During the golden period, Chinese growth was triggered by external factors. China depended on three engines to power the high growth: exports, investment and manufacturing. Exports and investment, which was mainly poured by foreign investors in manufacturing, contributed 60 per cent to GDP growth. The situation changed with European slump and global slump. It nudged the Chinese policy makers. China shifted its penchant from export based to domestic based consumption growth model. To stimulate the domestic consumption, Chinese government poured US$ 2 trillion in the economy. But, instead of channeling the resources into productive purposes which could uptick the domestic consumption, China splurged the fund into fixed investments. Most of these fixed funds were undertaken by state-owned enterprises and local governments. They proved unproductive. This resulted an imbalance between consumption and investment and aggravated government debt. Consumption continues to reel at much lower level than investment. Ratio of consumption to GDP was 36 per cent, while investment rate remained 40 per cent. The economy faced a huge credit exposure, triggering the debt to 280 per cent of GDP. Most of the construction projects are now saddled with massive over-capacity.
In the backdrop of rebounding of the economy, India is in a position to provide a strong platform for sustainable growth. India’s growth is insulated from the external shocks, which scores a point over China. Growth in India is domestic based and depends mainly on domestic demand. It is reflected by high household savings ratio, which is the second largest in the world . It represents 37 per cent of GDP. India has an edge over China. Private domestic consumption in India accounts for 57 per cent of GDP as compared to 35% in China.
Given the structure of the economy and the pillars for growth, India’s growth splurge is a sustainable and long term growth. Even though China excelled India in attracting three times more FDI at the similar growth rate in 2014, downturn in China’s GDP growth and the failure to resurrect the economy on domestic based factors will dither foreign investors to expand or make fresh investment in China.
Despair in China set a new strategy for the MNCs. It was China+1 strategy. It was seen an hedge against investment risk in China, which was rapidly loosing cost competitiveness due to high appreciation of renminbi. The strategy helps in risk diversification by spreading production process across the border in other Asian countries and protect the foreign investors from relying on a single country. Spreading production process to other countries with bigger domestic demand like in India and low cost countries such as Vietnam, Indonesia, Thailand gained momentum after China was entrapped by cost spiraling and downturn in GDP growth.
TESCO’s investment in India is a case of China+1 strategy as the remedial measure to insulate the investment in China. Spending twenty years with over 100 stores in China , TESCO – the retail giant of UK — has entered in multi-brand retail in India in December last as part of their China+1 strategy. High labour cost became the biggest barrier for TESCO in China, according to Mr Christophe Roussel, CEO of TESCO, China. More and more factories were running under capacity in China. TESCO increased its procurement of garment from India and Mediterranean Rim, Mr Roussel said.
Mr. Chris Devonshire Ellis, senior partner at Dezan Shira & Associates, a professional services firm providing FDI consultancy services in Hong Kong, said that many of their foreign investors clients in China were contemplating to go to India, not necessarily to shut down their manufacturing operations in China, but to take advantage of the large domestic demand.
Japan is the frontrunner to prop up China+1 strategy. Historical rivalry and the continuous rift between China and Japan over the disputed island in East China sea marked the end of Japanese investors’ binge in China. Japanese investors in China are eyeing for alternative destinations as insulation to their investment in South East Asia. They are accessing to Vietnam, Myanmar, Indonesia and India as their hedging destinations against the investment in China and Thailand.
Global manufacturing has made a transformational shift to cross-border manufacturing activities after the rapid growth of FTA (free trade agreement). This cheered One plus One strategy in expansion of manufacturing capacity in overseas. Foreign investors, who flogged into China and Thailand, are restricting their expansion in these countries and are diversifying their expansion in low cost and low political risk countries, such as in Vietnam, Myanmar and Indonesia, including India. China+1 and Thailand +1 strategies are gaining prominence among the Japanese investors.
FDI is an important engine to power the economy. It triggered the Chinese GDP growth during its golden period. Ratio of FDI to GDP was 4.5 per cent in its peak period in 2010 and 2011. While in India, FDI performed a low key role. Ratio of FDI to GDP was 1.6 to 1.9 in the peak period in India.
FDI has an important role in manufacturing and infrastructure sectors. In this perspective, FDI is an high powered beam to fructify Make in India programme. But, Make in India, which was launched with big bang, is loosing its steam. Voices were raised by corporate honchos. They argued that it was merely a concept and not a policy breakthrough in ease of doing business.
Mr Modi is lucky with tapering of oil prices and it’s impact on inflation. Given the propitious situations which made the economic fundamentals strong, it is imperative that India should encourage FDI to inject growth hormones and Make in India a reality. (IPA Service)
India
SPURT IN GDP GROWTH MAY WOO INVESTORS
SOME FUNDS MEANT FOR CHINA MAY BE DIVERTED
Subrata Majumder - 2015-02-24 10:49
A turnaround in the economy is visible. GDP growth, based on new series of 2011-12, was forecasted at 7.4 per cent in 2014-15, up from 6.9 per cent in 2013-14 and a spurt from 4.8 per cent in 2012-13. Paradoxically, China’s GDP, which was pitching for higher growth even after Lehman shock, is on downward swing. China’s GDP growth was 7.4 per cent in 2014, down from 7.8 per cent in 2013 and a deep plunge from 11 per cent in 2010. IMF has further trimmed Chinese GDP growth. It slashed Chinese GDP growth to 6.8 per cent in 2015 and 6.3 per cent in 2016. Days are not far when India’s growth will outsmart China, the economists believe.