India's China gap

Comparative foreign direct investment data among emerging markets and the World Bank’s various business environment indicators offer us a rough index of India’s poor showing as a desirable investment destination. The narrative is well established: Red-tape, corruption, policy uncertainty, inadequate personal security and so on. But how do potential investors and business people, who have to live and work here, really see us? Can India become the new factory to the world with the US-China trade war forcing manufacturers to look elsewhere?

Given India’s size, the country has been ideally positioned to reap the gains. Instead, India’s suitability is being sized up against far smaller Asian economies and it appears to come up short.  “India or Vietnam: Who’s the New China?” is the heading of an advisory written by a Chinese supply chain consultant in January on the two countries’ potential as alternative investment decisions after Donald Trump unleashed his trade war. At the end of a corporate-style, bullet-pointed exposition, the author concludes that the country whose economy is a 10th of India’s size was preferable. Worse, he concludes India will never be the next China in the medium term. 

This is a sobering assessment as the commerce ministry reportedly prepares plans, including tax breaks, to induce companies and investors to redirect their attentions to India as a result of the trade war.

The big surprise in this paper was revelations that Vietnam’s comparative superiority is not because it is, as conventionally believed, winning the traditional race to the bottom in terms of labour costs. On the contrary, Vietnam had begun to overtake India in terms of average wage rate in manufacturing in 2015. The two key reasons Vietnam scored over India are basic education levels and ratio of female employees.

Any visitor to Vietnam’s lively and pristine cities — also cited as a major plus factor compared with the shambolic chaos and grime of India’s urban spaces — will be struck by the number of well-maintained government schools, the result of a compulsory education programme launched in 2001, eight years ahead of India’s variably implemented Right to Education Act. 

At a time when India’s ruling regime appears determined to make Hindi the sole national language, Vietnam teaches English as its first foreign language and Chinese as one of its four second languages. In other words, the average young Vietnamese can communicate in both languages with investors from the US (their preferred investor community) and Chinese (whose economic model they emulate). 

In the context of the downgrading of English in India’s education curriculum, the author’s frank observation about our famed multi-culturalism is worth quoting in full:  “People in different states in India speaking different languages contributes to different cultures, which makes business management a headache…. Moreover, the 14 official Indian languages [actually 22] make it almost close to impossible for Indians from different states to communicate. If they don’t speak English, …it’s very unlikely that they can find ways to understand each other.”

As for female participation in the workforce, the writer has not explained why it is such a critical element in an investor’s decision-making. Perhaps high female participation ensures a larger labour force for gargantuan China-style factories or maybe they take it as a sign of a progressive, inclusive society. Though economists have found no single explanation for India’s dismally low participation of women in the workforce, the writer ascribes it to social mores: “Even though women who have received higher education and have a decent job after graduation will choose to be full-time moms as this is how the tradition works”  (sic).

In both Vietnam and China (and indeed in most of South East Asia), it is hard to miss the proliferation of women in the workforce. At 73.21 per cent, Vietnam has an appreciably higher workforce participation rate among women over 15 years than China at 60.87. India’s falling metric — from 36.7 per cent in 2005 to 26 per cent in 2018 — is unlikely to inspire confidence.

That Vietnam is already ahead in the race is clear. In Q1 of 2019, foreign investment in Vietnam rose 86.2 per cent, to $10.8 billion (Chinese investment accounts for about half that). Where Foxconn struggled for four years just to find an optimum-sized manufacturing base to assemble Apple iPhones in India, Intel, Samsung and LG have poured money into a country that endured over 30 years of war, decimating its landscape and claiming over 3 million lives. 

Now, as investors and executives relocating to that tiny country are discovering, Vietnam’s ability to absorb this deluge of investment is limited. All the undesirable symptoms of economic growth are manifesting themselves: Urban traffic jams, rising real estate prices, low skill sets of Vietnamese workers relative to their Chinese counterparts, bottlenecks at ports, and a shortage of workers — Vietnam has fewer workers than China’s Guangdong and cannot count on masses of migrants to make good the shortfall.  

An opportunity for India? It should have been. Instead, investors are eyeing … the Indonesian island of Batam. A free-trade zone that links Indonesia, Malaysia, Thailand and Singapore and an hour’s ferry ride from Singapore, it is now the cynosure of all eyes.