India has had a presence in Africa for centuries. While its commitment to the continent has been overshadowed by China, Sofia Lotto Persio looks at why Africa-India relations should not be written off as a thing of the past.
India-Africa trade is at a decade high. In 2014, India overtook the US to become Sub-Saharan Africa’s third-largest trading partner after the European Union and China, with trade flows accounting for US$62bn. Investment has grown too, leading Prime Minister Narendra Modi to boastfully declare at the third India-Africa Forum Summit (IAFS) last October: “India has emerged as a major investor from the developing world in Africa, surpassing even China.” He pointed to the outcome of previous summits as evidence: “Our lines of credit to Africa, which is cumulatively US$7.4bn from the first two IAFS, is creating infrastructure in Africa and boosting bilateral trade.”
Modi’s claim is based on Chinese statistics which indicate that the country’s overseas direct investment in Africa stood at a total of US$26bn at the end of 2013. Meanwhile, India’s investments in Africa measured US$50bn between 1996 and 2015. It is, however, fair to note that most of India’s investment has gone to the low-tax jurisdiction of Mauritius and that, despite this growth in trade and investments, China remains by far a more commanding presence in Africa – its trade flows with the Sub-Saharan countries are worth more than three times those of India. But do not let these factors diminish the growing importance of the other Asian giant to the continent’s economy. In fact, African exports matter more to India than to China. “The continent’s share of India’s trade grew to 8% in 2014 from 5.2% in 2000. In comparison, Africa accounted for 4.2% of China’s total trade in 2014 and less than 2% of the EU’s,” explains Sarah Baynton-Glen, Africa economist at Standard Chartered.
East vs West
As a 2013 report issued by the World Trade Organisation (WTO) indicates, the regional picture of trade has changed considerably over the past decade. “In 2001 Southern Africa accounted for nearly 60% of [African] exports to India while West Africa accounted for just above 16%. Fast forward to 2011, and West Africa is the largest supplier with a share of 40%, while the share of Southern Africa was 24%,” the report reads.
Having historically being more active in East Africa, with Kenya, Tanzania and Mauritius as some of the top trading partners, India-Africa trade relations have reached new horizons. “Some of India’s fastest-growing economic ties are with countries such as Ethiopia and Sierra Leone, which have small Indian communities, but high growth prospects and investment opportunities,” says Baynton-Glen. Oil-rich Nigeria and Angola have also become significant commercial partners. As mentioned on the IAFS website, India is Nigeria’s largest global trading partner and Nigeria is India’s largest trading partner in Africa.
Crude oil, commodities and raw materials make up the majority of the goods’ trade balance – almost 99% of Nigerian exports to India is in the form of oil. “Oil exports to India from the African countries, led by Nigeria, are likely to have increased as they [the African countries] seek to compensate for American exports lost to shale oil,” Gift Simwaka, Afreximbank’s regional manager for Southern Africa, tells GTR.
While East Africa remains the largest regional market for Indian goods, the region’s own exports to the country only represent 2% of the overall value of African exports. These include edible nuts, particularly shelled cashews, vegetables, iron and steel, coffee and inorganic chemicals, despite potential for value addition and intra-industry trade in sectors such as leather, apparel, beverages, diamonds, metals and ores.
The continent’s various regions also attract different kinds of Indian interest in infrastructure building projects. “Indian companies from sectors such as roads, power, including solar and thermal, project consultants and information technology prefer East Africa. Consumer-led industries like automobiles and agriculture see greater opportunity in Nigeria and surrounding countries,” says Karthik Natarajan, India lead, global trade services at FirstRand Bank. “Private sector projects like Dangote’s refinery project in Nigeria have seen many Indian corporates participating in it.”
Access to finance represents a big challenge for India-Africa trade. An Indo-African survey conducted by the Confederation of Indian Industry (CII) and the WTO found that the obstacles to trading revolve around accessing Indian buyers or African exporters, access to trade finance, poor business environment, transport and logistics costs, and informal controls and corrupt practices.
