Fresh waves to surf for Indian investors

Vaibhav Saxena

Over recent years, Vietnam and India’s relations have been tightened substantially, as marked by the two nations’ closer economic and commercial engagement. A large number of Indian companies have established and expanded their business in various sectors in Vietnam. The two countries’ bilateral relationship was elevated to a comprehensive strategic partnership in 2016.

India is now among Vietnam’s 10 largest trading partners with the total import and export value of roughly $10.7 billion, accounting for 2.2 per cent of the total import-export value of Vietnam. This number is expected to reach $15 billion by 2020.

According to the Vietnamese Ministry of Planning and Investment (MPI) in 2015, India had 95 investment ­projects in Vietnam with total registered investment capital of about $324 million. The year of 2017 witnessed an ­increase of over 200 per cent in the registered capital shooting up to $756 million, with 168 projects in the pipeline and making India 28th of the 126 countries and territories investing in Vietnam.

As of June 20, 2019, India had 254 valid investment projects in Vietnam, registered with $928.1 million.

Major sectors of investment include mineral ­exploration, energy, sugar manufacturing, agro-processing, agro-chemicals, pharmaceuticals, IT, electrical equipment, and car components. With this, India ranked as 29th among 129 nations and territories investing in Vietnam.

Future sectors of interest

Under India’s Act East ­Policy, Vietnam plays an ­essential role in India’s drive to increase its presence in Southeast Asia. Some of the main sectors in Vietnam which aroused Indian companies’ ­interest include garment and textiles, energy, IT, and ­pharmaceuticals and healthcare.

+ Garments and textiles

India is one of the major material suppliers of Vietnam’s garment and textiles sector. The potential to promote trade activities in this sector between the two countries remains high. India has long been popular for its fibre and yarn, which are materials for most kinds of fabric, making India one of the three largest textile producers in the world.

Under the Trade in Goods Agreement between India and the ASEAN, from January 1, 2019, most cotton, including woven cotton fabric and knitted fabric imported from India, are eligible for tax exemption. Due to this advantage, India’s competitiveness in garments and textiles will be enhanced sharply, creating favourable conditions for Indian companies to invest more in this sector in Vietnam.

+ Energy

During a state visit to India in March 2018, leaders from the two countries affirmed that Vietnam and India had made significant progress in co-operation in oil and gas exploration, renewable energy, power generation, and energy conservation. The Vietnamese government warmly welcomes Indian investment in energy projects, especially in clean energy projects. In order to further this co-operation, Vietnam and India aim to sign the Framework Agreement on the Establishment of the International Solar Alliance.

Adani Group, one of India’s multinational renewable energy conglomerates, has invested in a solar power project with a capacity of 100 megawatts in the central province of Ninh Thuan, and investors are looking into a couple of other projects. ONGC Videsh Ltd., India’s largest oil and gas exploration and production company, also invested about $114 million in Vietnam up to 2018.

+ Information technology

Bilateral co-operation between Vietnam and India in IT is essential to the two countries’ governments. Vietnamese officials encourage Indian investors to further their presence in Vietnam by providing them with preferential policies, aiming at building out Vietnam as a new hub for IT, especially in software development and hardware manufacturing.

In May, Hindustan Computers Ltd., an Indian multinational IT service and consulting firm, unveiled its plan to establish an IT centre worth $650 million in Ho Chi Minh City.

+ Pharmaceuticals and healthcare

Significant economic growth has resulted in considerable increases in living standards and life expectancy. This has led to higher demand for better healthcare, in which the pharmaceutical sector plays an important role.

Vo Tan Thanh, vice chairman of the Vietnam Chamber of Commerce and Industry, pointed out at the Indian Pharmaceutical Exhibition held in Ho Chi Minh City in January that the pharma industry has made noticeable progress in recent years.

However, local production only covers 52.5 per cent of the total domestic demand and to compensate for this shortage, Vietnam needs foreign partners. About 78 per cent of the materials for pharmaceutical production are imported from India and China.

