The latest developments in China are being watched with keen interest around the world. One of the main reasons for the close watch is that it is the second-largest economy and any upheavals there can spread ripples throughout the globe. The zero Covid policy has already led to lockdowns and movement curbs in major industrial regions of that country and slowed down economic growth considerably. The latest projections by the International Monetary Fund are that China which has been growing at a fast pace for several decades will be moving forward by only about 3.2 percent in 2022.
With rising Covid infections and a spate of protests and demonstrations over the government’s repressive policies, it looks as if growth may slow down even further in the coming months. Much will depend now on whether Beijing decides to relax its stringent policy regarding Covid quarantines. The restiveness of the general public, according to media reports, has been due to lockdowns forcing people to stay indoors for as long as four months. Reports have also surfaced about the protests of those working at the Foxconn factories which are the major suppliers of Apple iPhones.
One immediate fallout of slowing growth in China is going to be reduced demand for oil and this expectation has led to a sharp drop in international prices. With the world’s largest oil importer cutting back on purchases, availability is bound to improve a great deal. Currently, the benchmark Brent crude has fallen to 82 dollars per barrel with the West Texas Intermediate ruling at around 75 dollars per barrel.
The direction of prices in the near term, however, will depend to a large extent on how the Chinese authorities can handle the current round of protests against the stringent Covid policies. In case there is some relaxation of regulations, oil markets may react by pushing up prices once again.
Apart from oil, there is a wide range of commodities as well as intermediate goods that are bought to meet the needs of the enormous manufacturing sector in China. It is the largest importer of numerous goods right from minerals like iron ore to agricultural goods like soybeans. Purchases have already slowed down this year and a future dip in growth would hurt countries supplying them. It is no wonder then that prices of key commodities like metals including copper have already fallen in response to the news of internal strife and persisting movement curbs in that country.
The other significant outcome of the developments in China is that investments by western countries are likely to decline steeply till stringent measures remain in place. Reports from that country indicate that corporates are hesitant to venture there owing to hardships in the form of the inability to travel internally without official permits. There are also fears that projects may not be able to get off the ground as workers are not being allowed to leave their residences.
In this scenario, investors are moving to other countries like Vietnam and Indonesia. Several companies like Foxconn are now also interested in expanding their footprint in India, given the unrest in China. These developments have only exacerbated the fears which had arisen during the pandemic of relying too heavily on this country owing to the potential for supply chain disruptions.
As far as India is concerned, this is an opportunity to become a haven for investors who are no longer comfortable putting their resources into one of the world’s biggest economies. Right now, however, most companies leaving China’s shores are moving either to Vietnam or Indonesia where the policy regime for foreign investments is considered far more welcoming than here.
It is thus the right time for policymakers to undertake more reforms to make investments easier for companies seeking to shift base from China. The critical need of the hour in this regard is to cut down documentation as far as possible. Though efforts have been made to put procedures and processes online, these have not gone far enough. Even now, studies show that a potential investor has to obtain myriad clearances and approvals before a project can go on stream. There are both central and state government clearances to be gone through and it remains a bewildering maze for a new entrant on the scene.
There is no doubt that red tape has been reduced over the past few years. The question is, however, is it enough to lure companies here away from economies where it is still much easier to set up new projects. As far as foreign direct investment inflows are concerned, however, the outlook remains buoyant. Latest data shows that FDI inflows into the country were as high as 84 billion dollars in 2021-22 and there are expectations that it will reach nearly 100 billion dollars in the current fiscal.
Even in comparison to other investment destinations, India has emerged as one of the biggest according to the World Investment Report of Unctad. It puts India in seventh place as far as FDI inflows are concerned in 2022.
Yet there remains considerable scope for improving the current regulatory regime for foreign investments. Many of the broad policy approaches like the Make in India initiative as well as the PLI ( production linked incentive scheme) have already been successful. But there is a great deal of work that needs to be done at the micro level where procedural issues still need to be ironed out. If these issues can be resolved, it will be far easier for India to take advantage of the current developments in China and become one of the world’s top investment destinations.