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Of late, global commercial firms with their manufacturing facilities in China are having second thoughts on the continuance of their business activity in the region. The ever increasing domineering approach of Xi’s government coupled with a surge in labour costs and the US-Sino trade war has given a hard time to businesses carrying on manufacturing activities in the country. Furthermore, with COVID-19 spill over into the bargain, there has been an expedited shift in global approach scramming away from the socialist country. This in turn has opened new avenues for Southeast-Asian countries to provide for a favourable destination in relocation. India and Vietnam have been the front runners in attracting these relocating units. However, despite the former’s unmatched capabilities, the latter has been a preferred alternative. This post thereby analyses, why despite numerous advantages, the world’s largest democracy is still unable to woo manufacturing facilities as yet.
The Might of Make in India
To begin with, the Indian government in a bid to seize the opportunity created by the US-Sino trade tussle has been highly spirited on its policy front. Pursuant to its commitment, the government in 2019 allowed for a 100% FDI in manufacturing contracts, which made India one of the largest recipients of foreign direct investment with a total investment worth US$ 49 billion, a substantial increase of about 16% from its previous year i.e. 2018. The numbers for Vietnam, on the other hand, which had witnessed a 10-year high increase in FDI worth US$38 billion, were still low in comparison to India. It is also worth mentioning that the R&D expenditure as a percentage of GDP for Vietnam is also less to that of India. The availability of labour too is also at a rate cheaper in India than that for Vietnam. Moreover, India has also started revisiting its age-old labour laws with an intent to ease economic constraints and ensure greater flexibility to investing companies. To add further, manufacturers in the South-East Asian country are also heavily dependent upon the import of raw materials from China for producing goods, while India, on the other hand, is self-reliant in its production of raw materials.
India and Vietnam, being coastal countries, the up-gradation of port infrastructure has been the top priority for both governments. Since ports are in some sense the significator of commercial activity in a region, Vietnam, here too ranks lower on the Quality of Port Infrastructure Index, in comparison to India, thereby providing an edge to the latter in the shipment of cargos from its coastlines. The cost of transportation along these coastlines to countries like USA, Japan and South Korea is also interestingly cheaper than that from Vietnam, adding one more advantage over its Southeast-Asian Counterpart.
Shift Sentiment Against India
Despite the above stated unparalleled advantages, the shift sentiment has been against India. This can be marked by two key developments. Firstly, the intensification of the US-Sino trade war in 2018-19 which compelled the companies to shift their production facilities from China. It was during this period that a total of 56 companies shifted their manufacturing units from China. Of these 56 companies, 26 decided to establish their manufacturing units in Vietnam, 11 preferred Taiwan and 8 decided to establish units in Thailand, while India could only manage to have a dismal, 3 companies. Secondly, the COVID-19 pandemic, which only added fuel to fire to the largest democracy’s dream of becoming a global-manufacturing giant. These incidents indicate the present exigency regarding democracy’s approach towards influencing businesses and thereby requires redressal.
Thus, from an Indian standpoint, the country has to understand that this shift to Vietnam is not merely induced by the latter country’s policies attracting FDI, but rather by a holistic approach towards ensuring a business-friendly environment. For instance, India has a Political Stability Index of -0.96 as compared to Vietnam which has a score of 0.2 on the same Index. Vietnam provides for better political stability due to its constitutional scheme as compared to India. Moreover, the inflation rate which determines the cost of raw materials and other related costs is 7.66 for India as compared to 2.796 in Vietnam for the year 2019.
Another important factor that companies mainly focus on is the currency fluctuation rate, lesser the fluctuation, more is the stability. The fluctuation rate in the last 10 years in India is 2.5 times that of Vietnam. The labour force participation (Female to Male) too is better in Vietnam as compared to India. Furthermore, the strengthening of free trade agreements with countries like China, Japan and lately with the European Union, is signalling a promising growth for the Southeast-Asian country in attracting relocating units.
However, it is also the approach of Vietnamese government during the outbreak of COVID-19 which has been lauded across the globe, with the country having an infection rate of only 11 daily confirmed cases per million population. Further, in order to provide support to the companies government had also extended a credit support package worth US$10.8 billion in early March. This becomes especially relevant since the global recession inflicted by the present pandemic has left developing countries shattered, while Vietnam on the contrary, continues to thrive with a predicted growth rate of 2.7 per cent, arguably better than its competing economies.
Thus, while facts suggest that the shift sentiment might not really be in India’s favour at the moment, it becomes imperative for the world’s largest democracy to take on the leading role by laying stress upon providing real incentives to foreign firms and helping them set foot in the country. The overarching point that has been conveyed, is that, despite being a bigger economy with even greater human capital, India is only trying to cope-up rather than dominate. With real incentivisation and suitable reforms the country definitely has the potential to deliver great results, both, for the world as well as its citizens. However, missing out the opportunity today, as has been put forth by writers across forums, would only mean, watching the living standards of Southeast-Asian countries dash past our present generation, in the same way as our earlier generation watched the living standards pitch ahead in China.
ABOUT THE AUTHOR(S)
Shivam Tripathi is a final year law student at Maharashtra National Law University, Nagpur.
Aniket Taywade is a final year law student at Maharashtra National Law University Nagpur.
In Content Picture Credit: The Inverell Times