natural trading partners

At a roundtable in Mumbai hosted by National Australia Bank (NAB), it was clear that trading potential between India and Australia is a huge area of opportunity – in sectors such as mining and minerals of course, but also in dairy and other agribusinesses, LNG and educational and service industries.


Roundtable participants

  • Steven Cranwell, regional general manager, business and institutional banking, Asia, National Australia Bank
  • Nirvikar Jain, director, trade finance, India, National Australia Bank
  • Patrick Kearins, trade commissioner, Australian Trade Commission
  • Kylie Bell, Investment Commissioner, South Asia, Australian Trade Commission
  • S Maheshwari, president, finance and corporate affairs, Arshiya International
  • Shailesh Mittal, head, corporate treasury amd risk management, Vedanta
  • Geoff Parry, head of trade finance, Southeast Asia, National Australia Bank (chair)
  • S Ayyappan, deputy general manager and chief operating officer, State Bank of India

Thanks to NAB for hosting the roundtable in Mumbai


Parry: As a banker supporting trade and investment flows between India and Australia, it is clear that the relationship between these two partners is now symbiotic in nature, with each having needs and opportunities which are
well matched by the other.

What are the existing trade and investment flows between India and Australia? Are there any issues surrounding these flows, such as what is working well or what is not working so well? How can governments and banks do more to facilitate these flows? 

Kearins: Over the past five years, trade between Australia and India has grown by 25% a year. Now India sits in our top five trading partners. Our economic, trade and investment relationship has certainly given impetus to our broader relationship, though we come together through bilateral initiatives and multilateral forums as well.

Trade flows are around A$21bn and growing. There is no reason to think, at least from our side, that this is going to change any time soon because of the complementarity of the trade and increasingly the investment we are seeing – we are a good match for one another. Australia’s and India’s interests are converging.

The dominant contributors to our trade flows continue to be the resource-based non-monetary gold and coal supply, as well as education services. But complementarity is the reason for those three. Non-monetary gold supplies India’s strong demand for jewellery. Coal, both thermal and coking, is needed to help fuel India’s increasing demand for energy and infrastructure. Education is to help the Indian industry change the skill set of its people to get the productivity that every company in India is looking for.

The smaller items are just as important for similar reasons, whether it is agriculture, helping to increase yields in farm production, better water management solutions or clean energy for generating electricity from renewable sources.

Our trade to India is about A$18bn and Indian trade into Australia is the remainder.

In that context we are in the third round of negotiations in concluding a CECA (comprehensive economic cooperation agreement) between Australia and India. A CECA is broader than a free trade agreement (FTA), and includes elements around co-operation and capacity building.

We have strict phytosanitary requirements that govern the importation of agricultural and food items into Australia, so part of a CECA could be what Australia can do to assist India’s authorities establish the processes so that the Indian industry can meet our requirements and potentially access Australia as a destination market.

So a CECA is not focused just on increasing the trade – it is trade and investment, and capability.

Maheshwari: It appears that imports into India from Australia are substantially high as compared to the reverse flow. What do you think are the constraints on this trade deficit between India and Australia?

Kearins: A lot of it is historical. India and Australia’s convergence is being driven by India’s growth. Australia has things that India needs to help sustain that growth, but it could easily be the other way. Historically we have been on parallel tracks, so I think the blockage is a bit to do with mindset. A lot of Indian SMEs and large corporates from an export point of view think towards Europe and the US; it makes sense really. However, from an IT point of view all of the Indian
IT companies have been in Australia for many years. Increasingly, that presence in Australia is moving towards servicing the third markets as well.

Bell: India’s capability in the services sector and other knowledge intensive industries is well understood in Australia. If you look at the structure of India’s economy and where it perhaps has competitive advantages, it would be in sectors like IT, BPO and financial services.

Much of that trade and the work that Indian corporates are doing in Australia is probably not recorded in some of these statistics. For example, the top five or six Indian IT companies in Australia employ nearly 4,000 people, which is significant by Australian standards, with a population of only 22 million people.

