COVID 19 has managed to hit the world upside down with every countries market and the economy crashing. This has resulted in every country’s government to take severe steps to maintain their economy or to be precise, to keep it from not falling a lot. India is among countries, a developing nation which had a vision of becoming a $5 Trillion economy by 2023 but got shot by COVID 19 like everyone else. Prime Minister Narendra Modi in his recent press conference asked the people to be Independent and has released a ₹20 trillion package aimed at labourers, farmers, honest tax-paying middle class, as well as Indian industry including the cottage industry, MSMEs.
So, the question remains, what is India’s preparation for attracting overseas companies post-COVID 19?
PM Modi has signalled a major push to boost investments in the country and capture a part of the supply chain that is expected to move out of China as global corporations looking to diversify their production base in the aftermath of Covid-19.
Facebook’s $5.7 billion investment in Reliance Jio in the midst of coronavirus pandemic is a reflection of the faith that foreign companies have in Indian economy’s potential and future growth. It will not only create jobs but also bring in investments and keep the Indian economy’s momentum going.
Apart from ease of doing business, central and state governments will have to develop industrial parks and corridors on lines of China and ensure consistent policy framework for foreign investors, which is a matter of concern for most of them. The multinational firms would not completely leave China and shift base to other countries, but they are looking at alternatives and India could be one of the preferred destinations. The government has taken steps like promoting ease of doing business and liberalisation of the foreign direct investment norms to attract overseas investors.
India has jumped 14 places to the 63rd position on the World Bank’s ease of doing business ranking released last year. It figured among the top 10 performers on the list for the third time in a row, mainly due to the successful implementation of the Insolvency and Bankruptcy Code. The country was 77th among 190 countries in the previous ranking.
Prime Minister Narendra Modi held a meeting on April 30 to develop a strategy to attract FDI, particularly foreign firms wanting to move out of China, to boost investment. In fact, the Indian government is reportedly in the process of identifying and developing 4.6 lakh hectares of land, including 1.1 lakh hectares of existing land in industrial areas, and planning fiscal incentives in the form of preferential tax rates, tax holidays etc. in order to attract foreign firms. Further, a few state governments are also proactively working to capitalise on the opportunity.
The initiatives by the government are timely; they are coming at a time when foreign companies are looking to shift their production base out of China and their home countries are facilitating the move. Japan has announced $2 billion worth of incentives and Korea is encouraging its firms to shift from China too. It is not surprising that approximately one thousand companies are in discussions with the GoI to set up their production base in India. China has been the world’s factory for the last three decades mainly because of its FDI-led manufacturing exports. Almost 50 per cent of China’s growth comes from exports, creating millions of jobs.
Being a manufacturing powerhouse, China is known as ‘the world’s factory’. The ‘Made in China’ tag can be seen on a plethora of products across the globe. Although on a decline, but manufacturing constitutes a whopping 39 per cent of China’s GDP. The abundance of cheap labour in addition to a strong business ecosystem, low taxes and not-so-strict regulatory compliances, along with competitive currency practices are the main drivers of it. This also makes the country the largest recipient of FDI in Asia (World Investment Report, 2019).
Unlike the US, Italy, Spain and a few other countries, the COVID pandemic has, so far, not been severe in India in terms of both positive cases and fatality rate, if we normalise for the population. The initial stimulus package of Rs 1.7 lakh crore in March, followed by liquidity measures by the RBI and now, the stimulus package of Rs 20 lakh crore may help the Indian economy towards a vertical (V-shape) recovery. Therefore, post-Covid, India could be the brightest spot among the emerging economies when it comes to attracting FDI. “Make in India” will become a success provided we prepare the ground and grab the opportunity.
Initially, China attracted foreign investors with decentralised and favourable FDI policy that had a lot of incentives with regard to land, utilities, infrastructure and logistics. Cheap labour, large SEZs, favourable pricing of inputs, and an undervalued currency facilitated and attracted foreign firms. However, these advantages have reached a saturation point. In fact, foreign firms are now dealing with a higher cost of production, higher wages, stricter environmental norms etc. Many foreign firms have consequently moved their production bases to Southeast Asian countries.
The situation for foreign firms in China has become more unfavourable in the last few years. First, the US-China tariff wars happened, which created uncertainty vis-a-vis trade and investment in China. Leading MNCs whose production facilities in China were part of their global value chain became suspicious about business viability and expansion there. The latest reason to now worry foreign firms is the origin of the coronavirus outbreak and the lack of transparency in handling the pandemic — leading to a lack of trust of the major economies when it comes to China. The coronavirus outbreak in China disrupted the supply chain of foreign firms, and it is also going to be the point of contention between China and the rest of the world.
There are news reports of many Korean companies pulling out their investments from China due to health pandemic. There are also reports of Japanese companies embarking on the de-risking strategy and wanting to pull out their investments from China.
