The Third Africa-India Forum Summit is now scheduled to be held in New Delhi on October 26-30, 2015 and the Indian Government wishes to make the summit a wider ranging participatory and result-oriented one. Instead of simply enhancing goodwill measures, the third summit is to focus on utilising trade and investment opportunities to propel economic growth in these two regions, and expectations are high this time.

African continent presents an opportunity to invest, trade and build economic partnerships. There are definitive advantages to be derived from robust, low cost and enduring solutions for investment, infrastructure, social, education, health etc. that India has developed that may be effective under similar socioeconomic conditions in Africa. India too stands to gain immensely from all these aspects. Besides gains from trade, India can derive benefits mainly by creating partnerships in the areas of food security, energy security and non-fuel mineral resources.

At the moment African business community has no significant presence in India, except for a few in banking business like FirstRand Bank (FRB) and State Bank of Mauritius (SBM). However, interests are expressed by the African business community to invest in India, particularly in sectors like food and hospitality. To facilitate such possible business partnerships and ventures there is a need for assistance and active intermediation from the Indian government.

Key Future Potential Growth Sectors in Africa

• The biggest opportunity of future growth is probably in the consumer-facing sectors like consumer goods, telecom and banking apart from others. By the end of 2008, these sectors started growing two to three times faster than those in OECD countries.

• India has a golden opportunity to initiate partnerships with African nations in agriculture where it can benefit from the increased African output while contributing positively to Africa in terms of technical assistance, skill building, and research and development in agriculture.5 Africa will benefit in terms of increased output by using idle capacity, mainly unused arable land.

• Food and beverage spending is projected to expand the most in absolute terms, compared to any other consumer good category. However, with continuous development usually the spending pattern shifts towards higher quality goods. If consumption actually rises along with an increase in household income at the current rate then rapid increases are expected in retail banking, telecom and housing.

• African Development Bank estimates that if Sub-Saharan Africa (SSA) could achieve infrastructure development similar to that of Mauritius, then annual GDP growth in entire region may rise by 2.3 per cent. Africa needs $93 billion every year to create infrastructure for supporting growth and meeting development goals – two third for new investments and the rest for maintenance. African governments spend an average of $45 billion per annum on infrastructure, two third of which is domestically mobilised from taxes and user charges. Most of the new capital investment comes from external sources. For the specialised private or public sector infra and construction companies in India there are huge opportunities in infrastructure and constructions projects in different parts of Africa.

• Productions of different industries in different countries have substantially slowed down due to the overall slowdown in world economy, but still extractive industries will continue to support growth in 2015 and 2016 in most of the African resource-rich countries. According to estimates, the volume growth rate of the continent’s oil, gas, and most minerals can be between 2 and 4 per cent per annum in future. Even at current prices, the value of resource production has the potential to touch $540 billion in 2020, rising from an approximate $430 billion currently.

Africa and India: A New Frontier for Mutual Prosperity

India and Africa share many things in common, including heritage, culture and ancient trade. Broad cornerstones of future partnerships will be:

• Partnership in agriculture: While India can help Africa in agricultural capacity building, Africa can help India in ensuring future food security.

• Resource based partnership: India would do well to explore sustainable ways to contribute to the African growth story while benefitting in terms of its own energy security.

• Non-resource based partnership: While some African countries may need financing, others may be looking for partnerships in skill and capacity building. Depending on the difference in economic structures, India can build partnerships with both categories.

• Social sector cooperation and investment: Education, healthcare and housing sectors present a huge opportunity for cooperation and investment.

Exploring Investment Opportunities: Mutual Benefits

Indian Investment in Africa

Indian government-backed initiative to engage with Africa should provide ample opportunities for Indian outward FDI as well, and no Indian engagement with Africa will be complete without mutual exchange of direct investment. The first ever outward Indian FDI went to Africa – a textile mill established by the Birla Group in Ethiopia in 1959. Indian multinationals have ventured into both green-field and existing investments – in telecom, energy, computer services, power and automobile sectors, among others.

Major Reasons Behind Rising Trend of Indian Investment in Africa

Government policies, coupled with moderate but consistent economic growth, have given confidence to Indian companies to invest abroad through FDI route. Bilateral investment treaties (BIT) and double taxation treaties (DTT) also encourage better flow of FDI in host countries. Host country policies, like changes in corporate tax rates, other fiscal incentives and other privatisation policies, also influence OFDI. Along with political and cultural factors, other factors influencing outward FDI include comfort in English language and geographical location.

Composition of Indian FDI in Africa

Indian investment in Africa has been in primary commodities such as oil, gas and mining. In manufacturing sectors, automobile and pharmaceutical firms historically invested in different African countries. Pan-African investments are also made by prominent Indian telecom, chemical, metal and fertiliser companies.

Africa: New Destination for Investment and Capital Flow

According to Financial Times, Africa is the fastest growing destination for FDI. In 2014, the capital investment coming into the region grew by 65 per cent to an estimated US$ 87 billion, while the global green-field FDI market expanded by only 1 per cent. The number of projects in Africa increased by 6 per cent. Apart from investments in resources, there have been strong FDI inflows into real estate, hospitality and construction in 2014 along with consumer facing sectors like technology, media and telecom, financial services, consumer products and retail. There has also been visible enthusiasm about agricultural sector based investment activities in 2014.