Kearins: As India increases its capacity and technical efficiency in manufacturing, the automotive figures from India into Australia in the last five years have grown tenfold. They are still relatively small, but the growth is significant, and if you think of what the Indian automotive sector has done in the last couple of years, it is because the product that has been produced is competitive for a market like Australia. As the companies get to a point to service the domestic market and that domestic market starts to have globally competitive products supplied to it, it opens up export markets, including into Australia.

Maheshwari: In India, besides software exports, even manufacturing should have an edge, especially since labour costs are much lower in comparison to other countries besides available natural resources. For example, in the non-ferrous metal sector, labour costs in India are about 3-4% of sales, while in developed countries, the same on average is in double digits. Manufacturing in India could also offer substantial export opportunities, being a low cost producer – but this is not really happening.

Cranwell: There are certain industries that have led the way in India – the petrochemical/refining industry is a good case in point. At the same time, Australia has diminishing refining capacity and increased demand associated with the resources sector. The trade flows associated with this sector from India into Australia might not necessarily be direct, they also occur through the global trading houses.

Jain: Another factor with a lot of importance is food and agriculture. The population of 1.2 billion plus is growing in terms of wealth and prosperity, and studies show that US$2,000-US$3,000 per capita income is the inflection point towards changing dietary habits. That will involve a large part of the population moving from coarse grains consumption to soft grains, from basic vegetables to fruits and dairy products and other such changes. Needless to say that feeding a population of this size is not going to be easy, especially when agricultural growth is increasingly saturated.

There are farmlands in Australia capable of producing large quantities of crops to feed and fuel India’s growth. There is another area, in dairy, where India has made a lot of development that is centred around either government-owned dairy co-operative Amul, state dairies and a few large private dairies in the north. However, I think a true scaling up of operations on the private side has not happened yet. Technology and phytosanitary in dairy measures are another area of co-operation and growth. While raw material in the form of milk production is there, how do you translate that into a large professional dairy set-up, how do you move up the value chain and go international? With the potential in the dairy sector we could probably have five Amuls in India.

All these years, one barrier to growth has been the price of milk compared to the global price, but now milk and other dairy product prices have started catching up with global prices and this is likely to create incentives for further supply increases. Hence, I think that is another one big area where Australia and India can co-operate.

Bell: There are two opportunities here. One is for Indian companies to invest in Australian value-added agribusiness and food processing. We have seen companies in the last 12 months looking at, for example, sugar and dairy investment opportunities, and those companies plan to add significant value and develop new products in Australia for export back here to India, as well as the Middle East or Asia Pacific. The other opportunity was for us to work more collaboratively around research and development. Australia is a world leader when it comes to research for the agribusiness industry.

Indian consumers are typically very price sensitive and this will also affect Australian food and beverage exports. We are also working with Australian companies to consider coming here to invest in India and manufacture locally for Indian consumers.

I think when the Indian retail sector opens up we will also see more bilateral investment in this sector.

Cranwell: With what is going on in Australia in the dairy market, they are very keen to develop opportunities in export markets.

That is certainly a discussion that we are having with clients in Australia and in doing so linking them into our client base throughout Asia.

Kearins: It’s only been two years since India opened its protocols that Australia was able to export dairy products. Back to where governments have a role to play, the Australian scenario is that we are a very open market from both a tariff point of view as well as quantity restrictions. Where we have barriers or hurdles that some countries find hard to achieve, they are around phytosanitary measures. In agriculture it is about pestilence and disease that may be on a product that comes in, the aim to keep out pests or disease that aren’t present in Australia and that can affect our crops, but this is not a trade restriction.

One of the things we find is that companies take comfort in the fact that India is a democracy, has a known understandable judiciary and that the economics of India make sense. The practical elements, though, around other regulations in place confronting foreign businesses are sometimes difficult, as they are for Indian businesses.

Maheshwari: Yes, in India as well there are a few challenges and difficulties when setting up new manufacturing activities. Nevertheless, there has been increased awareness about bringing in legislation wherever possible and the government is taking steps towards the same.

Land acquisition has been the biggest challenge in India for setting up any project. To partially address the issue a new land acquisition bill is being proposed, which is expected to adequately compensate landowners, provide employment to at least one person within the family, besides attending to rehabilitation and resettlement issues.

