The Hindu Business Line : As China attempts to cool — India now a hot destination for FDI

While China adopts some protectionism to take the heat of its economy, India is opening its door wider to foreign investors. It is time foreign investors took a closer look at India's potential.

Worried by the imbalance in growth between the east and the rest of China and the widening gap between the rich and the poor, the Chinese Government appears to be turning to protectionism. Six government agencies last August decided to rein-in foreign acquisition of Chinese enterprises. Thus, China's Ministry of Finance was empowered to block any deal in the interest of the economy. Others measures included the mandating of imported inputs meeting domestic standards and to favour domestic products for government procurement. Rules are being framed to end the preferential treatment to foreign enterprises in various sectors.

The most important measure on which Beijing is working is a new law to unify the corporate tax system. The Chinese corporate tax rate is 33 per cent, with a number of adjustments and incentives. Thus, domestic enterprises pay, on average, 23 per cent, which is substantially higher than the effective rate of 11 per cent for foreign enterprises. From January 2008, the new law will unify rates at 25 per cent for foreign and domestic enterprises.

These measures the media have termed as a return to protectionism. Indeed the impact has already been felt. Foreign direct investments into China declined in 2006 by 4.1 per cent; the first time FDI is registering a downtrend since 1999.

Besides protectionism, the emergence of labour unions in foreign enterprises and playing an active role have raised eyebrows among the foreign management-dominated FDI firms. Currently, the labour unions are officially allowed to participate in major decisions with regard to wages and dismissal. But, now, the All China Federation of Trade Unions has started playing an aggressive role in foreign firms.

Where India scores over China

While China appears to be on the verge of reversing its open market economy stance, India is racing to open its economy. More sectors have been freed from the FDI cap. Telecommunication is open to majority foreign equity stake. Foreign participation in multi-product retail sector is under active consideration. Infrastructure is being developed on a large scale especially via the Public-Private Partnership route.

China's FDI attractiveness stemmed from cheap labour and lax worker laws, especially in the Special Economic Zones. This turned China into a manufacturing hub. This attraction is waning by the galloping economy and its rising wages. In most highly industrial provinces, the labour cost has multipled.

According to a JETRO Survey of Cost Comparison in 30 metros in Asian countries, in 2006 the wage level for general workers in Shanghai and Guangzhou overshot that in New Delhi and Bangalore. The average monthly wages for general workers in Shanghai were between $272 and $362 and in Guangzhou between $134 and $446. In comparison, the average monthly wages in New Delhi were between $165 and $320 and in Bangalore, between $ 209 and $325. According to the Jetro survey, the monthly house rent for foreign residents in Shanghai , Beijing and Guangzhou are much higher than in New Delhi and Bangalore.

India offers a bigger domestic market than China. In India, the ratio of domestic consumption to GDP is as high as 79 per cent compared to 57 per cent in China. This means the survival of foreign firms in China depends on exports. Export competitiveness of China is waning due to higher wages and high cost of other inputs. Can China sustain its export competitiveness with the rapidly growing economy putting pressure on cheap labour and low-cost inputs?

India has a vast pool of quality human resource that is also largely English speaking. About five lakh technical and engineering graduates are added to the pool every year. India will be the largest contributor to the working age population in the world by 2010. Besides, India offers a big pool of managerial and IT personnel. According to a FICCI sample survey of FDI firms in India, over 92 per cent of the respondents rated Indian "Executive Management" as excellent.

In contrast, in China the demand for talented workers is outstripping supply. According to the US - China Business Council, American firms are facing a crunch in filling up mid-level management positions in China.

India's shining FDI

India has built a strong platform to attract FDI. It has emerged the fourth biggest FDI destination in Asia, after China, Singapore and Hong Kong. Its FDI inflow touched $19 billion in 2006-07 from $ 7.7 billion in 2005-06. It has overtaken the earstwhile East Asian Tigers — Thailand, Malaysia, Indonesia, the Philippines, Taiwan and South Korea — in terms of FDI flows. Exclude Singapore and Hong Kong from the list — they are not comparable for FDI in these countries is more into trading activities — and India would be No. 2 destination for FDI in Asia.

A critical difference between the FDI flows to China and India is that the FDI surge into China was catalysed by Hong Kong and British Virgin Islands. As much as 42 per cent of the FDI China received in 2006 was from these destinations and a large part was money "round-tripping." The role of developed countries such as the US, and Japan or Europe is not significant in Chinese FDI. FDI from the US, Japan and South Korea with China declined by 5 per cent, 30 per cent and 25 per cent respectively in 2006.

In contrast these countries are the major sources of FDI into India. The US is the second biggest investor in India, after Mauritius. Of Mauritius investors too many are subsidiaries of American, British or European firms as also NRI funds.

These firms invest via Mauritius to reap the tax benefits available under the Double Taxation Treaty between India and Mauritius. The bulk of the FDI inflow was from Mauritius (136 per cent), the US (55 per cent) and the UK (69 per cent). Japan made a U-turn in jacking its investment in 2006 (by 93 per cent, according to Japanese Ministry of Finance)

While China is busy cooling its economy by adopting protectionism measures, India is opening its door wider to foreign investors. India is fast catching up with China in several factors where China had an edge.

It is time foreign investors took a closer look at India that is rising up the FDI attractive index.

(The author is Adviser, Japan External Trade Organization, New Delhi. The views are personal.)

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