A new trajectory for India-Africa ties

India now sees Africa as a promising market for Indian goods, services, and investments. This is evident in the government’s recent concerted focus on the India-Africa relationship—high profile visits by top leaders to African countries, a recasting of India’s development diplomacy, and an attempt to match action to past promises

India’s relationship with Africa has been through an unprecedented intensification in June 2016. In the first week of the month, Vice President Hamid Ansari visited Tunisia and Morocco. In the second week, President Pranab Mukherjee embarked on a tour of western and southern Africa, covering Ghana, Cote d’Ivoire, and Namibia. And in July, Prime Minister Narendra Modi is scheduled to visit Kenya, Mozambique, Tanzania, and South Africa.

The present renewed outreach is also unabashedly about business, and a good example of geo-politics combining with geo-economics. India views Africa as a promising market for Indian goods, services, and investments. So far though, any follow-up on promises had remained anaemic. Now, Indian leaders are seeking out fresh investment opportunities for Indian public and private sector companies in different African countries.

The vice president’s visits to Morocco and Tunisia are crucial because India imports phosphate—a critical raw material for fertiliser production—from these countries. Ansari also inaugurated an India-Morocco Chamber of Commerce during his trip to Rabat.

The president’s three-country tour provided an opportunity to further India’s business interests. At the India-Ghana Business Forum, Mukherjee said: “…the Indian Government would be ready to work with you in key sectors and areas of common interest and encourage Indian private as well as public entrepreneurs to bring more investments into Ghana.”[1] India’s cumulative investments in Ghana are over $1 billion and two-way trade during 2015-16 amounted to $3 billion.[2]

In Cote d’Ivoire, Mukherjee said: “…your country is blessed with fertile soil and abundant agricultural and mineral resources. Our public and private sectors are keen to join you in exploring these resources efficiently and in setting up agro-based industries.”[3]

At the same time, India’s development diplomacy for the continent has been through a strategic shift. Exim Bank, for example, is now likely to focus more on service exports, rather than compete with China for infrastructure projects in Africa.

The bank is looking to disburse close to Rs. 10,000 crores in Africa over the next three years as both commercial and concessional credit.[4] Service exports aim to build on India’s traditional strengths in Africa and will include healthcare, education, and information technology services. Exim inaugurated an office in Cote d’Ivoire during Mukherjee’s visit. The office is expected to widen the bank’s footprint in West Africa.

Exim Bank is also looking to sharpen its focus on another area of India’s traditional exports to Africa: project exports. It has requested the Reserve Bank of India to ease regulatory and compliance guidelines regarding minimum equity capital, leverage (the multiples—3X, 4X or 8X—of share capital that a company can borrow) and the maximum that the bank can lend to a single borrower.[5] These will be necessary if the bank is to make project exports one of its thrust areas.

These actions are in line with promises made during the Third India-Africa Forum Summit (IAFS) in October 2015. The first two editions of the summit—in 2008 and 2011—made numerous pledges but fell short on follow-up and delivery. Both sides were responsible for the indifferent implementation.

The last IAFS, held in October 2015, saw a strategic shift in focus—apart from the usual rhetoric, there was a better alignment of India’s global ambitions (both political and geo-economic) and traditional strengths.[6] [7] Importantly, the third IAFS created a formal monitoring mechanism to regularly review the progress of various projects at different stages of completion.

The summit aimed high—it also sought to create a global alliance of solar-rich countries.[8] Such an alliance will help create goodwill for India among Africa countries, and generate solidarity through collective bargaining when accessing IPR-protected technology from rich countries.

It’s starting with this summit that Modi has been building bridges with different African countries and soliciting support for a host of multilateral initiatives. These include backing for India’s membership of the UN Security Council along with a united front of emerging and poor economies at the World Trade Organisation.

The high-octane official Africa engagements will also help assuage concerns regarding India after recent allegedly racist incidents involving African nationals living in the country. But it is now up to India to ensure that its belated recognition of the critical role Africa can play in our strategic calculus, as well as in India’s trade and investment expansion plans, is not just a temporary spurt.

This feature was exclusively written for Gateway House: Indian Council on Global Relations. You can also read it here.

