The India-Vietnam story – are they allies or competitors?

Insight
The India-Vietnam story – are they allies or competitors?
Indian prime minister Narendra Modi with Vietnamese prime minister Nguyen Xuan Phuc, on the sidelines of 16th India-ASEAN Summit, in Bangkok. Vietnam is renowned for being quick to adapt to changes. Its recent free trade agreement with the European Union which saw the latter lift 85 percent of its tariffs on Vietnamese goods, is a case in point.Courtesy: ANI

India and Vietnam are widely seen as fierce competitors often vying for the same set of global investors, but the two countries also share warm bilateral relations and significant potential to grow their trade with each other.

For any global investor looking at Asia beyond China, the choice often boils down to two countries--India or Vietnam.

As one of the fastest-growing economies in the world backed by a young and aspiring population and a stable democratic foundation, India is an obvious magnet for foreign investment. It explains its better than expected FDI inflows of a 13 percent growth in a pandemic ravaged 2020, a year when global inflows plunged by 42 percent to levels last seen in the 1990s.

Similarly, Vietnam ranks high in parameters that concern any potential investor. Be it robust domestic economic growth--its GDP has grown an average 6.3 percent between 2000 and 2018, favourable geographical location in the heart of Asia and demography dividend with nearly 60 percent of its population in the working age, next only to India. Further, its small size makes it agile and nimble. Exemplified with its policy making Vietnam is renowned for being quick to adapt to changes. Its recent free trade agreement with the European Union which saw the latter lift 85 percent of its tariffs on Vietnamese goods, is a case in point.

India and Vietnam as competitors however, does not give the full story. Infact, it does not present even half the picture. While India does jostle with Vietnam for dollars in the global investment market, the two nations always have a strong bilateral relationship which itself is growing stronger by the day. As a member of ASEAN, the two countries have benefitted from the Indo-ASEAN free trade agreement that was signed in 2009.

At a time when the global supply chain is being realigned, it is not unnatural to see the two nations as fierce competitors. There are two facets to this theory. China has been one of the biggest beneficiary of global FDI over the last few decades and even if a fraction of this is up for grabs, it presents a big opportunity.

Add to that, any potential upheaval of companies that are already invested in mainland China deciding to pull out and reinvest in other countries, something that has been openly advocated by countries like the US and Japan, and the pie increases further. It is difficult to get a fix on how big the window is but surely runs into hundreds of billions of dollars.

Competition in electronics industry

In electronics goods alone for example, India’s domestic industry is staring at a potential windfall of nearly $ 170 billion by 2025 but it faces intense competition in this sector from Vietnam.

“The Indian industry suffers from a set of legacy problems which include high cost of power, logistics, lack of skilled manpower that make us uncompetitive globally. It also impairs our ability to wean away investment from other nations and fully exploit opportunities when companies look to move away from certain regions,” says Pankaj Mohindroo, chairman, India Cellular and Electronics Association (ICEA). “In a study we had conducted last year, we found that Vietnam is 1.7 times more attractive for investors while China is twice as attractive.”

Looking at India and Vietnam as competitors however, does not give the full story. Infact, it does not present even half the picture. While India does jostle with Vietnam for dollars in the global investment market, the two nations always have a strong bilateral relationship which itself is growing stronger by the day. As a member of ASEAN, the two countries have benefitted from the Indo-ASEAN free trade agreement that was signed in 2009.

Vendors preparing their decorative goods at the Spring Festival Fair in the Old Quarter in Hanoi, Vietnam. Over the past two decades bilateral trade between India and Vietnam has grown from $200 million to 12.3 billion.
Vendors preparing their decorative goods at the Spring Festival Fair in the Old Quarter in Hanoi, Vietnam. Over the past two decades bilateral trade between India and Vietnam has grown from $200 million to 12.3 billion.Courtesy: Getty Images

Over the past two decades, bilateral trade between Vietnam and India has steadily grown from $200 million in 2000 to $12.3 billion in the financial year 2019-2020. The target of $ 15 billion for 2020 was missed due to the pandemic but nevertheless, the trajectory has generally been uphill. Vietnam is India’s 18th largest trading partner, while India is seventh for Vietnam.

The growing bilateral trade is a reflection of the two countries awareness that they can help each other in one another’s area of weaknesses. India suffers from a trade deficit with China, its largest trading partner, and in many cases, it can potentially reduce its dependence on the dragon by shifting to Vietnam.

There has been a definite uptick in investments from Indian companies in Vietnam in the last few years. The major sectors Indian companies have invested in Vietnam are manufacturing and processing, telecommunications, IT, and mining. Tata Coffee recently inaugurated their 5000 MTPA freeze-dried coffee production plant in Binh Duong province of Vietnam last year. Similarly HCL Technology is establishing a $ 650 million technology center in Vietnam and plans to recruit and train over 10,000 engineers within the next five years.

An Akash-Weapon System being tested. India has built up a steady stream of defence supplies to Vietnam.
An Akash-Weapon System being tested. India has built up a steady stream of defence supplies to Vietnam.Courtesy: ANI

Key defence supplier

At the same time, India is emerging as a key defence equipment supplier to Vietnam. In 2013, India extended a $ 100 million line of credit for Vietnam to procure 12 high speed patrol boats that are being manufactured by Larsen and Toubro. The first of these boats were handed over in December last year. Another $ 500 million line of credit has also been given for Hanoi to buy a range of defence equipment including Akash surface to air systems and Dhruv advanced light helicopters. Vietnam is also keen for Indian companies to undertake oil and gas exploration in the South China Sea.

The growing bilateral trade is a reflection of the two countries awareness that they can help each other in one another’s area of weaknesses. India suffers from a trade deficit with China, its largest trading partner, and in many cases, it can potentially reduce its dependence on the dragon by shifting to Vietnam.

In the bigger picture, the much hyped India-Vietnam battle for attracting foreign investment is merely a side show.

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