By Subrata Majumder
Morgan Stanley in its recent review portrayed India as the most attractive destination for foreign investment in Asian emerging market. It upgraded India from 6th position to top in the region. Macroeconomic stability and faster growth in the post COVID years were reasons. India proved resilient to global volatility, stoked by US recession and Ukraine war. Global analysts were upbeat with India emerging as the next global destination for FDI, in contrast to China and South East Asia’s eroding prominence.
In 2022, India and Vietnam were the only two countries in East and South East Asia to pitch for higher growth in FDI inflow. China, which was the main headway for global FDI inflow, was dragged into retreat with its stringent COVID policy and domestic oriented investment policies. FDI in China grew merely by 4.5 percent, as compared to India recording 10.3 percent. South East Asia, which has been a major challenge to India, lost steam. FDI growth slid to 4.6 percent in 2022.In South East Asia.
US-China face off and Ukraine war added a new layer of FDI culture in the world. Low cost production and global network of supply chain, were outweighed by global political bi-partition and currency war. A wide gulf was created between west and east and de-dollarization emerged for the FDI boost in the bi-partitioned world. China poured substantial investment in Russia in Chinese Yuan and India opened gate for local currency investment by UAE – the third biggest trade partner of India.
US dollar is eroding prominence and Chinese yuan or local currencies are gaining steam in the de-dollarization movement. According to IMF survey, dollar share in central bank foreign exchange reserves declined from 71 percent in 1999 to 59 percent in 2021. US dollar was alleged for using more like a political weapon. Eventually, de-dollarization has become an additional factor for FDI diversification.
Given these, de-coupling and de-risking are gaining significance in making new trend in FDI. Till now, China was one of the main destinations for USA, Japan and EU investment. Chinese prominence is in retreat and outplaced by India as alternative in East and South East Asia with the advent of de-coupling and de-risking policies. FDI growth in China nosedived to 4.5 percent in 2022, after a spurring growth by 21.2 percent in 2021
De-coupling and de-risking do not have any academic or institutional definition by UNTACD, WTO, World Bank or IMF. In colloquial term, “de-coupling” means exiting investment from China and “de-risking” refers to China+1 investment strategy.
On June 21, USA announced multiple policy challenges – all centering to downplay China. President Joseph Bidden rolled out red carpet to Prime Minister Narendra Modi‘s visit, despite India’s neutral stance in Ukraine war. This reflects USA’s tilt towards India underlining India’s role in Indo-Pacific to counter China. Given these, global analysts perceived, “USA needs India more than India needs”.
USA was one of the top two foreign investors in India. During the recent visit to USA by Prime Minister Narendra Modi, USA and India signed several agreements covering defence procurement, joint weapon production and development of several critical technologies. These opened several opportunities for India to lure US investors, in the wake of de-coupling and de-risking strategies.
India ranked 8th in global FDI inflow, according to World Investment Report. It emerged as the second most attractive destination for FDI flow in South East Asia and third in the whole of South East Asia and East Asia in 2021. The main drivers for FDI flow in India were USA, Singapore and Japan. Together, these three nations accounted for nearly 50 percent of FDI flow in India
It is difficult to assess how much shift was made or could be made by USA and Japanese investors, owing to de-coupling and de-risking. Nevertheless, some cases may exemplify the shift.
De-coupling of Apple of USA from China partly and shifting to India has become the headlines. Apple’s decision of shifting production base in India signifies India’s challenge to China. It raises concern over China’s hegemony in global supply chain in the next decade. China has been the global powerhouse for supply chain manufacturing. Nearly, one fourth of global supply chain is accounted by China.
Japanese investors also looked to India as against China after Japanese government provided big subsidy to diversify offshore investment from China, to reduce over-dependence. Eventually, Japanese investment fell drastically in China. Though Japanese investment also fell in India in the post Covid era, the magnitude of fall was slower in India than in China. It was by 34.4 percent in case of China, as compared to 14.1 percent in India. There were 13, 934 Japanese companies in China in 2016. It dropped to 13, 685 in 2019. Share of parts and components from China declined from 29.5 percent in 2015 to 26.1 percent in 2021.
Focuses were made for South East Asian countries for diversification of Japanese investment. Even though thrusts were given for shifting to Thailand, Vietnam, Malaysia, Indonesia by the Japanese government, India emerged the preferred destination for Japanese investors.
Vietnam was focused a coveted destination for diversification. But Japanese investment in India increased much more than Vietnam. In 2021, Japanese investment in India increased by 132.9 percent, as compared to 76.3 percent in Vietnam. This advocated Japanese investors tilt towards India.
To sum up, though India was earlier not hyped as a better alternative to China, the recent developments in Indian economy and policies, including political stability, ensure a better bet for foreign investors. (IPA )
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