American investors splurged investment in India in 2020, despite COVID 19 battered the economy. Indian GDP dropped by about 7 percent in 2020. US investment in India spurred by over 297 percent in 2020 (up from US$3.6 billion in 2019 to US$14.3 billion in 2020). In contrast, US investment in China plateau , despite positive growth in the economy. In 2020, GDP in China grew by 2.3 percent. In 2019 , US investment in China was more than double of India – US$7.4 billion in China againstUS$3.6 billion in India.
The sudden reversal of US investors , focusing India an important destination and showing voltae-face to China, depicts a new perceived investment strategy of US investors in Asia to cope with COVID 19 affected Asian region. Recent surveys by USA suggest that firms may be increasingly circumspect about China’s short and long term perceptions on foreign investment in the wake of trade tensions, hike in wages in China and protectionism.
The paradox of US investors in between India and China – leaning towards India, while keeping China at bay – lies with India’s new generation of economy vis-à-vis China losing significance as a major supply chain source. US investors were allured by India, pitching 1 trillion US Dollar digital market by 2025. It is the second largest internet connection nation in the world. With nearly half a billion internet connections and the second most smartphone users, India has emerged a global leader for digital economy. In contrast, China lost sheen of the global largest supply chain due to COVID 19 , forcing US investors for rethinking their overdependence on single nation.
In 2020, USA was the second biggest foreign investor in India, after Singapore. More than one third of USA investment in India flowed in the digital economy. Google was the engine for trigger in USA investment in India . More than 90 percent of investment in the digital economy was made by Google .
Against these backdrops, China was losing the significance for US foreign investment. According to a survey by Kearney, last year some US companies were rethinking their supply chain operations after the tariff war and rising wages in China. They were trying to convince their Chinese partners to re-shoring the manufacturing in part to South East Asia or opt out of China. The survey unveiled three dimensional changes in US investment in China. Four years ago, cost was the main criterion for US investment in China. The second dimensional change was catalyzed by Trump led trade war. Third dimensional change was brought by COVID 19.
Given these, manufacturing imports from China declined substantially. A substantial imports were made from American invested companies in China. It fell from 24.3 percent in 2018 to 20.8 percent in 2020. In the wake of tariff war and losing sheen for low cost country (LCC), imports were replaced by other LCC. Eventually, share of other LCC in US imports increased from 12.8 percent in 2018 to 14.0 percent in 2020, according to the survey. LCC were mainly led by Vietnam, Thailand and Taiwan.
As a result, many US companies are considering “China plus” strategy – that is, continue to rely on China for bulk supply and also generate additional partners that can mitigate the risk of overdependence on China.
Notwithstanding, euphoria over China’s global FDI attraction hyped in media, despite the outbreak of corona virus . In 2020, China made a sharp growth in foreign investment, toppling USA –the biggest receiver of foreign investment. China received FDI worth US$ 163 billion in 2020 as compared to US $ 134 billion received by USA. In 2019, it was FDI worth US$ 140 billion poured in China, against US $ 251 billion in USA. Several reasons were cited for the revival in China’s FDI potential, such as successful containment of corona virus, re-opening of factories and uptrend in GDP growth.
The factor which boosted FDI in China was spurt in ASEAN FDI. ASEAN was never a major source of FDI in China. In 2020, FDI from ASEAN increased by 65.2 percent. The meteoric rise in ASEAN FDI in China owes to the launch of RCEP (Regional Comprehensive Economic Partnership). China has a big stake in RCEP. It provides biggest market in the trade block. In 2019, it accounted for 38 percent of RCEP import market.
Incidentally, India’s standpoint on South East Asia and East Asia witnessed a volta-face with the withdrawal from RCEP in November 2019. This raised eyebrows of the analysts and futurists over the economic partnership under Act East policy. Former Foreign Secretary Shayam Saran was flummoxed and quipped “is India retreating from Act East policy?”
Correspondingly, surge in US investment in India opened a new look to its FDI potential. FDI is an integral part of Indian economy. The COVID 19 induced pandemic and widespread lockdown leveraged digital transformation in India – a new look to its economy and FDI attraction. It ensured business continuity in India. This movement attracted the US investors, despite the Indian economy slipped in downtrend during the Covid 19 period.
Time has ripen for Look West. FTA with USA could be an important challenge to pave the way. USA is the largest trading partner of India. It toppled China, which seized trade power for over five years. Trade buoyancy with USA was generated by India’s more export to USA than imports, just opposite to China where trade swelled by India importing more and exporting less. It resulted a mounting adverse trade balance, causing pressure on BOP.
For years, India shot down the FTA with USA. USA was eager and India was cool. Former US Ambassador to India Kennth Juster mulled an FTA with India.