The general insight among countries and companies around the world following the Corona is that the list of suppliers should be diversified and that there should be another alternative to production in China. Globalization experts call it “China Plus one” Policy. India wants to be “the plus one” and it has also positive implications on Israel
Adv. Anat Bernstein-Reich
It was after a quarter, that global companies realized that it was not so soon that they would abandon their production lines in China. The decisive declarations that China would pay for the pandemic in the loss of being the world’s leading manufacturer and exporter were too early and when the domino bricks reached the rest of the countries, the general insight was that the list of suppliers had to be diversified and another production alternative had to be identified beyond China. Globalization experts call it the “China Plus One” policy. Meaning, every company needs to find another place of production beyond China. The governments of Asia, from their zoom rooms, have begun to fight for the attention of the global companies and have launched a series of incentives to attract them to their industrial parks. Asia’s developing economies that were expecting high growth rates in 2020, have already realized that this year is “gone” and many are already planning for 2021, with an emphasis on attracting foreign investors.
In a zoom lecture held by the Israel-Asia Chamber of Commerce, we hosted Dr. Soumya Kanti Ghosh, Chief Economist of the State Bank of India, who surprised us with estimations that in this fiscal year, the negative growth is expected to be 5%. From 2.6-4% positive growth forecasts (depending on whose estimation we use) to such a dramatic drop in forecasts, India will have to recalculate its’ trajectory. The rupee rate is also worrying. It has weakened by almost 10% since the beginning of the year. The Rupee started 2020 at its’ equilibrium point of Rs 70-71 per dollar and with the arrival of the pandemic to India, it jumped to Rs 75-77 per dollar. The Rupee likes to settle on round numbers, thus its path to exchange rate of 80 (rupee to dollar) seems to be close.
The Objective- Attract foreign investors that used to prefer China
The year 2020 started with high expectations. The IMF announced that India has overtaken Japan and is currently ranked as the world’s third largest economy in terms of purchasing power, after China and the US. Another achievement of the Indian Prime Minister, Mr. Narendra Modi, which didn’t get enough attention, is the increasing tax collection base. When Modi came to power in 2014, 30 million taxpayers were registered in India, currently there are 70 million. The potential is, of course, 270 million taxpayers, as the number of households in India, but doubling the number of registered taxpayers is an unmissable achievement. Since this is India, these numbers do not yet indicate doubled collection. Collection has grown by only 25% over these years and only 4% of taxpayers are responsible for paying 60% of it. Another encouraging figure is that over the last five years, as part of the Digital India scheme, more than 380 million people have been absorbed into the banking system. Even if most of them do not pay taxes yet, India has created a more effective supervision system for potential taxpayers.
Immediately after the pandemic started and China’s borders were closed, India realized that the supply chain that was originated in China was hurting India’s production capabilities, thus, in mid-May, Modi embarked on an ambitious program called “India Relying on Itself” (Aatmanirbhar Bharat), with a $ 277 billion budget which counts for 10% of the GDP. For an entire day, euphoria in India prevailed and the stock exchanges soared, but then the skeptics began to argue that this was not a new budget, but a new packaging of existing programs. Modi’s plan, which aims for India to become a $ 5 trillion economy (today it touches the $ 3 trillion), includes several interesting and relevant reforms for Israeli companies and foreign investors in general. Modi wants to attract foreign investors who have been choosing China for years, and a large part of his plan relates to the foreign investor and to “doing business in India”. Even if India does not replace China, Modi actually asks foreign investors that India will be China’s “Plus One.”
Let’s start with matters that are close to our hearts. For the first time in India’s history, a foreign investor has been allowed to hold 74% of a defense manufacturing company, without asking for special permits and easements. So far, Israeli companies seeking to open defense factories in India have had to settle for 49% holdings and find a local partner for the balance 51%, a structure that has been a source for concerns in intellectual property protection and corporate control issues. Immediately after this change, Israeli companies began to reconsider their activities in India, although the closed borders do not yet allow them to realize the said relief.
Another significant relief can be seen in the agriculture industry. India realized that one of the main sufferers of the Corona were the farmers who, at the beginning of the lockdown, could not go out to the fields and market their produce. Thus, beyond a one-time $ 2.5 billion aid, the new plan allows farmers to sell their produce directly to the consumer, with no middlemen and marketers who enjoy fat margins. Familiar to us? The program also provides farmers with budgets to adopt agricultural technology in order to improve shelf life and allow them to sell not only in the limited geographical area, but also reach other states in India and even export agricultural produce. Israeli agritech companies will be in great demand in India in the near future.
In February, President Trump and his wife visited India, in a show of strong friendship between the two countries. Clearly, China matters were also discussed. The US-China trade war supports the new-old scheme of Modi, especially by American companies and pro-American countries, who will most likely give preference to India. The saying “when two are fighting, the third wins” is also true here.
The writer is the CEO of A&G Partners, Chairperson of the Israel-India and Nepal Chamber of Commerce, and Vice President of the Israel-Asia Chamber of Commerce. Winner of the “Friends of India” Award for Economic Development in 2020.
The Marker Foreign Trade Magazine June 2020