References
[1] Mukherjee, Pranab, ‘Address at the India-Ghana Business Forum Event’; Speech delivered at Accra, 13 June 2016, <http://presidentofindia.nic.in/speeches-detail.htm?531>

[2] Press Release, Ministry of External Affairs, Government of India, Visit of President to Ghana (June 12-14, 2016), 6 June 2016, <http://www.mea.gov.in/press-releases.htm?dtl/26872/Visit_of_President_to_Ghana_June_1214_2016>

[3] Mukherjee, Pranab, ‘President of India; Speech in response to welcome speech by President of Cote d’Ivoire’ Speech delivered in Abidjan, Ivory Coast, 14 June 2016, <http://presidentofindia.nic.in/speeches-detail.htm?534>

[4] S, Arun, ‘Exim Bank’s African credit to boost service exports’, The Hindu, 12 June, 2016, <http://www.thehindu.com/business/Economy/exim-banks-african-credit-to-boost-services-exports/article8721312.ece>

[5] Lele, Abhijit, ‘Commerce ministry, RBI to review regulatory norms for Exim Bank’Business Standard, 24 May 2016, <http://www.business-standard.com/article/economy-policy/commerce-ministry-rbi-to-review-regulatory-norms-for-exim-bank-116052400042_1.html>

[6] Documents, Third India-Africa Forum Summit, India Africa Framework for Strategic Cooperation, 29 October 2015, <http://www.iafs.in/documents-detail.php?archive_id=323>

[7] Documents, Third India-Africa Forum Summit, Delhi Declaration 2015, 29 October 2015, <http://www.iafs.in/documents-detail.php?archive_id=322>

[8] Speeches, Third India-Africa Forum Summit, Speech by Prime Minister Shri Narendra Modi at the Inaugural Ceremony, 29 October 2015, <http://www.iafs.in/speeches-detail.php?speeches_id=276>

India’s five-cornered trade strategy

Five rather unfavourable trends define India’s trade performance over the past two years; these trends also provide useful pointers as to where India’s future trade strategy can go over the next three years as it deals with a global economic slowdown, the rise of megatrade agreements and a pivot to a more intensive trade relation with the U.S.

The Narendra Modi government’s trade policy has been marked by five noteworthy, but rather unflattering, trends: declining trade volumes, unsuccessful diversification of trade destinations, continuing deadlock in U.S.-India commercial ties, India’s services strength remaining underutilised in trade agreements, and, lack of a national strategy for mega trade agreements.

This then shapes the government’s trade agenda for the next three years.

The first element, the dismal state of India’s trade, impacts Indian industry. In the two years of the current government, exports have contracted by almost 17% — from $314.405 billion in fiscal 2013-14 (April 2013 to March 2014, a couple of months before Modi and his Cabinet were sworn in) to $261.136 billion in 2015-16. Even imports have dipped by a considerable 16% during the same period: from $450.12 billion to $379.6 billion.[1]

To be fair, exogenous factors are behind the drop. The global slowdown has eroded demand for manufactured goods. But, while global trade in 2015 expanded – albeit marginally, by 2.8%[2] — India’s trade shrunk. In addition, lower commodity prices have impacted volumes and values for both exports and imports. However, the fall in imports has another worrisome aspect – it could signify lower demand for raw materials and intermediate products from Indian manufacturing sector. Combined with lower merchandise exports, which also affects broad swathes of industry, contracting trade volumes adversely impact employment, incomes, investment, consumption and economic growth.

                        Exports                                      Imports

2013-14:    $314.405 billion USD        $450.199 billion USD
2014-15:    $310.338 billion USD        $448,033 billion USD
2015-16:    $261.136 billion USD        $379.596 billion USD
Source: Department of Commerce, Ministry of Commerce & Industry

Undoubtedly, trade performance has to be improved urgently. One reason for India’s continuing indifferent trade performance is lack of integration with regional and global supply chains. Foxconn’s decision to set up a handset manufacturing unit in India is an improvement but it will require many similar initiatives to markedly improve India’s trade profile.

This brings up the second aspect. India has been trying for some years to diversify its export destinations, away from the developing countries of North America, Europe and Japan where demand and consumption levels have dropped appreciably. India saw in Africa a key trade and investment partner and fixed a $90-billion trade target for 2015. It finalised similar trade targets with ASEAN, other regional groupings and individual countries. Unfortunately, most of these trade targets remain unattainable.

For example, trade between Indian and Africa fell short of the $90-billion target – two-way trade dropped from $71.5 billion during 2014-15 to $ 56.67 billion by 2015-16. One of the reasons for the shortfall is the steep drop in commodity prices, leading to the oil import bill from Nigeria (India imports about 15% of its oil from that country) shrinking. However, that still does not explain the lack of a concerted thrust at creating alternative markets for Indian goods and services in either Africa or Latin America. It’s not too late, given India’s strategic and civilizational ties in these two continents.

The third facet is a visible pivot over the past two years towards a more intense trade and investment relationship with U.S., though the results are mixed[3].