Not only being an important trading partner, the rise in healthcare spending in Vietnam also attracts Indian companies to allocate more capital in this field. Hospitals and clinics are among the most promising areas of investment.

Indian companies see great opportunities in pharmaceuticals as Vietnam grows wealthier

Concerns in Vietnam

+ Facilities and infrastructure

Facilities and infrastructure are among the major factors that impact investment attraction in Vietnam. In spite of the impressive growth of the Vietnamese economy, Indian companies still have to face challenges relating to proper connectivity within Vietnam and for trading purposes due to the lack of infrastructure in certain parts of Vietnam. Dealing with the local industry is an arduous task for foreign investors due to their limited knowledge of the domestic industry and the local constraints that flows from its narrow exposure to the global markets and industry practices.

Skills backed up by globally-recognised education standards also play an important role in developing any market and running a business which sometimes becomes a constraint as Vietnamese and foreign investors have to put in more time and effort to educate locals and achieve their business goals in Vietnam.

Most Indian investment prioritises the major cities of Vietnam, such as Hanoi and Ho Chi Minh City, which can offer advantageous infrastructure with human resources.

+ Government policies and administrative procedures

Uncertainties over the legal framework as well as the lack of internationally-qualified lawyers with globally-recognised degrees hinder the country’s progress with haywire policy drafting and legal practices on which investors have to rely on. The complicated admin procedures in Vietnam have given businessmen a hard time conducting business.

Such procedures require heads of enterprises to acquire a profound understanding of the law and act accordingly. This is difficult for most businessmen which makes them hesitant to allocate more human resources and capital in Vietnam.

New landmark FTA trends

The future directions of Vietnam in business and economic development are influenced by the two major agreements of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the EU-Vietnam Free Trade Agreement (EVFTA).

The CPTPP covers principles of trade, investment, ­intellectual property, and many other business fields. It stresses the reform of the investment and business environment, which is likely to boost ­Vietnam’s socio-economic ­development in a more ­progressive direction. In ­January the CPTPP officially came into effect in Vietnam, eliminating 95 per cent of ­tariffs at the time for CPTPP member countries.

With the implementation of ­the CPTPP, Vietnam has ­affirmed its commitment to taking strong steps in economic liberalisation to boost trade, as well as creating favourable conditions, a transparent and ­predictable environment, and improved market access for foreign ­investment inflows.

Trade activities – especially for exports – in textiles and footwear are expected to benefit immediately. According to a World Bank report in 2018, the CPTPP would contribute an increase of 1.1 per cent to Vietnam’s GDP by 2030. The boom in foreign direct investment (FDI) inflows, thanks to a more favourable investment environment, can result in the ­expansion of the service sector and improvements in productivity. Indian investors, especially textile producers and manufacturers, may set up more subsidiaries in Vietnam to take advantage of these factors. ­Domestic counterparts can seize these opportunities to integrate themselves into global value chains and strengthen the evolution of small- and medium-sized enterprises.

The EVFTA, which has just been signed, states regulations and tariffs imposed on both the EU and Vietnam in specific business areas such as trade in goods, government procurement, and intellectual property rights. This agreement is considered Vietnam’s most extensive integration agreement ever and is believed to provide an essential impetus in fostering Vietnamese exports to the EU.

The EVFTA is expected to open the gates for Vietnamese enterprises to infiltrate the most promising and largest market in the world. Vietnam has been exporting an impressive amount of seafood to the EU, and with the EVFTA coming into force, these exports will be expanded even further due to a wide range of benefits and preferential conditions.

Overall, co-operation between India and Vietnam has seen positive movements over past years, having noticeable impacts on the Vietnamese economy. Now, with the CPTPP and EVFTA going into effect, the Vietnamese economy is heading towards a promising future, attracting more FDI from foreign partners over the world.