Public Diplomacy Public Diplomacy

Doing Business with Latin America & the Caribbean

November 06, 2015

The recently concluded Latin America & Caribbean (LAC) conclave, organised by the Confederation of Indian Industry 8-9 October, was overshadowed by the VVIP India-Africa Summit three weeks later in Delhi.

The conclave was attended by the Vice President of Costa Rica, Foreign Minister of Uruguay, and Ministers from other LAC countries. At a dinner in their honour, External Affairs Minister Sushma Swaraj predictably touched upon India’s aspirations to permanent membership of the UN Security Council, terrorism, climate change, etc. The main focus, however was business with India.

EXIM Bank released a study during the event titled ‘Enhancing India’s Trade Relations with LAC’. The paper documents trade statistics and data on that region. The global economic downturn, fall in commodity prices, and their impact on LAC economies and trade give us a snapshot of the region's economy. India’s trade with LAC in calendar year 2014, at $49.1 billion, up from $5.2 billion in 2005 (statistics of ITC Geneva) is indeed impressive.

According to the website of India’s Department of Commerce - www.dgft.gov.in - trade between India and LAC in FY 2014-15 (April-March) amounted to $45.11 billion. This was an improvement over the previous financial year’s figure of $ 44.82 billion, short of the peak $ 46.67 billion in 2012-13, and dwarfed the $1.6 billion of 2000-1. Trade has rises twenty-five percent annually this century. India has run a trade deficit with LAC over the past decade - $16.5 billion in 2014-15. We need to take an objective look at the composition and trends.

Crude oil (sixty to seventy percent of India's import) comes from five countries – Venezuela, Brazil, Mexico, Colombia and Ecuador. In the prevailing buyer's market, India need not worry about their reliability nor, for the moment, about pricing mechanisms. Concerns over energy security have however led Indian companies to seek oil equity in some LAC countries. These investments carry political and economic risks. Reliance exports several billion dollars annually of refined products. There is the possibility this reverse flow may be hit if and when projected LAC refining capacities come on stream.

Volatility in commodity markets generally creates its own dynamic, whether copper from Chile, sugar from Brazil or soya from Argentina. Most Indian importers enjoy leverage, as does the government of India, which may still have room to lower tariffs and liberalise import procedures. To ensure dependable supply and price advantage, some Indian investment has taken place, not always successful. Jindal Steel and Renuka Sugars in Brazil are trying to put their experiences, in Bolivia and Brazil respectively, behind them. ESSAR Steel came a cropper in Trinidad and Tobago; Reliance relinquished oil blocks in Colombia and Peru.

Economic growth in LAC is slowing. Some of India’s major markets, especially Brazil, are in recession. According to the Economic Commission for Latin America and the Caribbean (ECLAC), in 2014 average regional growth was just 1.1%, the smallest since 2009. In April it predicted the region will only grow at around one percent this year. India's main market - South America - will have zero aggregate growth, Central America should grow at 3.2 percent and the Caribbean at 1.9 percent. The currencies of the major LAC economies have fallen against the dollar, more than the rupee in most cases. Slowing demand from China has put several projects on hold and affected several sectors. These factors could affect demand for Indian exports.

Key Latin American markets – Mexico, Peru, Chile – have signed up for the Trans Pacific Partnership. Negotiations are afoot by several LAC economies to promote trade with Europe, even Asia, to reduce trade barriers and attract investment. Given the integration within the region, these arrangements will lock LAC into supply chains, intellectual property and other regulatory regimes that favour their international counterparts.

India’s intrinsic advantages lie in the complementary nature of this economic relationship. With seven percent growth and insufficient raw materials, fuel and food, India presents a natural market for resource-rich LAC. It can compensate to some extent for the loss of other markets. Indian automobiles, pharmaceuticals, machinery, IT services and other exports are strengthening their presence there.

Investments between India and LAC have built up slowly. A paper commissioned by FICCI last year reveals that foreign direct investment (FDI) by Latin America to India in the period 2003-13 amounted to $ 2.68 billion or 0.8% of the FDI outflow of that region, and 1.0% of the total FDI received by India in that period. Indian FDI in Latin America in the same period amounted to $ 8.4 billion or 7.4% of India’s total FDI outflow, but 0.7% of Latin America’s FDI inflow. Brazilian, Mexican, Peruvian and Argentinian companies have a presence in India while companies from other LAC countries are on the horizon.

Leading Indian companies are invested in LAC: ONGC, BPCL, IndianOil, Videocon (hydrocarbons); Birlas (metals); Mahindra, Bajaj, Hero (automobiles). Others have a physical presence: Lupin, Claris, CIPLA, Dr Reddys (pharma); TCS, Infosys (IT); UPL (agro-chemicals); Suzlon, Praj (renewable energy) and several others.

India’s official establishment recognizes the enormous potential. The FOCUS-LAC program of the Department of Commerce, instituted in 1997 to finance trade promotion, has been extended till 2019. Udyog Bhavan is working on a pre-feasibility study before launching free trade negotiations with Peru. An amplification of the preferential tariff agreement with Chile, from less than 500 tariff lines to almost 3000, is close to finalization. Brazil, Paraguay and Uruguay reciprocate India’s initiative to amplify a similar agreement with the five-nation MERCOSUR (Brazil, Argentina, Paraguay, Uruguay and Venezuela).

Indian business needs official support. This implies more than political contact and reassurance, though that is essential. Financial underpinning, through concessional financing, despite the exchange risk, plays an important role. Indian banking is virtually absent from this region. EXIM Bank, a handmaiden of the Ministry of Finance, basically administers politically determined lines of credit. Agreements on investment protection, avoidance of double taxation, phytosanitary regulations, civil aviation, need to be seriously and conclusively negotiated with all possible counterparts.

Trade with the 54 African nations, at $75 billion, is comparable with the $45 billion - or $49 billion as per ITC - of the 33 nation LAC, in volume and composition. Africa has received $7.4 billion of Indian project finance, compared to less than $500 million for LAC. For the foreseeable future, LAC will be an important element in India’s energy and food security. Indian enterprise has tasted success and will probably retain momentum in LAC. India has hosted three summits with Africa. It is high time something similar is contemplated with LAC.

Deepak Bhojwani has served as Ambasssador of India in seven countries of Latin America and the Caribbean from 2010 to 2012.


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