[Answered] While Vietnam is set to become the most attractive destination for MNCs diversifying away from China, India needs to undertake substantial catch-up reforms in all areas to be considered a significant contender in this process. Elaborate.

After Covid-19, China is facing a unique global withdrawal of MNCs. Amidst this, Vietnam has emerged as the preferred choice of electronics and mobile phone companies, trying to move out of China.

Why Vietnam is becoming the most attractive destination for MNCs?

• Vietnam has invested billions of dollars in investments to set up research and education centers, attracting major chipmakers to shop there.
• Vietnam has evolved as an attractive destination for FDI, as it is increasingly providing cheap labour whilst offering a friendly environment and reduction in taxes to foreign enterprises. E.g. out of 56 companies that have moved out of China since its trade war with US, only eight have invested in India, while 26 shifted bases to Vietnam.
• Vietnam has been swift in offering attractive corporate tax rates for large firms wanting to relocate.
• Vietnam’s total merchandise exports grew at an annualised average rate of 18 per cent in the last 10 years till 2019, as compared with India’s 5 per cent.

India needs to undertake substantial catch-up reforms due to following reasons:

• Complex labour laws: Large-scale exclusions of workers from labour law, violence and arrests are the reasons for India’s poor performance.
• Land acquisition difficulty: Stringent land acquisition laws and inflexible labour regulations make it difficult for India to attract investors in the manufacturing sector.
• Enterprises continue to facedomestic policy challenges. The most difficult obstacles to efforts in scaling up production in India include complex tax policies and procedures, the substandard quality of infrastructure, and uncertainty in trade policy.
• Indian Firms also face problems inmeeting quality standards, lack institutional support, and inadequate information. All this impedes their integration into GVCs.
• India’s top exports comprised largely low-tech manufacturing products like mineral fuels, pearls, machinery, organic chemicals etc. Hi-tech exports as a percentage of manufacturing in Vietnam stands at 40 per cent, whereas in the case of India it stands abysmally low, at 9 per cent in 2018.
• 90 percent of Vietnam’s merchandise trade is through seaports. In the case of India, despite its coastline being almost double that of Vietnam, it has not been successful in using it to its benefit.

India is soon going to be the most populous country with the largest workforce in the world. India should update and implement Labour Rules as well as take steps to ensure clarity on data protection rules that may impact investment decisions for digital infrastructure.