How Emerging Economies Vietnam and India Complement Each Other

Future targets for Vietnam-India trade and investment

In late July, Vietnamese Prime Minister Pham Minh Chinh made a state visit to India, during which he proposed that the two countries rapidly increase bilateral trade to US$20 billion. Trade between India and Vietnam has grown significantly, reaching nearly US$15 billion in 2023, up from US$200 million in 2000. Of this, US$8.5 billion came from Vietnam’s exports.

Indian companies are currently involved in 410 active investment projects in Vietnam, with a total investment of US$1.03 billion, making India the 25th largest investor out of 146 nations and territories in the Southeast Asian country. On the other hand, Vietnam has invested in 16 projects in India, with a total capital exceeding US$14 million, excluding investments from Vingroup.

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Prime Minister Pham Minh Chinh encouraged Indian firms to expand their investment cooperation in sectors that align with both countries’ priorities and Vietnam’s needs. These sectors include high technology, electronics, science and technology, artificial intelligence (AI), infrastructure development, renewable energy, emerging energies like hydrogen, biotechnology, innovation, high-tech agriculture, and pharmaceuticals.

During his meeting with the Vietnamese Prime Minister, Indian Minister of External Affairs Subrahmanyam Jaishankar emphasized the importance the Indian government places on the visit, which is expected to strengthen Vietnam-India relations in the coming years. Dr. Jaishankar also pledged to work closely with the Vietnamese Ministry of Foreign Affairs to further promote bilateral relations in the near future.

Unlocking the full potential of India-Vietnam relations

Despite the mutual benefits both countries enjoy, the economic cooperation between India and Vietnam has yet to reach its full potential. To address this, the Vietnamese Prime Minister urged relevant Indian ministries and organizations to promote investment dialogues, creating a bridge between the two governments and their business communities.

The Prime Minister also called on Vietnamese ministries, sectors, and localities to take proactive steps, including:

• Increasing dialogue to address the challenges and obstacles faced by Indian investors in Vietnam.
• Implementing administrative reforms to streamline unnecessary procedures.
• Accelerating the adoption of digital technology and promoting decentralization.
• Optimizing compliance and reducing input costs for citizens and businesses.
• Enhancing infrastructure and creating favorable conditions to attract investment.

India vs. Vietnam: Economic powerhouses with distinct advantages for investors

Economic factors

India, as Asia’s third-largest economy, enjoys a significant competitive advantage due to its vast domestic market, diverse consumer base, and abundant low-cost workforce. With an unemployment rate lower than Vietnam’s, India offers skilled manpower at more affordable rates. For FY 2023-24, India’s GDP growth rate was approximately 8.2 percent, and its merchandise exports surpassed US$430 billion, positioning it among the top-performing major economies. Leveraging its economic strengths, India has launched the PM Gati Shakti, a US$1.2 trillion infrastructure development project aimed at attracting factories away from China.

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In contrast, Vietnam has a smaller economy, which affects its overall GDP and growth rate compared to India. However, Vietnam shines in several key areas. Its GDP per capita is higher than India’s, and it maintains a significantly lower debt-to-GDP ratio, indicating less foreign dependence. Additionally, Vietnam’s lower inflation rate contributes to the stability of raw material prices and other costs, a crucial factor during economic turmoil.

Vietnam also offers a more favorable corporate tax environment, with lower tax rates that appeal to businesses. The country provides attractive Corporate Income Tax (CIT) incentives for large corporations and priority sectors like high technology, textiles, electronics, and automobile assembly. Investment in economic zones, high-tech zones, and areas with socio-economic challenges can also qualify for these incentives. While preferential tax rates of 10 percent and 17 percent are available for 10 to 15 years with the possibility of extension, the impact of global tax reforms (OECD’s BEPS 2.0 Pillars 1 and 2) on Vietnam’s tax breaks remains to be seen. In comparison, India’s effective corporate tax rates range from 31.20 percent for small domestic companies to 43.68 percent for large foreign companies with a permanent establishment in India.

Vietnam’s lower currency fluctuation rate makes it an attractive option for foreign businesses looking to avoid currency risks. The Indian Rupee, however, is a “free-floating currency,” with exchange rates determined by market forces.

While India’s large market size gives it an edge over Vietnam, the Export Similarity Index reveals that Vietnam has a closer export basket to China, indicating its potential to better replace China’s export dominance.

In conclusion, while India’s larger economic structure offers advantages like cheap labor and a vast market, Vietnam’s notable strengths, including economic stability and investor-friendly policies, make it an appealing alternative for investors, particularly in times of global volatility.

Political and regulatory factors

This section examines the political and regulatory landscapes of Vietnam and India, focusing on three key aspects: political stability, the FDI Regulatory Restrictions Index, and the prioritization of strengthening their positions in the global supply chain.

Political stability:
Vietnam and India operate under distinctly different political systems. India is a democratic parliamentary republic with eight recognized national parties and over 40 regional parties. In contrast, Vietnam is a one-party state. In India, the government is elected by the people for a constitutionally specified term, and changes in the ruling party can significantly impact the national agenda.

This leads to lower political stability in India compared to Vietnam. The World Bank’s political stability index, which measures factors like the risk of disorderly government transitions, armed conflict, and social unrest, supports this assessment, with Vietnam scoring higher in stability.

FDI Regulatory Restrictions Index:
The second aspect influencing each country’s integration into the global supply chain is the FDI Regulatory Restrictions Index. According to the OECD’s 2020 assessment, Vietnam scores 0.125, with some restrictions noted for nationality requirements for business managers and executives. In comparison, India’s score is 0.21. The OECD’s FDI Regulatory Restrictiveness Index (FDI RRI) measures statutory restrictions on FDI across four areas: foreign equity limits, screening and prior approval requirements, rules for key personnel, and other operational restrictions on foreign enterprises. While India’s FDI regime is more restrictive, the government is actively working to liberalize these regulations, driven by a decline in FDI inflows and ambitious targets for boosting domestic manufacturing and global supply chain integration.

