India is preparing itself to overtake China as Latin America’s premier Asian trade and investment partner, writes Eleanor Wragg.
Over the past few years, China has dominated both trade and investment with Latin America, pouring over half a trillion dollars into the region’s infrastructure and becoming the biggest trading partner for some of its largest economies, including Brazil, Chile and Peru. Meanwhile, despite rapid economic growth and a similarly massive population, China’s rival, India, has barely made its mark on the region. But today, under a new, business-minded leadership that wants to boost India’s global profile and role, and with growing food, energy and infrastructure needs that could be met by the commodities Latin America has in abundance, can India become the other Asian giant in Latin America?
Following a decisive election outcome, in which Narendra Modi took power of what will be India’s most stable government in the past 30 years, things are looking up for India. Economists have rushed to raise their outlooks on the South Asian nation, with Morgan Stanley forecasting annual GDP growth of 6.5% up to March 2015, up from 4.9% the year before, and a Bloomberg survey pegs fiscal 2016 growth at 6.5% – not too far behind China’s 7.25% and far ahead of the other BRICs, Brazil and Russia, at 3.2% and 2.5% respectively. This growing economy with an emerging middle class needs precisely those commodities, food and energy resources that Latin America already exports to China. Meanwhile, India’s exporters have in Latin America a 600 million-strong market of customers for their car, technology and manufactured goods companies – already a growth sector according to HSBC, which says that in May this year, India’s manufacturing and services sectors grew faster than China’s. Furthermore, India’s low levels of natural resources and abundant skilled labour are an obvious balance to Latin America’s high levels of natural resources and scarcer skilled labour. All the factors point to the India-Latin America relationship becoming the next big frontier in south-south trade, but as yet, India only has an estimated US$42bn of trade with the region, dwarfed by China’s US$260bn.
Since India began to open its economy in 1991, its trade relations have been characterised by bureaucratic issues, procedural bottlenecks and a healthy dollop of mistrust, perhaps best illustrated by the ongoing free trade negotiations with the EU that have missed several deadlines. China has overtaken what could have been India’s position in several markets.
India has made some advances toward Latin America, however. In 1997, taking into consideration the potential for increased trade with the region, India’s department of commerce launched an integrated programme called ‘Focus: LAC’, which was extended up to March 2014, although it’s unclear if it has now been re-extended. The programme aims at encouraging the Indian private sector, as well as state entities, to develop stronger trade and investment linkages with Latin America and the Caribbean, and at the same time focuses on enhancing India’s export of textiles, engineering products, computer software, chemicals and pharmaceuticals to the region.
Deep Roy, associate partner at Mumbai-based law firm Economic Laws Practice, says Indian trade with Latin America has been more ad hoc than the structured process that has been followed by China. “There may not be any difference in opportunity between India and China,” he says. “It is merely that China has taken the initiative to open up avenues and have more arrangements in place. China has promoted the building of adequate infrastructure to open up shorter trade routes, and Chinese financial institutions have also provided considerable lines of credit for trading entities in Latin America.”
“India is still to sign comprehensive bilateral agreements with its trading partners in the region and lags in concluding agreements with other trade partners,” adds Vasudevan M, head of transaction banking at Indian bank ICICI in the UK, although he is optimistic that this will change under the Modi administration: “What I would expect from the new government is that it will be more proactive in completing the agenda set by the previous government.”
Also speaking to GTR, Mauricio Mesquita Moreira, an Inter-American Development Bank (IADB) economist and author of the 2010 book, India: Latin America’s Next Big Thing – one of very few reports identifying the possibility for trade to blossom between the two markets – says: “There are very strong reasons why these two economies should be trading more and it’s still a puzzle that they don’t trade more than they have been doing.” However, he identifies a lack of movement on the part of India in addressing issues such as high tariff and non-tariff barriers, particularly on agriculture, as a potential obstacle. “On the Latin America side,” he adds, “Mercosur has become more protectionist, particularly in the auto sector, and that clearly has hurt some of India’s exports.”
As growth in the developed markets of Europe and North America slows, Latin America’s resilience during the international financial crisis and rapid recovery has attracted Indian interest. The end of last year saw a flurry of important visits by Indian dignitaries to the region, with the external affairs minister heading to Brazil and vice-president Hamid Ansari taking in Cuba and Peru, where he launched the India-Peru Chamber of Commerce. In December, commerce secretary S R Rao said the country was considering widening its trade agreement with Mercosur, while at a conference in Hyderabad, Indian officials said they wanted to double trade with Latin America over the next five years, and would expand air and sea links with the region and negotiate more free-trade agreements in order to do so.
Proposals range from easing visa rules to establishing a direct shipping route to cut shipment time to 30 days from the current 45, as well as establishing a direct air link to Panama – all measures that can help close the logistics gap with China, which already has good shipping links through the Panama Canal.
