The current pandemic couldn’t have come at a worse time for India (not that there is a good time for a global crisis to occur. Ever). Experiencing ongoing slowdown, the country’s poor economic performance is indicated by its below 5 percent per annum GDP growth. The Covid-19 situation, however, might just be a blessing in disguise.
The onset of coronavirus has triggered global pushback against China and international companies have had a change of heart. When it comes to their operations and supply chain in China, many foreign firms are now looking for an out. India is deemed as the next best alternative.
Here are other reasons that added fuel to fire:
While “cheap labour, large SEZs, favorable pricing of inputs, and an under-valued currency” made China an attractive market initially, these benefits have worn out. Instead, the increasing environmental and labor costs are driving firms away.
Back in the day, the young labor force of China appealed to foreign companies. “With the median age of 27 and around 900 million working age population”, India is now looking as attractive as China did all those years ago.
Countries are incentivizing their companies to move out of China: Japan declared a $2 billion package to its firms to move out of China, while Korea is encouraging the same. The UK is also passively pushing back against China.
The looming tension between US and China stemming from their trade war is forcing companies to diversify, and hence shift out of China
INDIA'S MAKES MOVES
Last year, India moved up from its 77th position to 64th on the World Bank’s Ease of Doing Business Report. Factors that might have facilitated this jump include “24*7 online service to investors, response-query mechanism, proactive intervention with all the state governments, follow ups with all the GoI departments, reduction in documents for exports-imports from 11 to three, the Insolvency and Bankruptcy Code, and the creation of country specific (suchM as Japan and Korea) desks among others.” Additionally, India operates and is governed in a more transparent manner, compared to China.
Some of the actions already taken:
Creating physical space for companies that will move out of China: India is preparing a land that is twice the size of Luxembourg
The process of reaching out to foreign companies is now sped up during the pandemic, which includes contacting 1000 American MNCs.
Provision of fiscal incentives such as preferential tax rates, tax holidays etc for international companies
An economic task force is already in the works in Uttar Pradesh
LIMITATIONS
While this might be the time for India to seize this opportunity to become a more "favorable business environment", making changes in supple chains takes time. Before decisions are made and set in motion, India needs to improve factory conditions, such as the sanitation levels and access to ventilation, and market reforms such as "rationalizing punitive land acquisition clauses and multiple labor laws and multiple labor laws." But there exists 3 specific limitations:
Constantly changing attitude towards FDI: Foreign companies have been wary of India's relationship and its uneven regulation with respect to foreign direct investment. Especially with the government encouraging the Made In India agenda, these actions could come across as protectionist.
The country doesn't have enough regulatory stability currently and hence needs to improve so it can attract more global firms
Delhi exited the Regional Comprehensive Economic Partnership (RCEP) recently and this negatively affects India exporters. Without the trade agreement, they wont benefit from tariff-free access to destination markets.
India has always been one of the top options for foreign firms when looking to build their supply chain outside their own countries. The anti-China sentiment risen from the pandemic might encourage global companies to make the shift from China to India.
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