Despite the messaging, it is still advantage China

Many U.S. companies as well as the analysts who advise them are cognisant of India’s goal of becoming an alternative supply source and investment destination to China. But based on conversations I have had with a number of different organisations and companies here in Washington, it is fair to say that expectations are tempered.

First, despite media reports and strong messaging from Washington, fewer U.S. companies than predicted might quit the People’s Republic of China (PRC). Companies focused on the Chinese domestic market rather than as a base for exports will likely remain, at least for now. Those that do leave may not choose India as a relocation destination. Despite New Delhi’s noted success in attracting Apple suppliers to India, many U.S. companies with experience working with China are not convinced that India has the PRC’s established industrial base and expertise. They also see other Asian countries as more competitive. To change their minds, these sceptics must be convinced that India offers the benefits of China with fewer risks.

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The good and bad points

To be sure, India’s identity as a democratic “un-China” is one of its strongest selling points. There are no Indian government hackers stealing foreign companies’ industrial secrets. Although Indian officials may have spurned a meeting with Amazon’s chief executive officer Jeff Bezos due to negative India-related reporting in his The Washington Post newspaper, that is a far cry from the coercive tactics that Beijing employs against criticism by foreign companies both within and outside of its borders. India’s open and vibrant press, independent judiciary, and other advantages of democratic governance also provide a favourable contrast to China.

Yet, India might appear more like China to potential foreign investors than New Delhi might think, particularly given policies that seemingly disadvantage foreign investors who pose the greatest competitive threat to India’s domestic counterparts.

To be clear, India’s goal of creating national champions is not necessarily anti-competitive in itself. But when policies such as taxes on foreign e-commerce companies and education providers seem constructed to disadvantage foreign investors, investors will stay away.

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India’s large and increasingly well-off domestic market, while alluring, will likely not convince foreign companies to accept limits and conditions they might not accept elsewhere. Although early foreign investors in China endured years of losses caused by disadvantageous PRC policies, today’s shareholders demand more accountability and faster profit-making from companies in which they are invested. There are also now many more competitor investment destinations, both within and outside of Asia.

Why China scores

Despite many documented negatives and the overall sour foreign relations picture right now, China continues to offer investors many advantages, such as a manufacturing infrastructure and skill level that allows innovations to move quickly from prototype to product. This took decades of strategic planning. India’s own planning has been impressively stepped up in recent months, with the government identifying key sectors; surveying major companies about perceived roadblocks to Indian investments; and increasing Invest India’s outreach.

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But more is needed. For example, China’s specialised industrial zones are massive, collocating companies, factories, logistics, and even research and universities. The Indian government Budget that pledged to create equivalent zones is too small and is allocated among too many locations to compete.

Focus on States

The recent World Trade Organization (WTO) dispute panel ruling against India’s special economic zones policies, which the Indian government intends to appeal, might actually provide a chance to take a fresh look at the kinds of WTO-consistent industrial bases that are possible. New Delhi can start by focusing development in those Indian States that have already demonstrated the ability to produce and export in key sectors. Foreign capital could also greatly increase infrastructure funds beyond government spending alone. India might also usefully build up new industrial centres with an eye to geography, for example linking the southeast of the country to supply chains in Southeast Asia. In fact, by putting resources into States not led by the ruling national party, India will signal clearly that it is committed to economic openness, no matter who is in power, reassuring investors.

Work on the framework

India has taken a great step to reduce the number of investments needing approval by the Centre, and to increase intra-Ministry coordination on foreign direct investment policies. The same coordination could usefully be extended to the appointment of a high-level official or body in the Prime Minister’s Office to ensure any and all proposed economic policy changes are consistent with the goal of attracting foreign investment.

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A policy framework that is transparent, predictable, and provides increased consultations with existing and potential foreign company stakeholders before introducing new Indian economic policies, will play a crucial role in determining India’s foreign investment outlook.

Katherine B. Hadda is an adjunct fellow with the CSIS Wadhwani Chair in U.S.-India Policy Studies and a prior senior U.S. diplomat who most recently served as the U.S. Consul General in Hyderabad. The views in this article are of the writer and do not necessarily represent those of the U.S. Government

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