India’s engagement with U.S. froze under UPA-II regime. However, the past two years have seen considerable energy invested in the relationship. Trade ties between the two nations is conducted through the Trade Policy Forum (TPF, set up in 2005), under the broad rubric of the US-India Strategic and Commercial Dialogue. The forum’s ninth meeting was held in October 2015 and like other previous rounds, the outcome remained wedged between on familiar issues – agriculture market access, intellectual property rights, trade in goods and services. Strategy firm Albright Stonebridge Group comments: “Will the TPF continue to be a talk shop where issues are raised, discussed and shelved for discussion next year…Over the last few years a meeting would be called successful if both sides simply showed up to the meeting at the agreed place and time, discussed the agenda and closed by agreeing to disagree.”[4]

One of the perennial sticking points in the India-U.S trade negotiations is services, the fourth pillar of India’s trade profile and unarguably a competitive advantage. The Economic Survey for 2015-16 states: “WTO data shows that India’s services exports grew from $16.8 billion in 2001 to $155.6 billion — which constitutes 7.5% of the GDP — in 2014, making the country the eighth largest services exporter in the world. The share of India’s services exports in global services exports at 3.2% in 2014, is nearly double its share of merchandise exports in global merchandise exports at 1.7%.”[5]

But, India has failed to utilise this competitive trade advantage, specifically cross-border movement of professionals, in various trade agreements.

For instance, India signed a Free Trade Agreement (FTA) with ASEAN for goods first, and then followed it up five years later with a FTA on services. In the interim, India suffered a negative trade balance given the SE Asian region’s superior manufacturing capability and integration with global supply chains. Strategically, if India had signed an FTA for both goods and services simultaneously, the outcome might have been different.

The past lessons seem to have been learnt and, in various FTA talks, India is now insisting on inclusion of freer movement of professionals in return for demands to lower customs tariffs.

The fifth corner of India’s future trade strategy relates to mega trade agreements. The largest – Trans Pacific Partnership – promises to change how trade is conducted. India and China are noticeably absent from the pact; in fact, if the other mega agreement under discussion (Transatlantic Trade and Investment Partnership, between USA and Europe) is finalised, India and China could find themselves in trade hibernation.

Opinion is divided[6] [7] on whether India should join TPP, even though scholars are unanimous that such mega agreements will definitely result in trade diversion for India. Excluded by both TPP and TTIP, India has now set its eyes on completing the Regional Comprehensive Economic Partnership (RCEP), a trade and investment agreement between ASEAN members plus India, China, Japan, South Korea, Australia and New Zealand. Simultaneously, President Obama is pushing for India’s membership in Asia Pacific Economic Cooperation, a 21-country regional economic forum. In fact, APEC membership is a stepping stone for TPP inclusion.

India’s strategy on mega agreements should be to first conclude RCEP without compromising on its strengths. Alongside, India should also try and finalise FTAs with individual states, such as Australia. At the same time, the government must initiate a broader public discussion on India’s trade strategy, specifically to clarify the country’s stand on TPP and its focus on “beyond-border” issues, such as domestic labour laws or environment rules.

This feature was exclusively written for Gateway House: Indian Council on Global Relations. It can be read here also
References

[1] India’s Foreign Trade: March 2016; Ministry of Commerce and Industry, Govt of India; April 18, 2016; http://pib.nic.in/newsite/erelease.aspx?relid=0

[2] Trade Statistics and Outlook: Trade growth to remain subdued in 2016 as uncertainties weigh on global demand; Press Release No Press/768; World Trade Organisation; April 7, 2016; https://www.wto.org/english/news_e/pres16_e/pr768_e.pdf

[3] Elliot, Mark and Linda Dempsey; Stalled Progress on U.S.-Indian Trade; The Washington Times; January 12, 2016;www.washingtontimes.com/news/2016/jan/12/mark-elliot-linda-dempsey-stalled-progress-on-us-i/print/

[4] India Newsletter; Determining Success or Failure of United States-India Trade Policy Forum; October 28, 2015; Albright Stonebridge Group;http://www.albrightstonebridge.com/news/determining-success-or-failure-united-states-india-trade-policy-forum

[5] Page 158, Services Sector (Chapter 7), Economic Survey 2015-16, Vol 2, Ministry of Finance, Govt of India

[6] Banga, Rashmi & Pritish Kumar Sahu; Trans-Pacific Partnership Agreement (TPPA): Implications for India’s Trade and Investments; Working Paper CWS/WP/200/24; October 2015; Centre for WTO Studies; http://wtocentre.iift.ac.in/workingpaper/Trans%20Pacific%20Partnership%20Agreement_Implications%20for%20India.pdf

[7] Bergsten, Fred C; India’s Trade Gains From Joining An APEC-Wide TPP; September 18, 2015; Peterson Institute for International Economics;https://piie.com/research/piie-charts/indias-trade-gains-joining-apec-wide-tpp