Missing China opportunity, again PDF Print E-mail
Saturday, 24 November 2018 00:00
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The biggest beneficiaries of US-China trade war will be countries like Malaysia and Vietnam, not India


The global economy will slow due to the US-China trade wars, but it is not as if there are no winners. After all, if the US imports less from China, it will need to import this from some other country. Nomura research on the comparative advantage of countries, and their ability to step up exports concludes the biggest gainers will be Malaysia and Vietnam, though India has a bit of a chance, too, if it gets its act together quickly.

This will be the second time that India is missing the China opportunity, as it were. When China started vacating parts of the exports market as its wages rose, and it focussed on the higher end of the value chain, it was Vietnam and Bangladesh that grabbed the market in apparel exports and that, in turn, gave a fillip to their manufacturing growth. Bangladesh’s total exports grew by 82% in 2010-16 and Vietnam’s 145% versus just 17% for India. Given the average annual growth of apparel exports for 20 years after its take-off was 30.4% for South Korea, 65.8% for Indonesia, 27.9% for Bangladesh and 17.8% for Vietnam versus a mere 12.7% for India, this was a big miss. As a result, at $177 bn, Vietnam’s exports are already two-thirds of India’s—in both 2000 and 2010, they were roughly a third and were less than a seventh in 1990! And, unlike Bangladesh, Vietnam gets no duty sops from OECD nations.

Nomura’s analysis of the second China opportunity examines two types of scenarios; a short-run one where China/US import more from other nations and a medium-term one—if the war drags on—where suppliers in China decide to relocate their production centres.

For import-substitution, Nomura looks at the comparative advantage of countries, their export baskets and whether they are suppliers of inputs to China’s current exports; if they are, this makes it easier to directly export to the US. Taiwan’s production, for instance, is heavily connected to China’s exports and 6.3% of its GDP comes from the China-export business. This number is 4.1% for Malaysia versus a mere 0.5% for India, making it clear India is not a natural choice for import-substitution. Vietnam’s exports have the greatest similarity to China’s (0.43) versus India’s 0.27. And when it comes to US exports, while Japan has the greatest similarity (0.47), this is followed by Singapore (0.44), China (0.37), Malaysia (0.35) and Taiwan (0.33). Put all of that together, and you get the Nomura Import Substitution Index (NISI)—see graphic.

India does better on the Nomura Production Relocation Index (NPRI), primarily because of the size of its domestic market. In terms of investment climate, not surprisingly, the clear winner is Singapore, followed by Taiwan and South Korea. It is in this context that prime minister Narendra Modi’s attempt to boost India’s Ease of Doing Business (EoDB) rankings needs to be seen. From 142nd rank when Modi came to power to the 77th rank now, India is all set to break through to the top 50. This is impressive, but just one part of the story. Apart from the fact that any such ranking can be gamed by focusing on just improving that parameter, more worrying for investors is the fact that it still takes a long time to enforce contracts—indeed, India’s rank has fallen on this—and the ranking on resolving insolvency remains poor despite the new insolvency code. 

EoDB is important, especially for smaller businesses that can’t afford to hire ‘consultants’ to get all clearances for them, but a far bigger challenge is the policy uncertainty and the inability to get some very basic reforms going despite them being on the agenda for decades.

Labour reform, a big reason for India’s poor exports performance, in terms of price and quality, is an obvious one. Labour laws compel firms to stay small—according to the Economic Survey last year, 78% of Indian firms employ less than 50 workers and just 10% employ more than 500 as compared to 15% and 28% for China. So, when a Walmart wants a large order of jeans, it will prefer a China—India’s manual processing will ensure the fabric will not be consistent across batches. According to a recent study by Metro Valley, a firm that is working on environmentally sustainable urban development, while India’s labour costs are around half that of China’s, poor labour productivity means China’s cost of production is half that of India’s.

Add to this, the costs of poor infrastructure—road transport in India costs $7 per km vs $2.5 in China and it takes 21 days to deliver from JNPT to the US east coast vs 14 days for China. India proposed SEZs to take care of labour/infra shortages, but the policy was changed to levy taxes on them; and the Coastal Economic Zone plans haven’t taken off either. And firms like Apple are yet to get the concessions they wanted to set up manufacturing facilities here…

Make-in-India was a great opportunity since cutting-edge defence manufacturing could be encouraged with large government orders; but, these never kept pace and the initiative didn’t take off. There are, then, big flip flops in oil & gas, the inability to fix telecom policy, slow agriculture reform (India could be a larger agri-exporter), poor tax treatment … it says a lot that, despite Modi’s Startup India, many top start-ups are registered in Singapore and, even now, tax and other authorities quiz them on valuations and want them to pay taxes on this.

This is why India’s investment remains low—from 32.9% of GDP in FY08, it fell to 28.5% in FY18. And though FDI levels keep breaking new ‘records’, as a proportion of GDP, FDI fell from 2.8% in FY08 to 2.4% in FY18. Modi has, no doubt, made big moves in areas like GST and IBC, but when investors can go anywhere in the world, the overall pace isn’t good enough.

Last Updated ( Monday, 26 November 2018 03:54 )

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