For mines and minerals in India, the policy framework is under discussion. The bill proposes to make it mandatory for 26% of mining profits to be shared by locals. If enacted, it will also help in thwarting illegal mining activities.

Still there is lot to be done for improving business sentiments in India, including appropriate legislation in all business segments. For example, in the logistics sector for rail transportation, Indian Railways is enjoying a monopoly and there is a need for an independent regulator on lines as applicable in other modes of transport such as airports, ports and road transportation.

Mittal: We are in a progressive part and the next 10 years are going to be a key phase where we will see the difference. Looking at the youth of the country, people have a new focus; there are problems coming up such as political issues; corruption and various other things. If you look in terms of the energy of the youth, their mindset and awareness is certainly the change every country has to go through. I think that once we are through with significant movement in logistics and so on, by 2020, you will see a different India.

Cranwell: Kylie, how do you see competition with China? China is obviously trying to secure supply around those key sectors from Australia and elsewhere at the same time. Similarly, you have the historical footprint in Australia with Japan and South Korea.

Bell: Certainly five years ago I think Northeast Asia had a very strong presence within Australia, but I think in the last two or three years Indian corporates – of course companies such as Sterlite and Vedanta have been in Australia for much longer – have really started to secure those supply chains, and secure access to raw materials. Last year we had three or four very significant mining deals that pretty much doubled or tripled the Indian investment into Australia in one year. I see it continuing, and the Indian corporates now know Australia and are familiar with how we operate and what we have to offer.

They will be, if not as competitive, more competitive than, perhaps, the Chinese state-owned enterprises or other competition. They know what they are doing. They have good advisors and good backers, and I think that everything being equal they will continue to be successful. One of the issues, of course, for some of the companies in India is project financing. That is where companies such as NAB and State Bank of India come in.

Mittal: If you look at a mining product like copper concentrate, India imports almost 90% of its copper concentrate requirement, out of which nearly 25% is imported from Australia, which in my opinion should be worth not less than US$3bn-3.5bn a year.

It is about the fourth-largest export item from Australia.

So if you look at that copper concentrate companies in India – the major ones are Vedanta, Sterlite Industries and Birla Copper – importing close to 300,000 tonnes of concentrate each. Looking at the 25% of demand being supplied by Australia, I can see a lot of potential there, Australia being close to India in terms of freight and logistics.

Bell: Why have a duty involved?

Mittal: As India is in net deficit of copper, there is a case for the duty to be reduced to zero. That is an area where the trade relationship between India and Australia can add value, as this may benefit both countries.

In addition to copper concentrate, if we look at Vedanta – and I am sure other companies might also be importing – we are importing close to 0.5 million tonnes of alumina from Australia, and from all major suppliers like Glencore, Rio Tinto and BHP, which amounts to about US$250mn a year. There may be further business potential in this area also if there are favourable trade conditions.

Maheshwari: With regards to steel manufacturing, India is importing coking coal with major supplies of approximately 85-90% coming from Australia. Many Indian steel companies are assessing the potential to acquire coking coal mines in Australia. This is one potential area for M&A and trade-related activity to increase.

Bell: Many recent investments have been in acquiring and developing new Australian thermal coal assets. At the moment there is very little thermal coal coming in from Australia to India. Our exports are predominantly coking coal for steel production, and most thermal coal coming is from Indonesia. In the next five years, as the new Indian investors commence production, we will see a shift from just coking coal coming into India from Australia to include thermal coal.

The issue with investing in coking coal assets in Australia is that there are very few good assets going onto the market. It is a lucrative market for Australian coal producers, and many companies would ask ‘If my product is one of the most demanded in the world, why sell, why divest?’

Gujarat NRE for example has taken a mine that had been closed and has turned it around. Bhushan Steel has some coking coal projects in Australia and is doing well with those, but in terms of new opportunities it is a ‘sellers’ market and Indian companies will need to be patient.

Kearins: It is about securing access to resources, so buying is an ongoing concern in today’s climate in Australia – first, they are not really available. Second, it is globally competitive. Whoever has the deepest pockets is going to win; the market will set the price.