National agendas and policy initiatives:
Foreign investors entering Vietnam must navigate market access conditions governed by local regulations and international treaties. While Vietnam has a more stable political environment and less restrictive FDI policies, India has implemented more dynamic and far-reaching policies to enhance its position in the global supply chain.

Under Prime Minister Modi, India has launched several initiatives aimed at boosting manufacturing capacity. The “Make in India” initiative, launched in 2014, focuses on developing more than 20 industries to strengthen India’s manufacturing base. This was followed by the “Self-Reliant India Scheme” in 2020, which aims to boost domestic production, and the Production-Linked Incentive (PLI) Schemes introduced between March and November 2020. In May 2023, the Indian government doubled the budget for a PLI scheme for IT hardware to INR 170 billion (US$2.04 billion) to attract foreign investment.

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However, despite these aggressive policies, India’s approach still includes shades of protectionism, which may conflict with its global trade ambitions. For example, capital controls in India limit fundraising options, potentially curbing corporate growth and investment.

In conclusion, while Vietnam benefits from greater political stability and fewer FDI restrictions, India is making bold moves to elevate its status in the global supply chain through strategic initiatives. However, the interplay between these policies and India’s protectionist tendencies will be critical in determining the country’s long-term success on the global stage.

Social factors: Geography and human resources

Geography:
Vietnam holds a clear geographical advantage due to its proximity to Shenzhen, China, which allows businesses to save both time and capital when relocating production plants. Additionally, Vietnam is strategically located near key supply chain hubs for several multinational corporations, including Taiwan, Japan, South Korea, and various Southeast Asian countries.

Human resources:
India is likely to maintain its edge with an abundant and affordable workforce. According to the Japan International Cooperation Agency (JICA), Vietnam may lose its comparative advantage in cheap labor due to an aging population and rising labor costs. To counter this, increasing labor productivity is seen as the most effective solution, but it presents a significant challenge for the Vietnamese government, requiring time and substantial effort.

Vietnam – India: Allies or competitors?

When comparing India and Vietnam across political, economic, and social dimensions, both countries exhibit unique strengths and weaknesses. India, with its large economy, offers significant market and workforce advantages, while Vietnam is gaining recognition as a stable manufacturing hub.

Amid global disruptions such as the US-China tensions, the Russia-Ukraine conflict, the Israel-Hamas conflict, and recessionary trends in developed markets, unnecessary confrontations are unwelcome. India and Vietnam are no exceptions, and both governments view the current situation as an opportunity for collaboration. Bilateral cooperation policies are seen as a way for the two countries to complement each other.

For instance, Sanjaya Baru, former Secretary General of the Confederation of Indian Chambers of Commerce and Industry, views Vietnam as a potential partner in India’s new supply chain strategy. By connecting with Vietnam, India aims to boost exports to Southeast and East Asia through joint ventures.

Spotlight: How Apple’s ‘China+many’ production strategy has benefited Vietnam and India

Apple’s heavy reliance on Chinese factories has long been considered a potential risk, especially during times of global instability. The US-China trade war, the Russia-Ukraine war, and the lingering effects of COVID-19 restrictions merely reinforced these concerns. In recent years, Apple has initiated a strategic shift, urging its suppliers to relocate and diversify their factory locations. Vietnam and India have emerged as prominent destinations in this effort.

Vietnam has become a key manufacturing hub for Apple, producing iPads, AirPods, and Apple Watches, with suppliers for MacBooks also expanding their investments in the country. By 2022, Apple had established 25 suppliers in Vietnam, including major companies like Foxconn, GoerTek, Luxshare, Intel, Samsung Electronics, and Compal.

According to JPMorgan’s analysis, Apple plans to relocate 20 percent of its iPad production, 5 percent of MacBook production, 20 percent of Apple Watch production, and 65 percent of AirPods production to Vietnam by 2025. The report also highlights that Vietnam is becoming a significant manufacturing hub for components like camera modules and the electronics manufacturing services (EMS) of smaller-volume products, such as the Apple Watch, Mac, and iPad. Vietnam is already a major producer of AirPods.

Per the Vietnam government’s statements in 2024, Apple has invested nearly US$16 billion through its supply chain in Vietnam, contributing to the creation of over 200,000 jobs. Further, Apple told media that it intends to buy more components from Vietnam and that the company “stands ready … to enhance cooperation and investment activities” in the Southeast Asian manufacturing hub.

In India, Apple’s suppliers assembled iPhones worth approximately US$14 billion during FY 2023-24, accounting for 14 percent of the global total, or about one in every seven iPhones worldwide, according to Bloomberg. The production in India includes iPhone models 12, 13, 14, and 15, with Foxconn leading the charge in iPhone manufacturing within the country. Apple is also speaking to various OEM/ODM players in India’s automotive, aerospace, and consumer electronics sectors to explore potential supplier agreements spanning multiple product categories.

As a result of Apple’s relocation and diversification strategy, both Vietnam and India are poised to become major production centers for the company, solidifying their positions within the global supply chain.

Moreover, Apple is not alone in its determination to expand its production beyond China. Many economists have noted a growing trend of multinational corporations adopting similar strategies. With their distinct advantages, both Vietnam and India have become attractive destinations for a wide range of global companies.

With inputs from Vu Nguyen Hanh and Melissa Cyrill.

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