China’s loss may be India’s gain as over 1,000 foreign companies mull production from India !

China facing global backlash may be India’s gain as global Capital is likely to flow into India as Western economies have been badly battered and are looking towards India for pumping in investment. A key takeaway from a IMF webinar chaired by Raghuram Rajan is that global economies would look for countries that are less battered. Western economies are badly battered while countries like India, Indonesia, etc are not so battered. As such global capital could flow into India, if we can act efficiently to pull it.

Emotional and Economic backlash against China is expected. Already, countries and companies are working on strategy to pivot away from China as part of their supply chains. Japan Government has announced packages for it’s companies bringing back manufacturing home. Businesses need to keep this in mind and work accordingly.

The IMF MD Kristalina Georgieva had recently named former RBI governor Raghuram Rajan and 11 others to her external advisory group to provide perspectives from around the globe on key developments and policy issues, including responses to the exceptional challenges the world now faces due to the coronavirus pandemic. Rajan, is currently working as a professor at the prestigious University of Chicago. Other members of the group are Tharman Shanmugaratnam, Senior Minister of Singapore and Chairman of the Monetary Authority of Singapore; Kristin Forbes, Professor, Massachusetts Institute of Technology; Kevin Rudd, former Prime Minister of Australia; Lord Mark Malloch Brown, former UN deputy secretary-general among others.

General Outlook

India seems to have supressed the curve so far. It looks like it might escape the worst of the pandemic, but will have to be cautious about it. There is a good chance of re-occurrence of the virus, which could see a possibility of regular lockdowns. Businesses need to plan accordingly as capital will look for countries that are less battered. Western economies are badly battered while countries like India, Indonesia, etc are not so battered.

Emotional and Economic backlash against China is expected. Already, countries and companies are working on strategy to pivot away from China as part of their supply chains. Japan Government has announced packages for it’s companies bringing back manufacturing home. Businesses need to keep this in mind and work accordingly.

For individuals, health and safety will become No.1 on their agenda from the 3rd of 4th place. There will be more spending on this area and reduction in other discretionary spends. The ticket size of spending will drop for a while. People will spend on cheaper goods than on expensive goods, or delay spending for a while.

There will be extreme acceleration in digital economy including Home education, home entertainment, home fitness, etc. People will be less loyal towards brands as other aspects will take over. People will switch brands faster due to various other concerns like safety, etc. There will be trust deficit amongst stakeholders like vendors, customers, employees, borrowers, banks, etc. Banks will have trust deficit with borrowers, companies will have trust deficit with suppliers, etc.

There will be need to segregate Good Costs and Bad Costs. Good costs (Eg. Digitization, tech costs, digital marketing, best employees, etc) need to be insulated and protected. Bad Costs (Eg. Fancy office, unnecessary spending, bad performers, traditional working methods) need to be ruthlessly eliminated. Don’t be emotional about non-core businesses. Concentrate on core business.

It would be time to be frugal – Not necessary to have fancy office, fancy cars, excess employee strength, etc. Remove all the flab and be lean. It would be time to maintain Good behaviour – have frank and open conversation with all stakeholders like suppliers, employees, etc and try to find the middle ground, so that the burden can be shared justly.

In this crisis, there will be winners and there will be losers. Those who re-orient their strategy will be winners. Economy was in poor shape even before Covid. The government has little leeway to provide large stimulus. Government earns about $60-70 billion a week from taxes. Imagine what a hit a 5-week lockdown will have. Size of Indian economy is about $3 Trillion. In some scenarios, it is predicted that Govt could take a hit of nearly $1 Trillion.

Inequality has already sharpened. The gap between rich and poor has further increased. The government needs to concentrate on mass health and mass welfare. If not, 200 million people could sink into poverty. The government must explore printing currency (Quantitative easing), but there are limitations here. It has side effects like inflation, etc. Rich countries have more leeway for such quantitative easing. Government must concentrate on grabbing more capital from outside and do reforms to enable that.

Backlash against China

Internationally, there could be an emotional and economic backlash against China. Businesses with supply chains passing through China will need to keep this in mind and insulate themselves and build alternatives. India and Indian businesses need to try to become the contract manufacturer of the world, just like China is. India needs to make use of this opportunity smartly.

All big wealth funds and sovereign funds will be awash with Liquidity. This liquidity needs to be attracted to India. In every sector, there are good and bad companies. Management has to invest correctly in manufacturing and modern tech, be honest and fair to all stakeholders, etc. Those companies with good management and displaying good behaviour will come out victorious.

Export Business & Retail

Indian exporters need to build trust. They need live up to promises made. They need to deliver on time and deliver the promised quality. They shouldn’t make incorrect promises just to get more business. Bangladesh export business has built trust and a good reputation. Despite a chequered past (low quality, human rights issues, etc) they have managed to overcome and are winning.

