India needs policy changes as MNCs seek to exit China

The entire world is closely monitoring the unfolding developments in China. The reason is that the rising internal strife can affect economic growth there and that in turn could have an impact on the rest of the world. As the second largest economy, it is one of the biggest importers of a wide range of commodities. Thus the immediate impact of the events in that country is a sharp fall in prices of both crude oil and metals. It is also a supplier of an equally wide range of manufactured goods and production stoppages can lead to disruption of global supply chains.

The current scenario of protests against the repressive measures to implement the zero Covid policy come after months of lockdowns in key industrial regions of that country. Reports emanating from there indicate that people are frustrated by having been confined for such a long period of time. This has also affected overall growth in the economy as manufacturing areas have seen strict movement curbs. It is no wonder then that the International Monetary Fund has pegged growth for China at only 3.2 per cent for 2022.

One of the major fall-outs of slowing growth in China is reduced demand for oil and there has consequently been a sharp drop in international prices. With the world's largest oil importer cutting back on purchases, availability is bound to improve a great deal. Currently, the benchmark Brent crude has fallen to 86 dollars per barrel with the West Texas Intermediate ruling at around 80 dollars per barrel. The direction of prices in the near term, however, will depend to a large extent on the way in which the Chinese authorities are able to handle the current round of protests against the stringent Covid policies. In case there is some relaxation of regulations, oil markets may react by pushing up prices once again.

Apart from oil, there are a wide range of commodities as well as intermediate goods that are bought to meet the needs of the enormous manufacturing sector in China. Purchases have already slowed down this year and a future dip in growth would have an adverse impact on countries supplying them. Prices of key commodities like metals have fallen in response to the news of unrest and protests against the regime.

The other significant outcome of the developments in China is that investments by western countries are likely to decline steeply till such time as the stringent measures remain in place. Reports from that country indicate that corporates are hesitant to venture there owing to hardships in the form of inability to travel internally without official permits. There are also fears that projects may not be able to get off the ground as workers are not being allowed to leave their residences.

In this scenario, investors are moving to other countries like Vietnam and Indonesia. Several companies are now also interested in expanding their footprint in India, given the unrest in China. These developments have only exacerbated the fears which had arisen during the pandemic of relying too heavily on this country and risking potential supply chain disruptions.

As far as India is concerned, this is an opportunity to become a haven for investors who are no longer comfortable putting their resources into one of the world's biggest economies. Right now, however, most companies leaving China's shores are moving either to Vietnam or Indonesia where the policy regime for foreign investments is considered far more welcoming than here.

It is thus the right time for policymakers to undertake more reforms to make investments easier for companies seeking to shift base from China. The critical need of the hour is to cut down documentation as far as possible. Though efforts have been made to put procedures and processes online, these have not gone far enough. Even now, studies show that a potential investor has to obtain myriad clearances and approvals before a project can go on stream. There are both central and state government clearances to be gone through and it remains a bewildering maze for a new entrant on the scene.

It has to be conceded that despite these difficulties, foreign direct investment inflows have been buoyant in recent years. Latest data shows that FDI inflows into the country were as high as 84 billion dollars in 2021-22 and there are expectations that it will reach nearly 100 billion dollars in the current fiscal. According to the World Investment Report of Unctad, India is in seventh place as far as FDI inflows are concerned in 2022.

At the same time there is considerable scope for improving the current regulatory regime for foreign investments. Many of the broad policy approaches like the PLI (production linked incentive scheme) have been welcomed by industry. But there is a great deal of work that still needs to be done at the ground level to start a business. For instance, there are a multiplicity of taxes to be paid to municipal, state and central authorities. Land acquisition and obtaining construction permits are also lengthy processes. These procedural issues need to be ironed out and made easier for the new investor. If some progress is made in these areas, then India can take the lead over neighbouring Southeast Asian countries and make the country a viable option for corporates now seeking to shift base from China.