India Poised to Compete for Chinese Foreign Investment

Low labor costs and favorable demographics allow India to attract foreign direct investment.

Government buildings in New Delhi, India, October 28, 2011
Government buildings in New Delhi, India, October 28, 2011 (Chrissy H)

China aside, the smart money in Asia right now is on India as the emergence of the nation as a destination for foreign investment becomes more understood.

India’s main problem, however, remains one of perception — it has a noisy, democratic media that loves to blow up scandals and bad news.

By comparison, China pushes its troubles under the carpet through extensive media censorship. That has worked for China to a large degree and has served to underplay inherent financial and political problems in the country but that’s not to say they don’t exist.

In India, everything is aired publicly, creating a disparity of news information when the two are compared — China good, India dirty.

Perceptions aside, the reasons for India’s growing attractiveness as a China alternative are numerous. Firstly, as China has become wealthier, labor costs have increased dramatically — and this is effectively making China less competitive when talking about export driven manufacturing. That business is now leeching away to other emerging Asian nations, with India among the main recipients. That doesn’t mean China based manufacturers are leaving necessarily — it’s just that to financially justify establishing a manufacturing base in China today means that one should be looking at servicing the Chinese consumer market; and not all products are suitable for China.

China’s own development demographics have changed as well — twenty years ago, the average age of a Chinese worker was 23. Now, that average age is roughly 37 and that employee requires a far higher income than before. Interestingly, the average age of an Indian worker today is 23 — the same as China twenty years ago.

“We are seeing more interest in FDI into India than ever before,” comments Olaf Griese, partner at Dezan Shira & Associates in India. “Businesses have woken up to the fact that India is also a hot destination and, having established China holdings, many are now setting up operations in India as well. The two nations are complimentary investment destinations and now it is India’s turn.”

On top of this, the Asian trade dynamics are altering, with the Southeast Asian trade bloc ASEAN about to come into full tax free status in 2015. That is altering manufacturing investment patterns as businesses wishing to sell to Asia are now increasingly looking at doing so in ASEAN, using Singapore as a regional financial and services hub to access markets in Vietnam, Indonesia, Thailand, Malaysia and the Philippines. The faster growth potential lies in these countries as opposed to China — and India, with its DTA with ASEAN, permits duty free movement of over 4,000 different product and goods categories with the entire region and more to follow as the DTA still has many more under negotiation.

At present, India’s ASEAN strengths lie in the exporting of telecommunications and electronics products — a major competitive area with China. Add to that logistics, education and financial services and it is clear that India is going to become a long-term player in Asia in these key industries.

In terms of investing into India, many corporations are using Singapore as a regional hub. The city state is the de facto financial and services hub for ASEAN and, to some extent, is pushing subsidiary operations into India. That too echoes China, when twenty years ago Hong Kong was under British jurisdiction yet was still considered a gateway to China — a role it has since gone on to develop even further. Singapore does not levy taxes on profits realized externally from its borders and this promotes its use as a regional hub for Southeast Asia.

Also of interest in the China–India comparisons are the consumer values. While much has been made of the rise in Chinese consumer wealth, the India market also has a well established middle class consumer base of the same size — about 250 million. The differences between them lie in their spending behavior. China’s nouveaux riches tend to spend more on glitz and glamor while Indian money is older, more conservative in taste and more discretely spent.

This article by Dezan Shira & Associates, a specialist foreign direct investment practice, originally appeared at 2point6billion.com, September 7, 2012.

Comments

  • Everyone in the West is shocked by how jingoistic the Indian media is and how sensitive it is to foriegn critism.

    India has at least 12 different billion dollar + scandals. In comparison, in China the scandals limited to misuse of public funds at the regional level

    What use is the demographic advantage when half you population is in villages with record high poverty. China still has young workers waiting for permits to migrate to the east, so China has no shortage.

    The smart money is in Vietnam and Bangladesh but that’s short term. Long term, Brazil

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