More people will prefer to buy from retail stores where there is perception of safety (Eg. Sanitation, cleanliness, crowds, etc). They will move more towards malls away from markets. Many will move towards online stores. Wholesale suppliers also need to concentrate on such retailers.

Customers also need to be ring-fenced. A high end restaurant in Delhi is giving 40% of bill value as a gift coupon to be used anytime up to December 2020. Car companies are giving buy back offers, incase the customer loses his job in the next one year. Pricing needs to be re-approached. People are looking for cheaper prices or cheaper goods.

Outlook for businesses

Cinemas could take a big hit in the near future. Entertainment could move home. Because of this, cafes and restaurants might see some increase in business. Many chains are implementing measures like social distancing like lesser furniture, etc, to build confidence to consumers.

Smaller retailers need to send a message of safety. Have sanitizers, put up notice of “No Covid Positive Employees” found in the store, maintain social distancing, etc. Since travel and tourism will take a big hit, connected purchases will also shift. Purchases that happened abroad will happen at home. ( Electronics, Luxury goods and apparel, etc.,). But travel related purchases will drop.

Indian real estate economy is sitting on a huge inventory with a huge cost-of-carry. The industry is highly leveraged with low margins. Unsold inventory is considered as an appreciating asset, but might turn out to be a flawed view. Market was already overdue for a huge reset, which will be accelerated by the pandemic. Also, the sharing and co-working space could be hit as more businesses try to have their own smaller spaces and more WFH employees.

Gold-as-an-asset could see appreciation. Jewelry, as a discretionary spend, will take a hit. The Indian wedding industry will take a hit, as social distancing, cost consciousness, travel avoidance, etc., will prevent fat weddings, destination weddings, etc. This will hit all connected industries(Silk, party wear, etc)

There will be value destruction and value creation in different companies in the same sector. High Debt low margin companies will find it difficult. (indicates risky or unscrupulous management). High Debt high margin companies could be rewarded, but caution needs to be exercised. (may indicate sharp or dynamic management). No debt high margin companies are best rewarded now. Know more about the CEO and management and their actions and activities( 3 branches of Starbucks were kept open in India for last few days. The CEO of Starbucks India sat in the Fort (Mumbai) branch throughout the day to give his employees confidence and motivation)

New tech unicorns will be born. Those involved in cyber security, cloud services, online education services, etc. As for as forex markets are concerned, there would be no doomsday scenario (i.e. Dollar will become 90 rupees etc). Such scenarios don’t seem realistic

Government should be buying as much oil as possible, as such prices may never be seen in the future of oil. As the western economies are more battered and Indian economy is less battered so far, there is more liquidity coming in. That’s why there is a rally in the market. This scenario could change depending on the spread of the disease in India. Watch out for sharp spikes in the market. Better to avoid the spikes.

Near future

Big companies are paying the employees even when closed. The HUL decided not to cut a single rupee for their suppliers, service providers, etc. No haircuts. Safety of employees and customers is becoming a major point of focus.

This is possible because they have reserves of funds, etc that have been built up over the years. The Medium and Small businesses have to work with thin capital reserves. Excess capital is taken out of the business and applied into personal assets. Small businesses take out the surplus and purchase personal assets instead of re-investing in the business. There are various factors and motivations here. Because of this, they are unable to meet the cash expenses of even the next month.

A high end restaurant chain in Delhi (with Rs.40 crore annual turnover) is unable to pay the salaries of the current month as it has no liquid reserve. Owner has invested in personal assets like house in London, etc. Medium and Small business need to have a look at how they can build some business reserves to endure such disruptions.

Should force majeure clauses be triggerd in various contracts like rent, supply, etc? It will lead to litigation, but there is no point in getting into litigation now. All parties have been affected by the crisis. The tenants, the landlords, the lenders/financiers, etc. Parties need to sit across the table and find a common ground and mutually decide upon the costs, rentals, etc. Burden has to be shared.

Work From Home Scenario

It is possible for lot of employees to not visit the office and still be productive. In RBL corporate office, it is found that it is enough that only 30% staff stay in the office. Others can be connected from homes. This leads to lesser commute expense, stress of the commute, time wasted, etc. Parents can take care of children more effectively when WFH. There can be dark hours when no calls will be made, etc.

1000 foreign companies to move to India

As per a McKinsey survey of entrepreneurs released few days ago, 53% of Indian entrepreneurs are optimistic, while only 25% of Japanese entrepreneurs are optimistic. It seems to be a mild U-Curve for the Indian economy. But the descent has not stopped yet. Already a report by India Defence News on April 21 suggested that about 1000 foreign firms are mulling production from India as a base as “exit China mantra” grows. It says that of the 1000 foreign firms, about 300 are actively pursuing production plans in mobiles, electronics, medical devices, textiles. These companies see India as an alternate manufacturing hub and have taken up their proposals across various levels of the government, including central government departments, Indian missions abroad and state industry departments.

