Can ABC safeguard the Indian economy?: Case Study

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What is ABC you ask? This term has been the buzz word for quite some time now. Well ABC stands for ‘Anything But China’!

The Press Note (PN 3 of 2020), of April 18, 2020, which was issued by the Government of India made an important change to the Consolidated Foreign Direct Investment Policy (FDI Policy) seeking to “curb the opportunistic takeovers/acquisitions of Indian companies due to the current pandemic”, this mandates that prior approval of the government for FDI by any entity based in a country sharing a border with India … the main motive here is to curb any attempts by Chinese firms to take control of Indian firms during this economic slowdown.

China’s Central Bank People’s Bank of China (PBoC) bought over a 1% stake in India’s largest mortgage lender HDFC Ltd., and this is what may have triggered India’s sudden push against China, and echoes of ABC. Even Donald Trump has been quite vocal about stating the Corona Virus as the ‘Chinese Virus’. This has created an anti-China sentiment across the world.

Australia has called for an inquiry into where the virus had originated. German newspaper Bild demanded US$160 billion in compensation from China for damages to Germany caused by the virus. Around 7 Chinese ambassadors — to France, Kazakhstan, Nigeria, Kenya, Uganda, Ghana, and the African Union — have been summoned to answer accusations. Multiple governments around the globe want to sue Beijing for damages and reparations.

ABC is almost impossible to implement at the consumer level as practically every electronic device, household product, even tourist trinket – everything on sale is almost exclusively manufactured or assembled in China. China’s efficient manufacturing base is virtually impossible to replicate anywhere else on the planet, at least in the near foreseeable future. Change can only come if companies opt for alternatives

China in 2018 had a GDP of US$13.6 trillion, which made it the second-largest economy in the world, behind the US (US$20.5 trillion), but far ahead of Japan (US$4.9 trillion), Germany (US$4.0 trillion), Britain (US$2.8 trillion), France (US$2.8 trillion) and India (US$2.7 trillion).  China was also the largest trading nation in the world. Its exports were almost worth US$2.5 trillion, substantially ahead of the US (US$1.6 trillion). And in 2018, China attracted over US$203 billion worth of net foreign direct investment (FDI), much more than Germany, Japan, UK, France as well as India (US$42 billion), and second only to the US (US$258 billion) ABC may not be easy for China-haters to pull off.

China has US$ 2.5 trillion worth of exports, almost everything is manufactured over there. US has close to US$ 420 billion and India has US$ 75 billion worth of imports from China.

There is a huge backlash against China, Japan put US$ 2.2 billion to help its companies shift production out of China following the pandemic. Many sectors, like pharmaceuticals, agriculture, automobiles, and energy, have come under pressure global during health crisis. Supply chains can be moved to countries like Vietnam, Bangladesh, Turkey, India, and even Brazil. Global firms like US-based makers of medical electronics products like Teledyne and Amphenol and medical equipment makers like Johnson & Johnson have shown interest in India. Ministers are expecting over 100 global companies that are in dialogue with Indian embassies and ministries.

 “A phased manufacturing plan (PMP), with a supportive regulatory and policy framework, can do wonders for India,” says Gurdeep Singh, who had headed Aircel and ADAG’s Reliance Communication. “But it requires astute planning and unwavering adherence to the agreed plan, no matter what,” is what Singh said. Bharat Salotra, who ran Alstom India & South Asia added that “This decade is India’s last chance to take advantage of the demographic dividend. If we don’t capitalize on the opportunity thrown at us by this crisis, our demographic dividend can turn into a demographic disaster”.

Around15% of India’s imports come from China. This ranges from electronics and engines to boats, ships, and medical equipment.

The government of India is said to be developing a land pool of around 243,000 hectares in area to attract businesses moving out of China. An area of 461,589 hectares has been identified across the country for the purpose. This includes 115,131 hectares of existing industrial land in states such as Gujarat, Maharashtra, Tamil Nadu, and Andhra Pradesh. Sandip Das who was CEO of Hutchison, Maxis, and Reliance Jio says “We can make inroads certainly, but not replace China. We must creep in quietly and not be confrontational. Their retaliation can hit us hard. Speed is of the essence as the world is sensitive about China right now. We are not the only country that’s trying to capitalize on the opportunity!”.

One of the most successful ‘Make in India’ initiative in the past few years has been in the mobile manufacturing business.

Pankaj Mohindroo, Chairman of the Indian Cellular & Electronics Association (ICEA) previous Chairman of the Fast Track Task Force which was set up by the  Department of Electronics and Information Technology, says the manufacturing and assembly market for mobiles in India is worth Rs. 2,10,000 crores today. Mobile exports from India today top Rs. 26,000 crores, up from Rs. 1300 crores just two years ago. individually, and together, the opportunity to pursue, and become world-beaters. And each of these components is worth thousands of crores in value. For this humongous base, nevertheless, China imports US$ 400 billion worth of components and material; but parallelly value-adds and exports mobiles & electronics worth US$ 600 billion. “They still import most of the intelligent stuff like semiconductors and ‘memory’ components from Silicon Valley, Japan, and Korea”, he says. “But value-addition in China in an iPhone is 40%, and maybe 95% in a feature phone”. Thus, India needs to focus not on a micro-target of value-adding by import substitution in India, but create huge momentum for exports, and value addition will follow step-by-step in due course. In a few years, we will be NFE positive and there will be huge direct benefits of employment to millions, revenue generation, and skill development.

India will have to carefully play its cards with regard to ABC. China’s exports to India have climbed from US$ 1.83 billion to nearly US$ 75 billion in less than 20 years’ time. At the same time, India’s exports to China have gone up from US$ 0.92 billion to US$ 17.96 billion in the same time frame. Getting into an antagonistic position against China will lead to severe consequences as can be seen from the stats.

Akhil Gupta, Vice-Chairman, Bharti Enterprises & Executive Chairman, Bharti Infratel suggests both caution and a step back to strategize and rethink ABC. Why should ABC have to be Anything But China, he asks? Why can’t it be Apna Bhai China? China has the capital and willingness to invest in India. The PN 3 of 2020 notwithstanding, China is not a negative partner to do business with. India can protect some of the security-prone tech businesses and risk-prone financial businesses, but let China invest in other sectors where investment is in real short supply. Moral of the story: the first step in protecting yourself from the ‘enemy’ is to get them to invest in you!

ABC has two paradigms. One is to bag in on the vacuum created by the anti-Chinese sentiment. The other is to look at China as a friend and an enemy or ‘frenemy”.

The ‘frenemy’ approach has may pros, take for example the recent Facebook investment in Reliance Jio, around Rs. 43,574 crores for a 9.9% stake. Google and Facebook have around 80% of India’s digital spendings. If India welcomed the likes of We Chat (Facebook of China), Sina Weibo (China’s Twitter), Tencent QQ and Tencent Video (similar to YouTube), Baidu Teiba (the Chinese version of Google), Douban (lifestyle forum), Zhihu (Chinas Quora), Meituan-Dianping (Yelp type), Toutiao (Wikipedia plus Google) and other Chinese successes, the most likely scenario that will play out is how companies like Oppo, Xiaomi, One Plus and Vivo dominated the Indian mobile market, history could repeat itself with the Indian digital market.

The Government of India can mandate that the Indian entities will retain 51% on these new ventures, or other similar protections. This can bring in some huge investments both from Chinese, as well as threatened US behemoths, here the ultimate winner would be India. In other words, ABC for us can be America +Bharat+China!

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