India is looking at attracting companies shifting from China, but experts suggest the country will have to offer liberal land and labour laws as well as guarantee the policy regime will not be changed mid-way for the move to be successful. Some said China has the capacity to retain multi-national corporations, providing India little space to woo them.
Former NITI Aayog vice-chairman Arvind Panagariya, who had suggested setting up Coastal Economic Zones to attract companies from China, told Business Standard: “Why are the multinationals going to Vietnam and Bangladesh instead of India and Indonesia? Is it the ‘incentives’ on which we focus on or the business environment, which includes the functioning of factor markets such as land and labour?”
He said the country is surely not falling short on incentives, which now include a corporation tax rate of just 17 per cent on new manufacturing. “What we continue to lack are well-functioning land and labour markets about which we are still looking the other way. Coastal Economic Zones, which I have been lately calling Autonomous Employment Zones, are a means to offering well-functioning land and labour markets and swift Customs clearances over an area of 300-500 square kilometres.” He said the inspiration for CEZs has come from studying Shenzhen, which has the autonomy to enact its own land and labour laws. That allows it to respond quickly to the needs of businesses operating in the city.
Shenzhen is a city in southeast China, which has transformed itself from a small fishing village into an ultra modern metropolitan city. It has been developed as a model special economic zone by the Chinese government.
India had planned to set up 14 CEZs around Vadhawan in Maharashtra and Sagar in West Bengal. However, the plan was almost shelved, said an official. Instead, the government is looking at modernisation projects at ports across the country, he said. The professor of economics at Columbia University said many companies are definitely looking to shift their businesses.
“The US and Japan have already offered assistance to their companies should they wish to shift out of China,” Panagariya said.
Pronab Sen, the country director for the India Programme of the International Growth Centre (IGC), said companies should be questioned why are they not coming. The former chief statistician said ease of doing business was, of course, one of the hurdles. “Steps were taken on this front, but not enough, and not perhaps in critical areas,” he said. “We also have a tendency to change the policy regime at will. Quite often we do it with retrospective effect. All of this is a huge dampener.”
To a query that the NDA government has promised it would not change policies, Sen said it might or might not. “But the successor government may. I am not talking about single party, if you have this reputation of changing the policy regime, it doesn’t help. Nobody likes large uncertainties about continuation of policies. Talking about is not good enough. It is not about making promises,” Sen said.
Others pointed out that India's capacity to provide all-round incentives for investments remains dwarfed by China. “Globally, investment sentiments will remain depressed now. Despite repeated pushes by the US over the past four years, multinationals based in China have not made drastic changes in their value chains or seat of operations. They won't do that now given that everyone's motivation to increase profits and maintain stability is heightened as bottom lines drop,” said senior trade policy expert Biswajit Dhar. He said China hasn't announced any new incentives at the national or even the provincial level.
Sachin Chaturvedi, director-general of RIS, an international economic development and trade think-tank, said the government can draw companies from the same country into specific regions, thereby making hubs for them. “Currently, due to business reasons or otherwise, companies from Japan prefer the Delhi-Mumbai Industrial corridor, while South Korean firms are interested in Odisha and the east coast. A special economic zone-like model can be created for this purpose,” he said.
He said the government is working on addressing challenges with regards to land and labour issues while sectoral pitches are being prepared for companies looking to move out of China in sectors like electronics, auto components and mobile manufacturing.
“The timing to draw in investments is perfect, given that both the US and European Union are expected to drastically change their economic policies regarding China,” Chaturvedi said.
Industry leaders like Kanwaljeet Jawa, MD, Daikin India; Krishan Sachdev, MD, Carrier-Midea India; and Kamal Nandi, president of apex industry body CEAMA and executive vice-president of Godrej Appliances, told Business Standard that localisation of production will gain speed with this current crisis crippling India’s manufacturing capability due to its hit on China.