Amid chances of China possibly losing its tag of preferred manufacturing hub following Coronavirus, around 1,000 foreign companies are engaged in discussions at various levels with the Indian authorities. At least 300 of these companies are actively pursuing production plans in sectors such as mobiles, electronics, medical devices, textiles and synthetic fabric, according to top government sources.

These companies see India as an alternate manufacturing hub and have taken up their proposals across various levels of the government, including central government departments, Indian missions abroad and state industry departments. “About 1,000-odd companies are currently engaged in discussion at various levels such as investment promotion cell, central government departments and state governments. Out of these companies, we are targeting 300-odd companies,” the official said.

“We are hopeful that once coronavirus is in control, a lot of things will fructify into actual relocation. And India will emerge as an alternate manufacturing destination. Many countries like Japan, US and South Korea are over-dependent on China and that is now very apparent,” he added.

In a major push to domestic manufacturing, the Centre had in September last year slashed corporate tax to 25.17 per cent. For new manufacturers, the applicable tax was brought down to 17 per cent making it the lowest in South East Asia. Together with reduced tax rate and the roll-out of goods and services tax (GST), India hopes to attract sizeable foreign investment in the manufacturing sector.

It has now directed its focus on reducing the cost of production. With China in the firing line over its way of handling the deadly virus outbreak, major countries are expected to nudge their corporations to relocate production units out of China or set up new units at alternative locations.

In what appears to be early signs of possible changes in geopolitics, US President Donald Trump has questioned China over its response to the outbreak of the deadly virus. China had strongly protested Trump’s “China virus” remark but the American President has been lashing out at the country unabated. The US President said during a White House briefing that the virus “could have been stopped in China before it started and it wasn’t, and the whole world is suffering because of it.”

Meanwhile, Japan has announced $2 billion financial aid for its companies to shift production out of China. Many more countries could follow Japan, which is expected to benefit India. “Now the world is rethinking its strategy of putting all eggs in one basket. A lot of interest is being shown by companies towards India,” says Guruprasad Mohapatra, Secretary in the Department for Promotion of Industry and Internal Trade (DPIIT). “India is generally considered an attractive destination because of its market size and also India being a possible hub for exports in the region. That’s the reason FDI has been recording very impressive growth in the last 5-6 years,” he added.

While government is making all-out attempt to hard-sell India as a manufacturing hub it may find it an uphill task given that the production cost difference between India and South East Asian countries is about 10-12 per cent.

The government, however, sees large market size of India as a big plus for manufacturers. “If you manufacture mobiles in Vietnam, what do you do with them? You have to essentially export. You can’t sell there as there is no local market,” an official involved with the government’s Make-in-India initiative said.

He explained giving an example of mobile phones. “There is a huge market in India for mobile phones that cost less than $100. For mobiles costing $200 or more there is huge potential of export. So, from the 10-12 per cent (percentage cost difference between India and South East Asia), almost 6-7 per cent is negated or adjusted by India’s market itself. For the remaining 5-6%, a combination of state incentives and central incentives are there,” he added.

In the meanwhile, the government has reviewed the extant Foreign Direct Investment(FDI) policy for curbing opportunistic takeovers/acquisitions of Indian companies due to the current COVID-19 pandemic and amended para 3.1.1 of extant FDI policy as contained in Consolidated FDI Policy, 2017. Department for Promotion of Industry and Internal Trade, Ministry of Commerce and Industry has issued Press Note No. 3(2020 Series) in this regard. The present position and revised position in the matters will be as under:

Present Position

Para 3.1.1: A non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited. However, a citizen of Bangladesh or an entity incorporated in Bangladesh can invest only under the Government route. Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors/activities other than defence, space, atomic energy and sectors/activities prohibited for foreign investment.

Revised Position

Para 3.1.1:

3.1.1(a) A non-resident entity can invest in India, subject to the FDI Policy except in those sectors/activities which are prohibited. However, an entity of a country, which shares land border with India or where the beneficial owner of an investment into India is situated in or is a citizen of any such country, can invest only under the Government route. Further, a citizen of Pakistan or an entity incorporated in Pakistan can invest, only under the Government route, in sectors/activities other than defence, space, atomic energy and sectors/activities prohibited for foreign investment.

3.1.1(b) In the event of the transfer of ownership of any existing or future FDI in an entity in India, directly or indirectly, resulting in the beneficial ownership falling within the restriction/purview of the para 3.1.1(a), such subsequent change in beneficial ownership will also require Government approval. The above decision will take effect from the date of FEMA notification.