India: Alternate FDI destination vis-à-vis China

By Subrata Majumder

Morgan Stanley in its recent review portrayed India as the most attractive destination for foreign investment in Asian emerging markets. It has also upgraded India from 6th position to top in the region. Macro economic stability and faster growth in the post COVID were cited as the main reasons. India proved resilient to global volatility, stoked by US recession and Ukraine war. Global analysts were upbeat with India emerging the next global destination for FDI, in contrast to China and South East Asia eroding prominence.

In 2022, India and Vietnam were the only two countries in East and South East Asia to pitch for higher growth in FDI inflow. China, which was the main headway for global FDI inflow, was dragged into retreat with its stringent COVID policy and domestic oriented investment policies. FDI in China grew merely by 4.5 percent, as compared to India recording 10.3 percent. South East Asia, which has been a major challenge to India, lost steam. FDI growth slid to 4.6 percent in 2022.

US-China face off and Ukraine war added a new layer of FDI culture in the world. Low cost production and global network of supply chains, were outweighed by global political bi-partition and currency war. A wide gulf was created between west and east and de-dollarization emerges  a shine  for the FDI boost in the bi-partition world. China poured substantial investment  in Russia in Chinese Yuan and India opened the gate for local currency investment by UAE – the third biggest trade partner of India.

US dollar is eroding prominence and Chinese yuan or local currencies are gaining steam in the de-dollarization movement. According to  IMF survey, dollar share in central bank foreign exchange reserves declined from 71 percent in 1999 to 59 percent in 2021.  The US dollar was alleged for using  more like a political weapon. Eventually, de-dollarization became an additional factor for FDI diversification. 

Given these, de-coupling and de-risking are gaining significance in making new trends in FDI . Till now, China was one of the main destinations for USA , Japan and EU investment. Chinese prominence is in retreat and out-placed by India as an alternative in East and South East Asia with the advent of de-coupling and de-risking policies. FDI growth in China nosedived to 4.5 percent in 2022, after a spurring growth by 21.2 percent in 2021.

De-coupling and de-risking do not have any academic or institutional definition by UNCTAD, WTO , World Bank or IMF. In colloquial terms, “de-coupling” means exiting investment from China and “de-risking” refers to China+1 investment strategy. 

On June 21, the USA announced multiple policy challenges – all centring to downplay China. President Joseph Bidden rolled out the red carpet to Prime Minister Narendra Modi’s visit, despite India’s neutral stance in the Ukraine war. This reflects USA’s tilt towards India, hailing India’s leadership in the Indo-Pacific  to counter China. Given these, global analysts perceived, “USA  needs India more than India needs”.

The USA was one of the top two foreign investors in India. During the recent visit to the USA by Prime Minister Narendra Modi, USA and India signed several agreements covering defence procurement, joint weapon production and development of several critical technologies. These opened several opportunities for India to lure US investors, in the wake of de-coupling and de-risking strategies.

India ranked 8th in global FDI inflow, according to the World Investment Report. It emerged the second most attractive destination for FDI flow in South East Asia and third in the whole of South East Asia and East Asia in 2021. The main drivers for FDI flow in India were the US, Singapore  and Japan. Together, these three nations accounted for nearly 50 of FDI flow in India

It is difficult to assess how much shifts were made or could be made by USA and Japan investors, owing  to de-coupling and de-risking. Nevertheless, some cases may exemplify the shift .

De-coupling of Apple of the US from China partly and shifting to India has become the headlines. Apple’s decision to shift its production base in India signifies India’s challenge to China. It raised concern over China’s hegemony in the global supply chain in the next decade. China has been the global powerhouse for supply chain manufacturing. Nearly one fourth of the global supply chain is accounted for by China.

Japanese investors also vied India against China after the Japanese government provided a big subsidy to diversify offshore investment from China, to reduce over-dependence. Eventually, Japanese investment fell drastically in China. Though Japanese investment also fell in India in the post Covid, the magnitude of fall was slower in India than China.

It was  by 34.4 percent in the case of China , as compared to 14.1 percent in India. There were 13, 934 Japanese companies in China in 2016. It dropped to 13, 685 in 2019. Share of parts and components from China declined from 29.5 percent in 2015 to 26.1 percent in 2021.

Focuses were made for  South East Asian countries for diversification of Japanese investment. Even though thrusts were given for shifting  to Thailand, Vietnam, Malaysia, Indonesia by the Japanese government, India emerged the preferred destination for Japanese investors.

Vietnam was focussed a coveted destination for diversification. But Japanese investment in India increased much more than Vietnam. In 2021, Japanese investment in India increased by 132.9 percent , as compared to 76.3 percent in Vietnam. This advocated Japanese investors’ tilt towards India.

In summing up , though India was not hyped as a better alternative to China, the recent developments in Indian economy and foreign policies, including political stability, ensure a better bet for foreign investors.


Some key points about India as an FDI destination

  • Market Size and Growth Potential
  • Economic Reforms
  • Skilled Workforce
  • Infrastructure Development
  • Startup Ecosystem
  • Diverse Sectors
  • India’s FDI Policy
  • Trade Agreements
  • Sustainability and Green Initiatives

Despite its attractiveness, India does face challenges such as complex bureaucracy, regulatory hurdles, and infrastructure gaps in certain regions. These challenges can impact the ease of doing business and the speed of project implementation.

India’s political stability and commitment to reforms are important factors for long-term FDI. With increasing global emphasis on sustainability and environmental considerations, India’s efforts toward renewable energy, climate commitments, and green technologies can attract investments aligned with these goals.

Subrata Majumder is a former advisor to JETRO – Japan External Trade Organization, under The Ministry of Economy, Trade and Industry (METI), Government of Japan.

Disclaimer: The views expressed are not necessarily those of The South Asian Times  

Images courtesy of ET and Provided

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