China is the biggest trading partner of ASEAN. It is also the biggest import destination for the region. Over dependence on imports of inputs from China catalyses ASEAN’s export model economy. Over one-fourth (26 percent in 2018) of its global imports of electronic and electrical items, which make base for its exports, are from China. Eventually, FTA with ASEAN made a strong platform for its over-dependence on China for supply chain.

It launched BRI (Belt and Road Initiative) to reconnect the region and boost the trade links through infrastructure development. “BRI is the most viable platform for advancing China’s neighbourhood diplomacy,” according to Dr Jonathan Stromseth of Brooking Institute. Indonesia, Vietnam and Malaysia are the top recipients of Chinese capital through BRI connectivity

With the outbreak of coronavirus, cracks are developing in the supply chain in the region. It is said that Vietnam will be most affected due to its over-dependence. Hong and Singapore will be more severe, given the fact that they were already experiencing slow pace of growth due to structural weakness before.

The region’s most developed export oriented industries like electronics, automobile, machine and textile sectors will be most affected by the disruption of supply chain. Over 20 percent of global trade in manufacturing intermediates originates from China, according to UNTACD. Eventually, it will affect China’s manufacturing capacity and undermine the output elsewhere.

Coronavirus generated a new thought on South East Asia model of development. Heavy dependence on export led growth and overdependence on China centric supply chain will escalate risk. Given the uncertainty of the duration of the pandemic, it is advocated that diversification of supply chains to multiple nations is the only solution, instead of overdependence on one nation. In other words, small nations in ASEAN should diversify their procurement from multiple nations in Asia, who can provide low cost manufacturing. This leverages scope for other nations as substitute to China. India is no exception to this.

Every MNC is now looking for alternatives to reduce dependence on China. There are three ways to do it. First, they should move for sources back to home market. Second, they should move to the markets of its consumers, and third, move to third countries.

India stands for opportunities for later two sources. Given the demographic advantages of big population and low aging people, India has the advantage for a big consuming market. It is said that whatever you produce in India, you can sell. Automobile and mobile phone manufacturing exemplify the cases. India is the fourth largest producer of passenger car and the largest producer of two-wheelers in the world. Over 86 percent of these vehicles produced in the country is consumed domestically, even though they are high priced. So is the case with mobile phones. India is the second biggest producer of mobile phones. A large part of the production is consumed domestically.

After achieving a sustainable high growth for past few years, India was caught in the vortex of hope and despair due to contraction of GDP. It declined from 7.0 percent in July-September 2018 to 4.5 percent in July-September 2019. One of the main reasons was staggered domestic investment. Domestic investors were shy and demand was low. Amidst this, surge in foreign investment became some respite. Foreign investment surged from US $ 30 billion in 2014-15 to US $ 44.8 Billion in 2018-19.

India had already established its powerhouse of manufacturing, when a Chinese daily rang alarm bell two years ago for losing its competitiveness. Foreign investors were on the spree to dislocate their manufacturing facilities to low cost countries. To this end, India and Vietnam became the attractive destinations.

The decision of the world’s biggest smart phone manufacturer, Apple Inc, USA, to vacate production chain in China and shift to India is a case in point. Foxconn, the Taiwanese MNC as contract manufacturing of Apple, decided to invest US $ 5 billion in India. With Apple shifting, other tech giants shifted to India, perking up India’s rank to the second position in global mobile phone manufacturing

RCEP (ASEAN 10 + 6) is the main source of FDI (Foreign Direct Investment) in India. In 2018-19 it accounted for 47 percent of total FDI flow in India. Investment has become the need of the day after the country plunged in downswing in growth. Even though India’s FTA with ASEAN resulted in demerits in trade by widening trade deficit, in terms of foreign investment it yielded windfall. In between 2011 and 2018, FDI from ASEAN leaped 80 percent. It accounted for 37 percent of total FDI in 2018, as compared to 12 percent in 2011. This underpins the other side of FTA, albeit trade demerits.

Given the China’s influence gradually ebbing as a major supply chain hub and Japan asking its investors to withdraw from China, new opportunities emerge for India to woo investment from these nations. With India having a big consumer market on the one hand and a large pool of working population, equipped with IT skills, India is likely to outbid China for an important investment destination. In the light of these structural changes in RCEP, India can have a second thought on joining the trade block. (IPA Service)