By Subrata Majumder
At the time when India unveiled its much hyped “Make in India” dream of Prime Minister Narendra Modi, China silently unleashed its “Made in China” programme to re-build its manufacturing hub. “Make in India” and “Made in China” sound similar in their perspectives. But, conceptually they are different. While “Make in India” was a call to establish world’s biggest manufacturing hub and increase share of manufacturing in GDP from 15 per cent to 25 per cent, “Made in China” was to rebuild China’s manufacturing sector into a qualitative workshop with production of more Hi-tech products. So far China’s manufacturing sector served as turf for volume production. While India made attempts to woo both domestic and foreign investors to make the manufacturing hub, China reposed the responsibility on foreign investors.
Diagonally, both are different in two ways. First, structurally “Make in India” is the first stage for India to set up the manufacturing hub. “Made in China” is the second stage for China after accomplishing the first stage of world’s biggest manufacturing hub. After the appreciation of Chinese renminbi, China lost the paradise of low wage. China seems to vacate the area of low cost and volume production and shift to hi-tech production. China’s shift from volume production will be boon to India to establish its global workshop with low wages.
Secondly, the strategies, which both India and China will follow to woo investors, are different. While China believes in doling out more tax incentives to allure the foreign investors, Mr Modi believes in gearing up a large and sustainable middle class market. He believes that expansion of manufacturing will open new opportunities for employment. More employment means more income. This will translate into a transition of people from poverty to middle class and will help in enlarging middle class market. By this process, a cyclic demand will be created and will lead to a big and sustainable market. Mr Modi does not believe in incentives. He said “industrialist don’t come due to some fancy incentive scheme…or that tax free. Incentives don’t work”. He believes that investors will come if the environment is growth oriented. He said “We need to create development and growth oriented environment. This is government’s responsibility “.
In contrast, China gave thrust on incentives. Even at the first stage of building up global workshop in China, tax incentive was the main tool to woo the foreign investors. It ceded fifty per cent tax breaks to the foreign investors. In its second stage of “Made in China” programme, China will accelerate tax breaks to encourage enterprises to upgrade their equipment and increase research and development to improve the manufacturing industry. Imported high- tech equipment will enjoy tax deductions and will have tax holidays.
Given the global definition of industry friendly investment destinations, will Modi mantra impel the investors, which focused on 3D (democracy, demographic dividend and demand)? Besides wages, investor’s charm for investment are driven by three main factors. They are high demand, low infrastructure cost of manufacturing such as land, power, water and corporate tax. India has always been compared with China and South East Asian countries in the perspective of investment. Notwithstanding India’s huge domestic demand driven by large demography, its competitiveness for manufacturing is far below than China and South East Asian countries. In China, wages might have been uncompetitive after appreciation of renminbi. But, the land rates, electricity tariff and corporate tax are far more competitive than in India. For example, the land rates of US $ 2.40-3.58 per sq meter in Guangzhou and Shanghai in China, 2.06 per sq meter in Taipei (Taiwan), US $ 0.17 per sq meter in Hanoi (Vietnam) and US $ 0.5 per sq meter in Yangon (Myanmar) are lower than in important industrial towns in India. In Gurgaon and Bangalore, the land rent in the industrial estates were in between US $ 3.93 to 5.29 per sq meter in 2013.
Similarly, high corporate tax dampened the manufacturing competitiveness in India. The corporate tax in India is 33 per cent. Against this, the corporate taxes are 25 per cent in China, Malaysia, Vietnam, Myanmar, 20 per cent in Thailand and 17 per cent in Taiwan.
Can Prime Minister Narendra Modi mesmerize the investors with his philosophy of large demand only? The cost competitiveness is a driving force for the global investors. The Indian MNCs are at par with global investors. Investors depend upon bank finances and shareholders’ interests, which are profit oriented. Modi mantra of “Make in India”, based on 3D and enlargement of employment opportunities, embraces longer time to create a big and sustainable middle class market. Will the bankers and the shareholders wait for long period before the companies reap the profit? Further, high cost of production in India cannot match with the demand even though high tariffs protect the domestic market. China’s gushing export to India is a case in point.
Investors harp on incentives. China’s emergence as a manufacturing powerhouse has been possible with large doses of tax incentives, in addition to low labour cost. In 2004, China dashed with plethora of tax incentives to establish the manufacturing base. Foreign investors, who were setting up their factories in special economic zones and start new and hi-tech industrial zones, were to pay corporate tax at 15 per cent against the normal corporate tax of 33 per cent. In 2010, China unified corporate tax and weaned away the preferential treatment to foreign investors.
Therefore, at the initial stage of building up the manufacturing base and given India’s cost disadvantages, tax and fiscal incentives are imperative. They will work as stimulant to the investors and will offset the cost disadvantages as well. At present, China+1 is gaining prominence in the global strategy for investment. Given the ebbing of low cost advantage in China and sagging export opportunities in the west, China is turning an investment risk. China +1 strategy insulates foreign investor’s investment in China. India should avail this opportunity to woo the investors. (IPA Service)