In its 31st survey made in November 2019, JBIC advocated India as the most attractive investment in 2019, leaving behind China and Vietnam at second and third position respectively. The survey further revealed that India’s surge in the rank was due to drop in voting rates in China. In other words, China’s drop paved the way for India to rise to the top for investment destination.

Nonetheless, opinion survey is an indication and data speak themselves more determinately about the trend. According to METI, India emerged 5th biggest receiver of Japanese investment in Asia in 2019 (BOP base), leaving behind Vietnam at 6th place. Notably, Japanese investment in India was twice of that in Vietnam in 2019. It quadrupled within three years – from US $ 1.6 Billion in 2017 to US $ 5.1 Billion in 2019. Against these, Japanese investment in Vietnam crawled to a marginal increase from US $ 2.0 Billion in 2017 to US $ 2.5 Billion in 2019. The trend shows the tenet of the Japanese reliance on India’s potential.

Why is it then India was toppled by Vietnam in NNA survey within two months of JBIC survey. In popularity and reliability, JBIC is more pronounced since it has been conducting the survey for three decades. What does it connote? Is JBIC survey more reliable or NNA survey should be trusted to determine Japanese future plan for alternative to China?

No doubt, Vietnam has many attractive features: cheap input costs, stable politics, increasingly liberalized trade and investment policies and its FTA with Japan and other countries. But, It has limitations too. They are its high dependence on foreign inputs for production and exports, limited sectors for investment, retreat of globalization after COVID 19 and its much smaller population.

High dependence on foreign inputs limits the capacity expansion, embodies risks if the political relation rages into confrontation, retreat of globalization reduces import intensity in production and exports and small population limits the domestic demand.

China is the main source for imports of foreign inputs in Vietnam. More than one third of Vietnam’s imports come from China. Given the over dependence on foreign inputs, its gross exports include more of Chinese intermediate goods than domestic products. Eventually, it raises risks for sustainable growth in exports, in the event of any political upheaval. India is a case in point. India’s over dependence on Chinese component and parts for mobile phone manufacturing caused a big headache for the Government of India. Even though it helped in building a new industry, the bitter political relation between the two countries in the wake of frequent border conflict forced Indian government to put barriers on imports from China.

Another weakness of Vietnam for overdependence on China is that its integration with other Asian countries. Its imports witnessed downturn from these nations with the increasing imports from China. In other words, Vietnam’s rise in GVC participation rests more on foreign inputs , predominated by China. So far so, it is conducive till the political relation is normal. But, China has lost its integrity as a good trade partner with its expansionism policy. After China defied Hague arbitration rule, which blamed China’s forceful assertiveness in South China Sea, sovereignty of Vietnam is at stake.

Vietnam has limited sectors to attract investment. The target industries are electronics, footwear and textile. This means firms looking for shifting from China will find to meet only a subset of their needs. This leverages more opportunities in India, which embraces multiple sectors for investment. From manufacturing of electronics, automobile and defence equipments to construction, embodying big investment in infrastructure, India can provide larger scope for Japanese investment in India.

Domestic demand is another important parameter, which edges out Vietnam. India’s population is more than ten times of Vietnam. Eventually, all’s said and done, investors in Vietnam have to reap the benefit through exports, unlike in India where domestic demands become the determinant for sales. Many suggested Vietnam is an alternative to China for supply chain. But, with the retreat of globalization in the wake of outbreak of COVID 19, situation ignited supply chain risk with the disruption in production in the world. It nudged countries to have a second thought on import dependence in GVC model and turn inward for development of domestic supply chain. In fact, since 2011 global import intensity to production witnessed a downturn, according to OECD. Reasons were trade tensions, protectionism and uncertainty in trade policies.

Locked into the quagmire of retreat of globalization and rise in protectionism, which will be detrimental to GVC by export base economy , it warrants for a greater risk for investment in export base economy than in India. India’s new initiative in Make in India is to establish a strong domestic supply chain, focusing on MSME (Micro, Medium and Small entrepreneurs), with abundant financial support. (IPA Service)