The Japanese government has earmarked 2.2 billion dollars as an economic stimulus package to help its manufacturers shift production out of China, as the economic impact of COVID-19 disrupts critical supply chains. China’s controlled economy and rising trade war tensions with the United States further makes it difficult, especially in the current times.
Moreover, the fight for supremacy in technology and military, the differences between US-China on trade, intellectual property rights, and geopolitical issues, are here to stay. Therefore, foreign companies which heavily depended on China are now looking to diversify the risk to their supply chain by moving out of China. And India offers them the best alternative.
India provides a suitable alternative destination for companies looking for relocation. Proposals for which are already being reviewed at various levels- central government, state industry departments and Indian missions abroad. This should be seen alongside the Indian government’s policies to boost up its manufacturing sector.
Although the COVID-19 would definitely cause delays in starting of the new economic process, nevertheless, India can fill the vacuum created in the manufacturing sector. For this, India needs to smoothen its policy process to make sure that the trajectory doesn’t get shifted towards Bangladesh, Malaysia, Vietnam or Thailand.
The window of opportunity is narrowing as the countries are pacing ahead in taking advantage of the situation and India needs to act fast if it is to regain competitiveness and market share in the manufacturing sector. India has the required labour pool, however, it needs to push the business acumen in favour of market requirement for long-term sustenance.
India, the world’s fifth-largest economy with an abundant labour force, offers the best alternative in terms of the depth and size of the markets. With the median age of 27 and around 900 million “working-age” population, India is a young and aspirational economy. In the past, China used its huge labour force in manufacturing by attracting FDI — it’s time for India to do the same, particularly when foreign firms are looking for an alternative manufacturing base. According to a UNDP report, India will have a working-age population of 1.14 billion, with rising urbanisation and a populating middle-class by 2025, creating a huge domestic market. India is also a resource-rich country. Therefore, India has its stage set to attract both market-seeking and resource-seeking FDI.
Starting from the early 1990s, India has progressively opened up sectors with hiked FDI equity to foreign investors under automatic routes. In recent years, there have been many proactive steps to facilitate foreign investors such as 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 (such as Japan and Korea) desks among others.
All these reforms resulted in India improving its ranking in the World Bank’s Ease of Doing Business report and also in the world competitive index in the last three years. No wonder, India has been ranked by multiple international bodies as one of the most favoured designations for FDI. Moreover, unlike China, India is a stable democracy where governance and rule-making are much more open and accountable.
However, simply opening of the sectors or the economy, and inviting foreign investors, will not be enough. We need to create a conducive and favourable business environment that enables foreign firms to manufacture at a competitive cost and use abundant resources like manpower. We need market reforms such as rationalising punitive land acquisition clauses and multiple labour laws, both at Centre and state level. It is time to speed up work on the four labour codes on industrial relations at a central level. The government should augment the work on infrastructure, logistics and trade facilitation so that trade and transaction costs, crucial for FDI firms, are reduced.
The need of the hour is also to redesign and revamp SEZs and EPZs policy for better performance. Though the reforms are very progressive at the central government and higher bureaucracy level, things are different at the level of state governments and lower bureaucracy — which actually matters when it comes to the implementation of projects and economic activities. It is time to train and bring about reforms at the lower bureaucracy level, which is not ready to give up their power. FDI will not only augment capital formation, but it will also act as a vehicle for technology up-gradation, skills development, exports promotion, job creation and the improvement of the overall competitiveness of the economy. This is an opportunity for India in the post-COVID era. If we grab this opportunity, the next 30 years would belong to India at the global stage.
China has managed to flag itself in the international market due to its flexible labour laws. These governments are working towards attracting foreign companies by building a strong infrastructure with land attribution. Putting a step forward, the Indian government has chalked out a plan envisaging an investment of Rs 100 lakh crore in the infrastructure sector over the next five years.
What labour law changes by states mean?
As the economy struggles with the lockdown and thousands of firms and workers stare at an uncertain future, some state governments last week decided to make significant changes in the application of labour laws:
Madhya Pradesh has announced to abolish the obligatory to fill 61 registers and 13 returns, instead only one register and the return will be sufficient to take license along with allowed overtime of up to 72 hours and the period of working shifts in factories to increase from 8 hours to 12 hours. There will be no inspection in the firms employing less than 50 workers and in the small and medium enterprises, the inspection will take place only with the permission of the labour commissioner or in case of complaint.
Uttar Pradesh labour laws for the next three years to provide a cushion to the sagging businesses and factories in the state. Now, the industrial units will also not have to worry about inspection or enforcement officials knocking on their doors as they would not be looking if the labour laws are implemented.
Gujarat has amended the Factories Acts in the last month to increase the work time to 12 hours every day and 72 hours every week, compared to 8 hours every day and 48 hours every week.
What it means for India?
These laws, it is claimed, will bring about increased and incentivised economic activity. The labour laws in India are too restrictive or inflexible and due to the very fact, employers hold back on hiring, which has impeded the growth of organisations in the past. Following this logic, organisations will have an easier time adjusting to market conditions leading to growth and better benefits for workers.