India India: giant trade possibilities

India India: giant trade possibilities

No one thinking seriously about Latin America and the Caribbean’s (LAC) engagement with the global economy can deny the importance of trade, investment, and cooperation with Asia.

But why is India often overlooked?

No one thinking seriously about Latin America and the Caribbean’s (LAC) engagement with the global economy can deny the importance of trade, investment, and cooperation with Asia.

But why is India often overlooked?

The possibilities for deeper ties are immense, as detailed in the study LatIndia: the Future of Cooperation between India and Latin America. India is a 1.3 billion population economy expected to expand at 7.7% a year between 2018 and 2023 whose natural resource constraints represent a big potential market for LAC exports of mineral, energy and agricultural products.

That country’s comparative advantage in information technologies (IT) and other business services—rather than manufacturing— represents an opportunity for more complementarity and less direct competition with LAC.

Trade in goods between LAC and India increased by an annual average rate of 26% between 2003 and 2014 when it reached $45 billion all-time high. But since then trade flows have experienced ups and downs, stagnating at $36 billion in 2017, well below its full potential.

How can Latin America deepen its ties with India?

Consider the following options:

Export diversification

LAC’s exports to India are highly concentrated in a small number of commodities, mainly petroleum, which accounts for 55% of the region’s total exports to that country since 2012. And the top four export products, petroleum, copper ores, soya bean oil, and gold, account to 84% of the total.

The region can turn around this scenario by expanding exports of higher-value-added food products. India’s demand for imports of edible oils, dairy products, temperate-climate fruits, and processed foods and snacks is expected to increase rapidly in the coming years, due to domestic supply constraints and a growing middle class.

More and better trade deals

Latin America and the Caribbean producers face considerable barriers cracking that market: the average Indian tariff for agricultural products was 36.4% in 2015, with Colombia having to pay 51.8% and Mexico 37.3% for those goods.

LAC countries should reach new trade deals with India in addition to the only two existing trade agreements with Mercosur (signed in 2004) and Chile (2006). Both treaties were initially quite shallow, with only 3.2% of tariff lines receiving preferential access in the Mercosur agreement and only 2% in Chile’s.

The good news is that the Chile-India pact has expanded the number of products covered from around 500 to 2,800, including key Chilean agricultural exports of fresh fruits and vegetables. Moreover, Peru and India are negotiating an agreement; Colombia has expressed interest in a deal for several years, and India is an observer in The Pacific Alliance, strengthening ties to the regional bloc of made up of Chile, Colombia, Mexico, and Peru.

Foreign direct investment

FDI represents an opportunity to deepen ties. Direct investment is on the rise, but it remains far below its potential. While Indian firms invested $3.1 billion in LAC between 2008 and 2017, according to the Reserve Bank of India (RBI), LAC firms invested $3.7 billion in that country from 2000 to 2018, according to India’s Ministry of Commerce.

Despite the small aggregate figures, 150 Indian companies are now operating in Latin America, with 45% of them concentrated in two sectors: pharmaceuticals and telecommunications services.

When it comes to pharmaceuticals, Dr. Reddy’s is a market leader in several LAC countries, Torrent has over 40% of its global presence in Brazil and Mexico alone, and Glenmark runs an oncology research center in Buenos Aires.

In addition, several of India’s leading IT firms—Tata Consulting, Infosys, Aegis, Genpact, and Sasken—employ upwards of 25,000 workers in LAC.

As these examples suggest, Indian FDI in the region is more weighted towards manufacturing and services than to natural resources, underscoring the potential of FDI to help diversify economic relations. Manufacturing accounted for 58% of total investments between 2008 and 2016, with business and financial services making up the next largest share (25%).

Governments can encourage FDI by ensuring a stable and transparent policy framework for investors and promoting efforts to increase information about market opportunities.

Firms, too, should be more proactive in exploring unfamiliar markets. The multilatinas, companies that have outgrown their home markets and become multinational, have yet to make serious inroads in India, outside of exceptions such as Brazilian bus manufacturer Marcopolo and Mexican cinema chain Cinepolis.

Government-to-government cooperation

LAC and India can also deepen relations by increasing cooperation in sectors like infrastructure and transportation. Poor connectivity between LAC and India is a major obstacle to increasing trade between the economies and inhibits tourism and personal exchanges. Cooperation to expand and improve transportation linkages between these two distant economies is critical to deepening relations.

Policy cooperation can also help both sides adjust to the rise of digitalization. India and LAC’s strong capabilities in IT and software should facilitate finding solutions to the policy challenges surrounding e-commerce, big data, artificial intelligence, and other fruits of the Fourth Industrial Revolution.

As explored in the report India: Latin America’s Next Big Thing? there is a large untapped potential between LAC and India. The ball is on the camp of policymakers on both sides.