By Aditya Puri
Jun 10 2013
Its military adventurism and economic uncertainty open opportunities for India
The Chinese incursion into our territory was disturbing. The world is troubled by the nationalism and authoritarianism of China. Yet, going by feedback from senior executives in American and Japanese corporations, it offers great opportunities for India.
China's rise as an economic superpower has been a source of concern for the West and for neighbours like India. The accusation levelled against China is that it has not played fair on the economic battlefield. Through a combination of artificially undervalued exchange rates, subsidies to state enterprises routed through its state-controlled banking system, rigid wage controls and dubious trade practices, it has decimated one industry after another in competing economies.
Things have changed over the last three years. Wages have increased, international pressure has forced it to ease its draconian control on the exchange rate. The possibility of its financial system imploding has forced it to reconsider its usual policy of using massive doses of credit to ward off any downturns in its business cycle. Rising political and social tensions, underpinned by growing inequality, have forced China's politicians to focus more on domestic markets and buttressing domestic consumption, instead of devoting all their attention to exports. While this transition in its basic economic model is incomplete, it has slowed growth to 7-8 per cent for a while to come.
With its economic momentum slowing, Chinese politicians appear to be repackaging the Chinese dream through a mix of strident nationalism and regional authoritarianism based on military might. It seems to be a throwback to the days of imperial China. The fracas with Japan over the disputed Senkaku/Diaoyu islands in the East China Sea is an example of China's new military adventurism. The recent military incursion into Indian territory is yet another.
For India, this presents a massive economic and business opportunity. China has been among the biggest recipients of global FDI. In 2012 alone, it received $112 billion. This could change in future. The world, particularly the US and Japan, seem deeply troubled by China's rising nationalism and its aspirations to hegemony in the Asia-Pacific region.
Japanese and American commercial interests are re-evaluating China, appraising the impact of concentration, uncertainty and geopolitics. They are, in fact, looking at alternatives and India is a major destination under consideration. We need to get our act together as this is a big opportunity to get FDI to meet our capital and employment needs. We must make the Japanese comfortable and the Americans enthusiastic.
While China's shifting political and foreign policy stances (and associated geopolitical risks) affect its viability as an investment destination, there are economic considerations like rising wages and an appreciating currency that justify a shift away from China. Recent surveys show average industrial wages in China, at $300 a month, are the highest in the region. Despite inflation and the shortage of skilled workers, India's average organised-sector wage level, at about $270 a month, is still considerably behind China's. Besides, unlike the Chinese yuan, which is likely to appreciate further, the Indian rupee could see a period of sustained depreciation, making the manufacturing sector that much more competitive.
Capital scours the world and India does have competition. Indonesia's average industrial wage is lower than $200 a month, Vietnam's is even lower. However, two things work for India. First, it has a much larger labour pool and this is likely to put a lid on long-term wage inflation. Second, the large and young labour pool offers huge market opportunities that our smaller Asian peers lack.
China's regional ambitions alone cannot pull FDI into India. The investment environment has to improve and this involves not just improvement in infrastructure but also a better regulatory and policy environment. We cannot afford to forget that while China ranks 91 in the World Bank's much quoted "Ease of doing business" survey, India ranks 132. Besides, there has been growing concern among potential investors about the instability of our policy regime in areas ranging from telecom licence allocations to tax policy. All this needs to be addressed before we can even aspire to benefit from FDI flows switching away from China.