial tax system discourage foreign investors. For example, the recent tax increases at higher levels of incomes will discourage many foreign investors, leading figures from Indian industry, such as Mohandas Pai, Chairman of Manipal Global Education, and Kiran Mazundar-Shaw, Chairperson of Biocon, have said. Experts said this will be a major disincentive for foreign nationals to relocate to India as part of any programme to set up large manufacturing facilities in this country. Then, the levy of a tax on share buybacks by companies and the tax on dividend distribution means companies in India are subjected to an effective rate of taxation of about 48 per cent. This completely negates the cut in the headline corporate tax rate from 30 per cent to 25 per cent for 99.3 per cent of companies. India, thus, compares extremely unfavourably with South East Asian countries and China, which levy 20-25 per cent taxes on corporate incomes. “Unless there is a favourable tax regime and ease of doing business it would be challenging for industry to move from China to India,” said Gem & Jewellery Export Promotion Council's Shah. Industry bodies and experts have flagged these issues to the government but there is as yet no indication that there is any rethink on any of them. However, these have to be addressed urgently for India to emerge as a viable and attractive destination for companies looking for alternatives to China. On the positive side is the passage in the Lok Sabha of the Wage Code Bill, marking the beginning of labour reforms, the dramatic improvement in rankings on the Ease of Doing Business Index and the Global Competitive Index
A further improvement in India's position in the Ease of Doing Business Index is on the cards when this year's rankings are released later this year. Ongoing reforms in rules relating to land, labour and capital are in the works and will begin to show results once they are in place. The government has announced an investment of $150 billion over the coming five years to improve India's infrastructure and lift it to global standards. If it can address the tax-related issues and make tax administration more investor friendly, India will be well placed to attract a significant portion of the investment that is looking for alternatives to China.