The Hindu Business Line : Making the most of yuan revaluation

The combined effect of the lower-than-expected yuan revaluation and the US' suspicion over China's interest in the US energy sector, should give India the leverage to woo American investors. Also, the highly educated workforce, management talent, regulatory measures, cultural affinity and a vast English-speaking workforce are the pluses in India's favour, says S. Majumder.

AS TRADE between developed and developing nations rise, the chances of conflict become greater. The US-China trade spat is a case in point. The US' huge trade deficit, believed to be caused by cheap exports from China, resulted in Washington pressuring China into revaluing its currency. China succumbed to the pressure and revalued the yuan against the dollar by over 2 per cent on July 21. The 1980s saw a similar situation, where the yen was up-valued to make Japanese exports costlier in the US.

Sino-American relations are governed as much by political as by trade issues. The US is contemplating blocking the takeover bid by China National Offshore Oil Corporation — a 70 per cent government-owned company — of the California-based oil and gas company, Unocal Corporation on grounds of energy security.

One major factor in the Sino-American relations is that China depends more on US than vice-versa. The US is China's biggest export destination, accounting for over a third of its global exports. This apart, China needs US' investments and technological expertise.

Will the minor revaluation of the yuan appease the Bush administration, which had been clamouring for at least a 10 per cent adjustment? It is believed that the revaluation will only have a marginal impact on the US trade deficit. Much depends on how China floats the yuan against other currencies. The latest revaluation may stave off US retaliatory action, but only temporarily.

India factor

India's links with the US, on the other hand, appears to be strengthening, especially after being tacitly accepted into the nuclear club. On the economy front, India's potential for growth appears good, with GDP growing at 6-7 per cent, exports surging at over 20 per cent, and foreign direct and portfolio investments swelling by the year. The US' contribution to this trend has been significant.

Of late, there has been phenomenal growth in India-China trade as well, with China emerging India's second biggest trade partner in the past two years. But unlike with the US, any surge in the India-China trade will be ephemeral.

This is because the characteristics of trade between India and the two countries are different. While the trade surge with China is mainly import driven, that with the US is export led. Further, a single item — electronic goods — contributed to the spurt in imports from China, whereas exports to the US consist mainly of textiles, garments and diamonds, items that India is inherently competitive.

In addition, the up-valuation of the yuan will impact India's imports of electronic goods from China. Though the revaluation is minor, the cascading effect will be substantial because of the high tariff.

The combined effect of the lower-than-expected yuan revaluation and the US' suspicion over China's interest in the US energy sector, should give India the leverage to woo American investors. Now, China has the edge in terms of labour and infrastructure. But post-revaluation, it is doubtful whether China will be able to provide cheap labour and be a low manufacturing base on a sustainable basis.

For instance, half the respondents to a recent CII-AT Kearney survey felt that India was on a par with or better than China in terms of MNC performance. Though investors favour China over India for its market size, access to export market, government incentives, favourable cost structure and infrastructure, India's highly educated workforce, management talent, regulatory measures, cultural affinity and a vast English-speaking workforce are seen to be more favourable.

The US has contributed significantly to India Shining. It has been the country's biggest trade partner — both in merchandise and invisibles, which include software and business process outsourcing (BPO) — and foreign investor.

For China, the US is its leading trade partner and third in terms of investment. But in terms of contribution, the US' role is more significant in India. In China, US investments are confined to manufacturing and assembly, while in India they cover a wide spectrum of business activities.

Coming to items traded, China's exports to the US consist mainly of electrical and electronic goods, thanks to cheap Chinese labour and infrastructure. These are mostly produced by MNCs operating in China. Post-revaluation, manufacturing competitiveness could wane, which will force MNCs to shift base.

On the other hand, India's manufacturing strength is growing. This is perhaps because of the greater urgency shown by Indian manufacturers to take on global competition following the easing of licence restrictions and tariff rates. The growth of the auto parts and electronic industries are cases in point. Most MNCs surveyed by CII-AT Kearney feel that their performance in India have met or exceeded internal targets and expectations.

In terms of potential gains to the US, India is likely to score over China. While China leads in manufacturing and assembly, India is ahead in IT, business processing and R&D investments. Though China entered the World Trade Organisation two years back, it has not opened up its services sector fully, and transparent regulatory measures are lacking.

India, too, faced many a hassle when it threw open the services sector, but that has not prevented it from raising the foreign investment cap to 74 per cent in telecommunications and banking and there is talk of hiking the FDI limit in insurance.

Also, government approval is awaited for throwing open the $180-billion retailing market. This market is expected to double by 2010.

In pharmaceuticals, India holds much promise and is ahead of China. With product patent law in place, India has the potential to attract foreign investments in drugs and pharmaceuticals, where the US is a leader. According to The Economist, "foreign investors can feel more comfortable about shifting more of their operations to India." India has a large pool of doctors, many of whom are foreign educated and have the required technical competency, as has been proved by the buoyancy in "contact research" business in drug and clinical trials.

A large India Diaspora can be the conduit for US investments. This segment has contributed significantly to the growth of US-India relations. Many of this class are now looking homewards, what with India brand shining, with a healthy GDP growth rate, good governance, a large pool of skilled workforce and managerial talent, and a growing private sector.

What India needs is a constant dialogue between the two countries and a greater role by the chambers of commerce and industry associations. The country has signed free trade agreements (FTAs) with Sri Lanka and Thailand, and a Comprehensive Economic Cooperation Agreement with Singapore. US investors must know that foreign affiliates incorporated in Singapore will be given "national treatment" for investment in India in various manufacturing fields under the agreement. It is time, therefore, that US investors had a relook at India as an investment destination.

(The author is a Senior Researcher in a Japanese MNC in New Delhi.)

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