China has been the apple pie of the eye of global investors for many decades, It has attained the status of World’s Factory, and it has been successfully maintaining it for many years down the line. However, situation has been on downward spiral for last couple of years, and China has started to feel the pinch of economic depression now.
The latest news of China’s deficit in foreign direct investment (FDI) in the July-September quarter of 2023 has sent shock waves in the entire world. For the quarter, it reported an FDI deficit of $11.8 billion, which is first time negative in last 2 decades.
This means that instead of foreign money entering China to create infrastructure, startups, and real assets, the foreign investors are pulling the money out of the country last quarter. This is a massive reversal phenomenon, which has been seen first time since 1998, when the country’s forex regulator began compiling this data.
It reflects a de-risking underway of global value chains (GVCs) away from China, mostly in line with the ‘China plus one’ strategies adopted by global businesses in response to supply chain challenges posed by COVID-19. The pandemic had exposed over-reliance on Chinese factories as a glaring risk.
At another level, it may also reflect a geopolitical rupture playing out as a kind of Cold War II, globalization as usual having taken a recent blow from the war in Europe and a flare-up in West Asia posing another threat, amid talk of a Moscow-Tehran-Beijing axis looking to topple today’s ‘Pax Americana’ order.
As it happens, the Chinese economy is in a slump and may remain too weak to get GDP growth back near double digits (its pre-pandemic ‘normal’). But then, Beijing did itself no favour by taking an autocratic turn, with business crackdowns, power exertions and other statist moves since its recent re-embrace of socialism (the version with “Chinese characteristics”) after a long market-oriented run of FDI-fueled growth.
Communist China’s economic rise started in the late 70’s, with the help of Deng Xiaoping’s smart policies and USA’s support. The US had identified an opportunity to split labor-rich China away from Soviet influence using trade agreements and business ties.
The situation once again changed after the division of USSR, fall of Berlin Wall and official end of the Cold War ended. China drew FDI in such bulk that it was taken as a theme track for its sizzling output growth as well as export success.
At the time, the USA also facilitated the entry of China to the World Trade Organization, which also allowed China to take more leverage to enhance its economic might. China’s integration with global trade, the US had held, would turn it more democratic. Hindsight now tells us that China was merely biding its time on that front. History hadn’t ended with the Cold War and the US-set world order remains in the cross-hairs of its discontents.
Xiaoping model of FDI backed export-led growth pursued since 1978 seems to have run its course with the tipping point being the Covid epidemic crippling the global economy. Inevitably, China has had to look within for growth which is sadly not happening with unemployment at 21% level, prices plummeting and consumer spending heading South. Apart from that China was also indulged in repeated altercations with its neighbors, which also created a negative impression about its capability to deliver to the world.
India has positioned itself as a next BIG THING
While China was facing all these challenges, its neighbor and arch rival India was going through a transformation, which China experienced in last 70’s and 80s. the Fortune of India changed in 2014, when BJP led government took the reigns and started manufacturing led economy, which used to be Agriculture and Service based economy.
Indian government has taken several pathbreaking steps, made various policies, laws and frameworks. Which helped it positioned itself as a hospitable place for the West’s megacorps to diversify their GVCs. India’s FDI inflows have been on an uptrend this century, peaking at just under $60 billion in 2020-21 (thanks to tech deals), before slipping 1% the following year and then 22% to $46 billion in 2022-23. India drew almost $11 billion in the quarter ended June, a 34% year-on-year drop.
While this data doesn’t reveal a GVC-rejig FDI boom, we clearly do have an opportunity to become the world’s next mega factory. To make the most of it, though, the government must keep its policy choices adaptive. Many moves have been made and schemes launched to attract GVCs and position India as a hub for manufacturing, but, policy-wise, what is not working must be changed as soon as evidence of it emerges.
Under watch in this context are a corporate tax cut, production linked incentives, import restrictions, trade-bloc aversion (in favour of bilateral ties) and an import tariff ‘up-creep.’ We would need far more than a marquee MNC win (a la Apple Inc) or two for FDI levels to soar.
All in all, we can say that India has pitched itself as the Next Factory of the World, and western powers are indeed believing in this idea too. India is a matured democracy, with higher degree of transparency and processes, which attract other nations to start their operations in India and seal important trade agreements.