How India can pip China by leveraging inbound FDI

FDI in appropriate sectors in India can have a spillover effect on quality, manufacturing processes and knowledge transfer

Unprecedented is an understatement. Global pandemic, negative crude oil prices, countries shutting borders, global lockdown and volatile stock markets are now the order of the day. Amidst this disorder there is one country, China, that is attempting to buy stakes in leading companies from prominent economies. While global markets have lost nearly 30 per cent of value, predatory acquisitions by China, has led countries such as the United Kingdom, Germany, France, Spain and other EU countries to block or restrict FDI from China into key and high technology sectors and companies. India’s move is aligned with the stance taken by the global majors. This move reinforces the bold position of India to block hostile acquisitions of Indian companies.

In China, the State-Owned Enterprises (SOEs) account for nearly 30 per cent of acquisitions on the buy side from the country’s outbound acquisitions. The undervalued exchange rate of yuan (RMB), low interest costs and excess liquidity through M2, M3 money supply levels, have been the concerns of the US and other leading economies. China’s central bank announced an infusion of $174 billion in early February 2020, as a stimulus during the Covid 19 crisis. High liquidity and low interest costs also help large Chinese conglomerates to take significant stakes and acquire companies with high differentiation across the world.

While India has revised its FDI policy demanding a closer scrutiny of investments especially from neighbouring countries, the time is perhaps ripe to capitalise on the initiatives implemented till date and laurels won so far. India is poised to support the shifting demand from China. Once known for its low labour costs and large population with good coding skills, India has moved rapidly over the last five to seven years into becoming the trusted partner for all major countries and a friend in need to support the global pharma requirements. India’s rank as a global player has improved in ease of doing business rankings (63rd rank, compared to the previous year’s 77th rank).

Clogged supply chains

Reverse globalisation and protection of home markets is expected to be the trend going forward and is likely to continue for some time. However, the existence of an imbalance of relative cost structure and skill level are the major challenges faced by countries that are locked in with China. China accounted for over 12 per cent of global trade in 2018. Being the main sourcing hub for the world, the pandemic that started in China is immobilising the world and economic activities on account of the snag in global linkages. Clogged supply chains and drained demand are forcing economies to face the twin battle of Covid 19 and an economic downtrend.

FDI into India, with necessary caution, will help India gain a significant stature in the world and support the immediate requirements of the global trade. FDI in appropriate sectors will also have a spillover effect on quality, manufacturing processes and knowledge transfer. Building self-sufficiency and self-resilience can be considered key ingredients of economic policies of all countries. The ‘Make in India’ programme formulated by India can now come in aid of this objective. Standard operating policies (SOPs) for the make in India programme can help small and medium-sized enterprises rise to the occasion. “Made in China by 2025” is akin to this programme and envisioned to achieve a target growth in select business sectors.

A related point here is that while encouraging FDI, the ‘Make in India’ programme may aim to encourage, develop and protect knowledge. India’s rank in resident patents is 7th in 2018 compared to 29th rank in 1990. FDI and ‘Make in India’ programmes aligned with increasing patents will not only curtail a forex drain, but will help augment and strengthen forex resources in the country. It is empirically proven that FDI improves domestic investment and therefore has an econometric effect not only on investments but the overall economic indicators.

FDI round tripping

India is not new to attracting and managing FDI, though often criticised to be lagging compared to China. If one were to discount the round tripping of inbound FDI in China, which is estimated to be 40-50 per cent and the revised FDI in India as per definition of international standards, the gap in FDI between the two countries is not as high as it is being made out to be. India’s population which is often touted to be a hurdle, can be reskilled through effective focused programmes to become the workforce for the growing demand from FDI into India and India’s own growing requirements to becoming a self-sufficient country. Leveraging ‘Skill India’ to integrate with this vision and moving towards large scale prototyped production to meet the global demand is critical to integrate FDI flows and domestic spillovers.

Another perspective of FDI is the outbound FDI, which Indian companies are now embarking upon for acquiring brands and plant facilities. India’s SOEs in key sectors such as oil and gas have made large scale outbound acquisitions. With Government of India inducting private sector talent to support and share skills with the Government in policy and strategy, there are clear intentions demonstrated to have private- public (PP) initiatives for the benefit of the country.

While the capitalists often quip that the Government has no business of being in business, perhaps the timing is right to extend that PP initiatives to outbound acquisitions and support domestic companies overcome liquidity challenges through partial stake ownership of these acquisitions while the actual business is managed by private companies. At an appropriate time the Government can unlock the value of its stake in such companies. The goodwill built by India can potentially help companies overcome integration issues through least resistance.

With increasing outbound FDI and stronger manufacturing initiatives, India has the capability and potential to become more self-reliant, a trusted global industrial hub and pave the path for the envisioned five trillion dollar economy.

Kameswari is an ACA, Management Consultant and Independent Director of several companies. Thenmozhi is Professor, Department of Management Studies, Indian Institute of Technology Madras

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