According to Ashok Dhar, head of international supply and trading at Essar Energy, part of the problem comes from the fact that African banks do not have the resources to fund large – and expensive – transactions. “The major challenge faced in general is performance of the African importers to accept the orders and making timely payment. Banks are too cautious and this delays the execution of the transaction. A trading company needs working capital which only banks can provide: no [other] financial institution. This limitation restricts trading activity,” he tells GTR. “Governments in Africa, especially countries with potential like Mauritius, have to focus on this aspect.”
Elevated transport and logistics costs also stand as a major impediment to Indian exports going to Africa. High shipping costs, political risk, country risk and the accompanying cost of insurance weigh on Indian exporters’ shoulders, which is why many have been finding various alternative mechanisms to mitigate the risks. Unlikely to find support in the traditional banking sector, they often rely on the Export-Import Bank of India’s (India Exim) backing.
In a recent deal, India Exim extended a US$87mn line of credit to the Zimbabwean government for the renovation of a thermal plant. Under the terms of its credit line, the bank will reimburse 100% of the contract value to the Indian exporters upfront, upon shipment of equipment and goods or the provision of services. “Except for the government-owned India Exim, the appetite to finance deals among Indian banks is very low,” says Simwaka.
Lowering transaction costs is crucial to enhance trade between India and Africa. “Given the high transaction costs in exports to Africa and the risk perceptions attached, Indian exporters may become risk-averse and place the burden on the buyer. Exporters insist on advance or at sight letter of credits, thereby placing the onus on the buyer. The buyer’s working capital hence is stretched,” says Natarajan.
Knowledge of the African market was also cited in the CII-WTO survey as another major impediment to Indian exports to the continent. Particularly, the SME sector requires information on the growth prospects and how their products can find a market there. This information is crucial in allowing access to different industry sectors and to an ever-growing, young market.
While China faces demographic issues akin to those of European countries, India and Africa are still young economies, with approximately 65% and 57% of their population between 15 and 64 years of age, respectively. According to Sachin Chaturvedi, director general of the think tank Research and Information System for Developing Countries (RIS), having faced similar development challenges in their post-colonial periods, the two partners share aspirations that could help them foster development and co-operation, in line with the rising ambitions of their populations.
In describing India’s strategy towards Africa, he talks about the concept of a “development compact” structured around five elements. These are: trade and investment; technology; capacity building; lines of credits; and concessional finance. According to him, such a strategy would help India differentiate itself from the essentially transactional approach with which other global players have sought to deal with the continent.
Indeed, technology is a mutually-beneficial sector that is likely to increase in importance as the regions and their relationship develop. “The technology that will help Africa transform its raw materials into especially light manufactured goods will enhance intra-African trade, with the benefits of reducing its susceptibility to global commodity price shocks, as well as job creation and economic growth. India will benefit more and more in terms of access for its goods and technology in Africa’s growing market,” says Simwaka.
The WTO report highlights India and Africa’s trade and capacity-building initiatives in this context, including India’s Pan-African e-network project, a platform offering tele-education and telemedicine solutions to over 47 African countries as well as IT centres of excellence set up by India across the continent. Also noticeable is the India-Africa engagement in the health sector, which has been growing at a rapid pace in areas such as the export of high-quality, low-priced Indian pharmaceuticals, and the setting up of manufacturing units and healthcare infrastructure facilities within Africa.
Finally, there is significant untapped potential for services trade between India and Africa. In particular, the tourism and business travel sector, which is the largest services export industry in the continent, could still leverage its attractiveness to target an increased number of travellers from India.
The potential for expanding trade relations outside of the commodities sector is big, and the fall of commodity prices and economic diversification efforts may just provide the push to move in that direction. The latest IAFS saw the highest ever representation of African countries in attendance to discuss the future of their relationship with India, suggesting that there is mutual interest in exploiting these opportunities and tackling current challenges, and proving that India-Africa trade isn’t ancient history – it is only just getting started.