And in anticipation of these new trade flows, banks and even the India private sector are taking note: “During the past few months, we have seen an increased interest from Indian financial institutions in joining our trade finance facilitation programme as confirming banks,” says Gema Sacristan, who manages the financial markets division at the IADB. “This can translate into Indian companies and financial institutions setting up financial infrastructure due to the increased trade flows between Latin American and India.” She says she has already seen an increase in Indian companies needing financial services to do business with Latin America.
Recent legislative changes in India also look good for Indian companies looking to trade with Latin America. In May, the country’s Reserve Bank permitted authorised dealer banks to allow exporters to receive a long-term export advance up to a maximum tenor of 10 years for long-term supply contracts. “This will act as a strong tool for Indian exporters to receive upfront equity and will definitely be a structure that will promote trade,” says Roy.
And bankers expect that more developments like this will be on the way. “The expectation is that there will be lots of traction coming out of the government to improve and make up lost ground for India because today the whole trade and investment sphere is overshadowed by China,” says ICICI’s Vasudevan.
India also brings very different assets to the table than China: “India has some natural advantages,” he adds. “It is a large democracy, and its strengths lie in information technology, software, offshoring, business process outsourcing and auto manufacturing.”
It’s not just trade that looks set to take flight. Indian investment in the region has already started to pick up in sectors as diverse as IT, pharmaceuticals and hotels. Hero MotoCorp, the world’s largest two-wheeler manufacturer, has firmed up plans to set up a plant in Colombia, while tuk-tuk maker Bajaj, which already sells its two and three-wheelers across the region, has reportedly announced plans to set up a Latin American assembly unit.
However, Indian investment into Latin America hasn’t been without its controversies. In 2011, Essar Steel pulled out of its proposed US$12bn steel plant in Trinidad and Tobago following protests, and Jindal Steel exited its US$2bn venture in Bolivia, citing problems with the government.
“Culturally, there are difficulties between Latin America and India when it comes to doing business,” says Rafael Amiel, director for Latin America at IHS. “Indian businesses find there are often issues, too, regarding payment capacity and willingness to pay.”
Nevertheless, India is largely perceived as an easier partner than China, which often attaches political strings to its business with the region. “It’s much easier for Indians culturally to invest in the region than it is for the Chinese,” explains Mesquita Moreira. “The amount of complaints you have about Chinese firms’ way of operating you won’t have in India. You’re not going to have to deal with the Chinese government; 99% of the Chinese companies in Latin America are state-owned so you never know who you’re dealing with. That’s not the case with Indian firms because you’re dealing with the private sector.” In addition, unlike Chinese firms, who often seek to impose Chinese managers on their projects, Indian companies look to hire locally. Even though China is ahead of India in terms of volume of trade with Latin America, India’s more conservative manner of doing business in Latin America has its benefits. The Indian formula can be beneficial for the long-term relationship between India and Latin America. And given that India currently has a smaller volume of trade with Latin America, its imports attract considerably less attention and the mix in the basket is perceived as less threating to Latin American industries than the Chinese basket. Also, unlike China, India is not simply exporting finished products to Latin America. Raw materials and intermediate products comprise over half of Indian exports to the region, which mean more opportunities for value-added manufacturing for Latin American firms.
There’s also more common ground between Latin America and India than with China. India’s gradual journey along a path of reforms mirrors that of several Latin American countries that have achieved democratic stability. “The relationship with India is much easier than with China because of the size of the state in China and the institutional issues with the system of government,” says Mesquita Moreira. “The policy lessons that can be exchanged between India and Latin America make much more sense because you have democracy; I think Mexico and Brazil can learn much more from India than from China.”
Given all this, could India displace China as the major Asian player in the region? IADB’s Sacristan sees more of a complementary role: “In general terms, the imports from China are not the same as the imports from India. Among other things, on one hand China exports machinery, industrial equipment, chemicals, vehicles and apparel to the region; while on the other hand India exports textiles, manufactured goods, pharmaceutical products and technology.”
India still has a lot of work to do, but given the right conditions, the situation looks positive. Writing for Gateway House, the Indian Council of Global Relations, the former Indian ambassador to Argentina, Uruguay, Paraguay and Venezuela, Rengaraj Viswanathan set out a laundry list of requirements if India is to take advantage of the opportunities Latin America has to offer. Among them are free trade agreements with Mexico, Colombia and Peru and a deepening and widening of the already-existing preferential trade agreements with Chile and Mercosur. He is also pushing for IADB membership for India, like South Korea and China, while, eyeing China’s estimated US$102bn of credit to Latin America during 2005 to 2013, he also wants India’s Exim bank to review its policies toward the region. Analysts will be keeping an eye on the Modi administration’s progress in these areas.
While India still lags China taking into account the 13-year difference between the opening of the Chinese economy in 1978 and that of the Indian economy in 1991, it seems fair to say that India will soon see much higher levels of trade and investment with Latin America. “India is going to hit the natural resource constraint just as happened in China. Latin American exports to China only really took off after 2000, and China has been growing since the late 1970s. It’s all about reaching the tipping point. I don’t think India has hit that constraint yet; but they’re going to sooner rather than later,” concludes Mesquita Moreira.