Parry: Just bridging the gap with opportunities, if you take coal and iron ore, there you have typically more upfront investment and much longer payback times, which falls more into the space where governments can play. The Chinese government can maybe take a very long-term view, whereas a corporate has shareholders and quarterly returns. Is there a way to break that logjam a little bit, and do governments play a role there? 

Mittal: If you take the Vedanta case, when we acquired CMT and Thalanga Copper Mines in Australia almost 10 years back, it was a making hardly any profit. As we wanted to be a long-term player there and with our own expertise on the subject, we have turned it around into a very good profit-making company for the last many years.

So from an Indian business point of view my feeling is that all the companies operating in Australia have the the view of an inclusive growth and an objective to remain invested for a long term.


Parry: What is the expectation of the banking sector? What is working well at the moment and what more do the banks need to do? 

Maheshwari: I believe expectations of corporates in India are to place equipment orders with vendors who also offer the financing arrangements. Today ECAs from each country would have to come forward and offer the financing solutions to boost exports from the country. Banks need to evaluate and support such financing arrangements. A few other expectations from banks is for more structured product offerings meeting the needs of each industry and each customer; innovative financing solutions so as to reduce costs of capital.

The existing interest rates on rupee borrowing in India have substantially gone up and businesses may not be able to sustain such high interest costs.

Mittal: If you look at suppliers of concentrate or coal or even other metals, offtake agreements between the seller, the bank and buyer are probable scenarios. I am sure a few such deals happen where the bank can finance the miner/seller with an offtake agreement, and then they become the channel between the seller and the buyer. This makes it easier for the buyer to get working capital funded by the bank and at the same time the supplier in Australia or the other place is secured. I see a lot of potential in such types of structured transactions that strong Australian banks can support, and which will effectively increase business volumes with Australia.


Parry: In the Australian banking sector there is a lot of familiarity with financing commodity flows. That makes sense, and by definition that is short term. If you compare that to German or Italian banks, historically they continue to finance a lot of machinery export capital, which has a payback of five years. The old forfaiting market was born supporting these sorts of longer-term capital goods. Maybe that can extend a little bit into these projects– let’s say for a project in India that has a five or seven-year payment cycle. An Indian conglomerate or an Indian bank is willing to take the majority of the payment risk of that, but long-term financing is still a problem. 

That forfaiting market existed for 50 years supporting exactly those sorts of flows. One of the issues is that the European banks who do the majority of that sort of financing do not have cheap five-year money to lend any more. If there is a good obligor, a good bank willing to stand behind it, how do you get that into a different market? 

For some of these projects, maybe that is something that can be reinvigorated. It is just joining the needs with that market and that is not a particularly complex structure. It is slightly outside the traditional comfort zone techniques of the traditional banks financing the India-Australia flows; it is long-term financing for five years, rather than 90-day cash conversion financing, because it is a project or it is machinery. I wonder if there is a potentially simple solution with a bit of joining the dots there. It will not solve all the issues, but maybe there are some opportunities there, based on what you were saying about the needs. 

That assumes someone is willing to guarantee the payment. If it is a project based on securities and cashflow, then more thinking needs to be done. 

Jain: One thing we might have missed out is LNG, which again is a very natural complement. India is hugely power-hungry and imports a lot of LNG from the Middle East, especially from Qatar. Australia has a huge surplus and has a lot of potential in natural gas. In fact, LNG Petronet has already signed offtake in an Australian project based in Gorgon. Indian output is not growing as rapidly as demand, and hence it is going to be increasingly hungry for such resources. While a lot of global oil and gas majors are doing projects in Western Australia, it is only perhaps a matter of time before a consortium of Indian companies go out and do some joint exploration and development work in Australia. Since these are very high capital cost projects and will have a very long-term gestation, it might evolve in a manner involving financial players from the long-term financing market (ECAs), facilitation and offtake agreements with various consumers and a consortium of developers to share risk. It is not new and has often been done in the past but the involvement of an India-centric consortium is something that can definitely evolve and will be of great relevance to India and Australia.

Cranwell: A significant issue with regards to these resource deals in Australia is that they are massive US$30bn-US$50bn projects in some instances. Sponsors will undoubtedly be considering what investors are bringing to the table beyond their equity investment and offtake.The role of ECAs will be quite critical in assisting with meeting funding requirements.

