As is said, use a crisis to bring in change and to your advantage. It appears that since the COVID-19 crisis, India as an investment case seems to have just got a whole lot better. Within the ‘lockdown period’, the Modi Government has promoted policies that aim to make India a manufacturing powerhouse for the world.
What we know is India has a total population of 1.35 billion with an average age of just 29 years. Therefore, while it boasts the world’s largest workforce, it needs to convert its population burden into a demographic dividend. So creating employment for some 10 million people a year is paramount.
Therefore, it is focusing on expanding its manufacturing base to become a cornerstone of the Indian economy, which could see India exceed growth expectations over the coming decade.
China’s recently-imposed exorbitant tariffs on Australian agricultural exports, believed to be in response to Australia’s demands of an independent inquiry into COVID-19, have drawn comments from the Australian Prime Minister that Australia must now strengthen its cultural, business and trading relations with India as an alternative to its heavy reliance on China. Whichever direction this political posturing may eventually take is not a matter for consideration here, but clearly it has thrown up opportunities which India is planning to capture.
India’s Prime Minister Modi recently released sweeping reforms specifically to land ownership, banking, liquidity and tax to attract more foreign investment in an effort to promote an ongoing global manufacturing shift from China to India. There is a view that the first wave of transfer of manufacturing took place after World War II, from the US to Japan. The second wave was a shift from Japan to South East Asia. The third wave was a shift from South East Asia to China and now there could be a fourth wave where manufacturing shifts from China to India and possibly Vietnam.
Historically, India has been a difficult place for overseas manufacturers to acquire land as typically it must be purchased from several small land owners which has been time-consuming and overly costly due to unwanted bureaucracy and interference from political parties. The federal Government is now working in conjunction with state governments on developing substantial land areas to attract foreign investment. Reports estimate that the area being set aside to entice new manufacturing away from China could be up to twice the size of Luxembourg.
Tax reform has been imposed dropping the tax rate from the typical 25% to 15% for all new manufacturing ventures. A financial incentive is offered for large-scale electronics manufacture.
Banks have been consolidated into four major banks with an injection of around US$55 billion ($78.3 billion) and permission to raise funds from capital markets has been granted.
Around US$266 billion will be provided to stabilise the economy, of which US$60 billion are loan guarantees for small businesses, power companies and non-bank lenders.
Some of the shift in manufacturing to India could occur to prevent supply chain disruption and also support Indian companies to manufacture in India. Examples include:
- Apple has committed to shift approximately 20% of its production from China to India over the next five years and invest up to US$40 billion as an initial entrée;
- German sport shoe maker Von Wellx has shifted manufacturing to India;
- Teledyne and Amphenol from the US have begun discussions with local companies; and
- Two South Korean steelmakers have renewed discussions with the Government to set up integrated steel plants in India.
Meanwhile discussions have been initiated with over 1,000 US companies offering incentives to manufacturers to move to India, with promises of changes to labour laws.
How much of this will eventuate remains to be seen, but there is renewed commitment by India to try and become the third-largest economy in the world by gross domestic product (GDP) in 2025. The case for a transition continues to be compelling as manufacturing wages in China increase to US$3.50/hour compared to just $0.90/hour in India.
Recently, the International Monetary Fund has forecast Indian GDP growth to remain positive at 1.9% in 2020, the highest of major economies. India is projected to be the world’s fastest-growing economy with an economic growth target of 6% to 9% per annum.
It is a combination of recent yet significant macroeconomic stimulus and targeted micro economic reform for manufacturing that could help India exit a pandemic induced recession much stronger than their developed or developing nation counterparts.
India plans to grow into the third largest economy globally within the next decade. Small to mid-sized companies must naturally drive this transition and for this reason we have a significant overweight to such companies in the Fiducian India fund.
India is not without its own challenges, however it is for the best part a stable functioning democracy. Its challenges are not impossible to overcome and do not appear to deter corporate enterprise.
Indy Singh is executive chair of Fiducian.
