India’s Need for FDI to Boost Manufacturing Sector

The trade dispute between China and the United States of America continues to intensify. Chinese exports have become more expensive for US importers. Many companies have been looking for ways to relocate their manufacturing operations. 

About 56 companies who relocated their manufacturing operations from China between April 2018 and August 2019. Out of the 56 companies, 26 relocated to Vietnam, 11 to Taiwan, eight to Thailand, only three of them moved to India, and two to Indonesia. The data is taken from a study done by Nomura, a Japanese financial group. 

Many companies had plans to relocate for quite some time. Also, the costs in China were looking up. However, the plans delayed due to uncertainty and hassle of relocation. Companies made a move after the imposition of additional US tariffs on Chinese manufactured goods.

Relocating manufacturing facilities is not an easy task. In addition to high set up costs, there are more factors to consider including infrastructure, communications, and connectivity. Cost-effective warehousing, transportation, and other logistics support also gain importance. After the initial set-up, companies also need to find the requisite manpower and train them. Other factors that play a key role would include government support, taxation policies, legal framework, and the time required to start the business. 

Currently, both India and Indonesia have the necessary demographics to become global manufacturing hubs. Both have the potential to stand to the heights of China, which produces one-fifth of the world’s goods. India and Indonesia have the second and the fourth largest populations in the world; India’s population is expected to cross China’s by the year 2030. Both countries have a comparatively younger population. The labour cost in India is lower than that of China.

Also Read: Can Corporate Tax Cuts Revive the Indian Economy?

Now, why are India and Indonesia not favoured by global MNCs for the relocation of manufacturing facilities?

India’s and Indonesia’s GDP growth rate is higher than many major global economies. But they have not been able to keep up their manufacturing potential. In India, the Foreign Direct Investment (FDI) in manufacturing is as low as 0.6 per cent of the total GDP. FDI is an indicator of foreign corporations confidence in an economy. FDI helps a developing economy to create employment, bridge financial gaps, and promote growth. 

Businesses generally choose a location based on the ease of doing business. For example, in Vietnam, a single point of contact is offered by the government for all government clearances. 

India and Indonesia need to boost infrastructure development, remove trade barriers, and carry on with land and labour reforms. The countries also need to offer a conducive tax and legal environment for foreign MNCs. Both countries have initiated steps in this direction.

Indonesia is offering tax incentives and quick government clearances for foreign companies setting up manufacturing facilities in their country. Similarly, the Indian government has also cut corporate tax rates across the board and offered incentives to new manufacturing companies.

India and Indonesia could take a leaf out of the manufacturing culture of countries like Japan, Germany, China, and South Korea. This could help the government achieve the set target of increasing the manufacturing sector’s share in GDP to 25% by the year 2022. 

For any clarifications/feedback on the topic, please contact the writer at sweta.dugar@cleartax.in.