Policy Uncertainty Has Hobbled India's China Plus One Push

This has ignited a fresh debate regarding policies that foster an enabling environment for multinational corporations (MNCs) to consider it as an alternative destination for their manufacturing operations.

The increased importance of the China Plus One strategy has resulted in a tectonic shift in the global manufacturing landscape. It is encouraging multinational corporations like Apple, Microsoft, Dell, Black and Decker to shift a part of their manufacturing from China to other economies. 

MNCs are moving out of China for several reasons, including pandemic-induced supply chain disruptions, the US-China trade war, geopolitical tensions, declining labour costs and the need for greater supply chain resilience. 

Although the China Plus One strategy is considered a relatively new phenomenon, the shift of manufacturing from China to other developing and low-income economies has been underway for some time, due to rising labour costs and China’s transition towards high-value-added manufacturing. 

China Vacating Space

On its own, China is vacating space in low-value-added manufacturing in sectors like light engineering and garment manufacturing. This, in turn, is creating opportunities for developing economies like India to capture the vacated space and to capitalise on MNC-driven China Plus One manufacturing.

The central question, in the context of the NITI Aayog report, is why India has been unable to leverage this. 

The answer is not straightforward and demands a comprehensive analysis. Some issues are worth examining in this context. Firstly, India’s regulatory framework has been characterised by ambiguous regulations, policy uncertainty, unpredictable law enforcement practices, and suboptimal ease of doing business. 

Frequent changes in policies and regulations not only create policy uncertainty but also discourage foreign firms to make investment. A report by the Ministry of Corporate Affairs states that between 2014 and 2021, 2,783 foreign companies and their subsidiaries closed their business operations in the country. 

The exodus of MNCs is forming a view among foreign firms that the risks of doing business in India outweigh the potential commercial considerations. MNCs are moving out of India for several reasons, from retrospective taxation, land acquisition issues, labour strikes, misuse of the Enforcement Directorate by the State, corruption and state-backed industrialists. 

For instance, a labour strike by Samsung workers in Tamil Nadu tarnished the country's global image. The state's inability to resolve such issues in a timely manner undoubtedly undermines its potential to attract international investment that follows the China One Plus strategy.

India's Tariff Wall

Second, India's import tariffs significantly increased under the Self-Reliant India initiative. The conventional economic logic suggests that high import duties force MNCs to bypass tariff barriers to serve the domestic market. 

This thinking is influenced by India's success in attracting export-oriented foreign direct investment (FDI) to the automobile and auto component industries. However, the tariff-jumping strategy may not be useful in the context of complex global value chains (GVCs), particularly in high-valued products like semiconductors. 

High import tariffs prove counterproductive to the global sourcing models of MNCs that hinge on the efficient functioning of GVCs, where goods traverse multiple times before reaching the final market. MNCs make investment decisions based on host country policies, particularly how these policies ensure flexibility in coordinating complex global supply chains. 

This underlines the importance of the rationalisation of import tariffs along GVCs to attract MNCs that are moving away from China-centric supply chains. This requires an understanding of the nature and global linkages of product- and sector- specific GVCs, and their evolving realignments. 

Third, India has significantly liberalised its FDI policy and allowed international investment through an automatic route in several sectors. While FDI policy is a central subject, its implementation lies with the states. 

FDI Policies Of States

The role of the states in the effective implementation of FDI policies cannot be understated. However, there are serious concerns about policy implementation at the state level. 

For instance, district-level officers in departments such as electricity, municipal corporations, the environment and water are often inadequately trained to provide support and guidance to foreign investors on procedural and administrative matters. It has been observed that MNCs struggle to deal with local-level officers for such matters, leading to significant delays in regulatory approvals. 

This highlights the need for granular reform in the implementation of policies, rules and regulations. More specifically, there is also a need to address the operational challenges faced by MNCs when taking local regulatory approvals. 

If India truly wants to leverage the potential of the China One Plus opportunity, amid global geopolitical flux, supply chain disruptions and the Trump tariff war, it is crucial for policymakers to understand sector-specific policies and operational impediments to FDI. 

These issues need to be carefully examined at the state level, where FDI is implemented. This should be complemented by greater transparency, consistency and adherence to international standards within India's regulatory landscape. Failing to do so will not only undermine India’s economic interests, but also sabotage its global reputation as a credible partner in the global business community.

(The writer is an associate professor, Jindal School of Liberal Arts and Humanities, O P Jindal University, Sonipat. Views are personal)