As opposed to ‘Go Global’, ‘Make in India’ is likely to remain a capital importing programme
China’s ‘Go Global’ is an interesting contrast to India’s ‘Make in India’. The two slogans reflect contrasting priorities as well as differences in economic circumstances.
Premier Li Keqiang has urged Chinese companies to ‘Go Global’ for tapping overseas investment opportunities. The call has gone out to state-owned enterprises (SOEs), which have been the leaders in both overseas greenfield investment and acquisition of foreign firms. SOEs would also collaborate with firms from other countries for ‘third country’ investments. The establishment of a Sino-French investment fund for investing in third country markets is an example.
The ‘Go Global’ call comes at a time when China has become a net capital exporter for the first time. Revised data on Chinese outward FDI for 2014 estimate such flows at $123 billion, compared with inward FDI flows of $120 billion for the same year. More overseas investments by Chinese SOEs is likely to cement the country’s position as the largest outward investor and highest capital exporter. The possibility is imminent given that other major capital exporters, such as EU member states like Germany and the Netherlands, or Gulf countries like Saudi Arabia and Kuwait, are experiencing resource crunches, either due to structural factors or falling resource prices.
In terms of drivers encouraging ‘Go Global’, the most obvious is the falling rate of return on domestic investment in China, combined with the fact that most Chinese SOEs are searching higher profitability. For the latter, prospects of expanding investments in China for higher returns are not particularly bright at this point in time. Even though cost of capital in China continues to remain low, labour and material costs have been rising, pushing up marginal costs.
SOEs remain the biggest consumers in China as well, with domestic procurement rules weaving them into a mutually beneficial producer-consumer relationship. The benefits, though, are becoming less over time given that inability to lower costs and expand sales are affecting profitability.
It is important for Chinese SOEs to ‘Go Global’ in search of greener pastures. The fact that Chinese outward investment is increasing sharply, making China a net capital exporter, underpins the eagerness of Chinese investors to move abroad. The Chinese state, on its part, has been facilitating the efforts. Indeed, one can also visualise the role in a reverse fashion, in the sense, initiatives by the Chinese state, such as the One Belt One Road (OBOR)—combining the land and maritime silk routes—envisaging ambitious regional connectivity plans with ample investment opportunities for Chinese SOEs.
‘Make in India’ is in contrast to ‘Go Global’ as it is essentially an effort to encourage capital imports. India, till now, is not only a net capital importer, but also a much smaller player in global capital flows, compared with China. While Chinese outward and inward FDI add up to $243 billion, such flows for India, measured in terms of equity flows, add up to barely $37 billion for last year, making them around 16% of China’s total external long-term capital flows. India’s overseas FDI last year, measured again in equity flows, was just about $4 billion.
The emphasis in ‘Make in India’ is on attracting foreign investment for expanding domestic capacities. The effort points to the difference in underlying macroeconomic circumstances between the two countries. The first point to note is the relative attractiveness as a foreign investment location. From a business perspective, China still has more going for it in terms of ‘attractiveness’ given that it continues to remain a better place for doing business by any yardstick. However, higher costs and lower returns can dent the charm. India can offset the Chinese ‘charm factor’ if it can clean up its ‘doing business’ and combine it with advantages of being a location with lower production costs and potential higher returns on long-term investment. The latter advantages justify India’s emphasis on capital imports through ‘Make in India’, while their absence validates China’s emphasis on capital exports through ‘Go Global’.
The second important factor behind the contrast is in actors that are capital exporters. India has very few SOEs, except some like ONGC Videsh, which have had active outward FDI policies. India’s outward investments have been driven mostly by private firms. For quite some years now, Indian companies have not been having adequate surplus capital for overseas investments. Subdued domestic economic conditions have affected growth of investible surplus, as have unfavourable conditions in overseas capital markets for mobilising funds through debts. Matters have not been helped by downward rigidities in Indian interest rates impinging the abilities of Indian corporates to raise resources.
Unlike China, where SOEs continue to have access to capital due to lower interest rates and can, therefore, afford to ‘Go Global’, Indian companies do not have much wherewithal for doing so. ‘Make in India’, therefore, is likely to remain a capital importing programme, as opposed to ‘Go Global’.
The author is Senior Research Fellow at the Institute of South Asian Studies in the National University of Singapore. He can be reached at firstname.lastname@example.org. Views are personal