Bell: You talked about Chinese state-owned enterprises. There is certainly a perception that they have the ability to access funds and approvals for offshore investment very quickly, which has meant they have been successful in making large investment deals offshore. Within India the scenario is different. It is the Indian corporates that are largely driving the offshore investment.

Ayyappan: Coming back to the cost of funds, there is huge demand for funds in India from various corporates. In rupees, we are in a position to lend at a cheaper rate whereas in foreign currency, whenever we provide funds from our own sources, it is at a cheaper rate.

From my bank’s perspective, we are trying to negotiate lines of credit, particularly from ECAs. We can get funds at cheaper rates, which we lend on to respective corporates who have collaboration or JVs with exporters/SMEs of that ECA’s country origin, or some company coming into India – maybe somebody coming from Canada, investing money in this country – such a customer can be financed. Loans are underwritten by us and cost savings, in the form of reduced interest, is passed on to the corporates.


Parry: That is the goal: to best align the appetite of investors who have long-term funds with projects and payoffs that are long term in nature. As more goes through the banking sector’s intermediaries, particularly if it is going into areas where the banking sector is used to doing short-term financing, it is going to face that mismatch and become more expensive or more difficult to get funding. That is the challenge. Traditional financing methods go some way to solve that, but banks need to do more and be open to say, ‘okay, well, it’s a non-traditional form of finance but we know we have an investor base, and private placement markets which may have appetite for a long-term LNG project India might be doing with Australia’. 

That is what I have found from structuring large, more complex, non-traditional trade structures – securitisation projects and such – which are just there to provide liquidity and capital relief. The hardest part is not finding investors who have potential appetite; it is explaining what trade finance can offer. With that first stage done though, then you start to create pockets of liquidity. 

Cranwell: As banks move into a Basel III environment, we shall have to progressively meet targets around liquidity and capital.

The holders of longer-term infrastructure debt potentially are a different investor group and, to your point, there needs to be further progress on this issue with super-funds, insurance groups and fund management groups more broadly, who might be better placed in that environment to actually ultimately hold that debt. However, banks do have the critical role through the development phase here where they can bring genuine expertise in terms of providing a solution.


Parry: The financial intermediaries of banks play that role as the structurer and arranger but not necessarily financier. It is just marrying the two. 

Maheshwari: From the financing perspective, corporates in India would also desire to access global bond markets and capital markets to meet India’s increasing appetite for entrepreneurial growth.


Parry: That fits with the role banks have started to take anyway, around the more complex or longer-term funding.

It is not necessarily funding it themselves; they are lining up the parties that have good experience in that space. 

Cranwell: Certainly in Australia and the US, and to a certain degree in Europe as well, there is very strong distribution capability in the private placement market – including the debt capital markets in Australia as well; both institutional investors, but critically also around the retail side. Retail investors in Australia are very interested in opportunities with well-rated corporates back in the Australian context. The retail market is really starting to kick off, particularly off the back of some of these private projects, superannuation funds and the development of that sector with self-managed super-funds. Retail investors in that context are actually looking for more of a fixed income style of product rather than pure equity.

Kearins: Talking about some of the other financial institutions, it is about chasing growth as well. If you are sitting on your superannuation in Australia, where is the growth going to come from? All the analysts predict China and India, so where would you expect the funds to flow? Where the growth is.

Linking agriculture and urbanisation around India and the planning required to accommodate the population that’s planned to shift from agriculture to urban areas, the development of the Delhi Mumbai industrial corridor and the more than 20 cities planned is a point in case. Australia can figure broadly in the planning and delivery of this development, including infrastructure development – through public and private partnerships – urban design optimisation of rail and road lines, waste management, and water management to name a few. The associated aspects are also areas where we can participate, including the build for, then provision of, healthcare that’s going to be required.

Jain: Yes, and there are challenges that India faces on sustainable real estate development and infrastructure, where progress has been made by Australian companies and they can partner with some of the leading Indian companies in that space.


Parry: Well it seems corporates are still the key in India. All the investment required needs both intellectual property and natural resources, so those flows are only likely to increase.