Africa’s Outward FDI: Possibilities and Realities

In today’s financially integrated world, capital, even from an early stage economy, creates aspirations for itself. It is important to note that African outward FDIs include intra-continent investment of African capital which is the second largest source of FDI in Africa. Employing a part of country’s financial resources outside remains essentially a policy decision, and an issue of political economy in any particular country. However, there are African countries in advanced stages of development such as South Africa, where companies are quite keen on investing not only inside but also outside the continent.

Outward Investing African Countries and India as the Potential Destination

In a financially integrated world, foreign investment is increasingly transforming itself into a two-way affair because of global aspirations of transnational capitals. High-profile countries like Mauritius show steady outflow of FDI ; Democratic Republic of the Congo has shown quite a big jump in FDI outflows in the last three years; Tunisia, Burkina Faso, Guinea, Senegal, Togo, Cameroon, Gabon, Zambia and Zimbabwe show sporadic outflows. Algeria, Egypt, Libya, Morocco, Liberia, Nigeria, Angola, and South Africa have shown steady and quite high outflows of FDI in recent times. Some of these FDIs from Africa have the potential to come to India.

Towards a New Era of Investment between Africa and India

Given the enduring relationship with Africa, India is in a perfect position to initiate a mutual organic growth partnership. The relationship has to be built not only on economic fundamentals, but also on mutual trust. With India’s clear intention to contribute to the capacity and skill building in Africa, the cornerstone of the relationship must be trade and investment. With relatively free flowing capital and enhanced facilitation on both sides, India and Africa can contribute to each other’s growth story. It will feed positively into economic multiplier mechanism and boost economic development in both regions.

Role of Trade Agreements in Facilitating Trade

Trade Agreements and Trade Blocs in Africa

Since the early 1990s many African countries have made significant progress in opening up their economies to the rest of the world, either through trade liberalisation or by exchange rate liberalisation. With the creation of regional trade agreements in other parts of the, African nations too entered into 30 regional trade agreements (RTAs) or trade blocs, many of which are part of deeper regional integration schemes with an aim to strengthen intra-regional trade and investment relations by eliminating or reducing tariffs and other barriers, and fostering a common economic union amongst member states.

India’s Trade Agreements with African Countries

India has already signed bilateral free trade agreements with 19 African nations and Preferential Trade Agreements with 13 other African countries. Currently, India is negotiating for preferential trade agreements with SACU countries and other trade blocs such as RECs, COMESA and ECOWAS to create a conducive environment of trade. India is also negotiating a Comprehensive Economic Cooperation and Partnership Agreement (CECPA) with Mauritius.

Impact of Existing Trade Agreements and Blocs on Indo-Africa Trade

Substantial evidence supports the fact that signing of agreements with Africa gave a fillip to the existing trade. In 1991 where India’s total trade with Africa was only 97 million USD, it reached 71 billion USD11 in 2014-15 with a compound annual growth rate of 31 per cent. As a result, the trade balance of India with African countries has substantially improved, which is a positive development in Indo-Africa trading relations. African countries also have the potential to improve their trade fundamentals by exporting into Indian markets, if more such agreements with India fructify.

Implications of the Africa Free Trade Zone

The Tripartite Free Trade Area (TFTA), will integrate the 26 member countries of COMESA, EAC, and SADC.

Future targets of all these trade negotiations also include a gigantic plan to create a Continental Free Trade Area, consisting of all 54 nations, by 2017, which will have a combined market of one billion people. African countries as of now belong to several groups, thereby making the process of any trade agreement with them somewhat cumbersome. It is hoped that TFTA will facilitate access to markets within the region and end overlapping membership complications. The deal also aims to strengthen the blocs’ bargaining power while negotiating at the international level.

Non-Tariff Measures in Africa

In recent years tariff rates applied by countries around the world have fallen to historic low levels owing to the growing number of multilateral, regional and bilateral trade agreements. Instead, traded goods are required to comply with various regulations which include licenses or permits to import, quality requirements, inspections and price controls, before they are allowed to enter the destination market. These regulations are classified under non-tariff measures.

African countries appear to regulate their imports more than many other developing countries, especially in relation to Pre-Shipment Inspections (PSIs), possibly implemented to fight corruption, to facilitate and accelerate custom procedures and ultimately to help in the correct evaluation of imports and taxation, all of which greatly affect African countries. To enhance trade relations with India and other potential trade partners outside Africa, greater regional coordination and efficient regulatory procedures will have to be established.

Scope and Possibilities of New Trade Arrangements

Some of the sectors that offer new trade opportunity and need focus to enhance trade relations are pharmaceuticals, capital goods, automobiles and spare parts. Countries like Nigeria, Egypt, Tanzania, and Kenya, are major markets of India. However, several new markets have witnessed significantly high growth in recent times such as Algeria, Togo, Cameroon, and Ghana. India needs to diversify its product basket persistently to keep the current growth buoyant. African countries may require capacity building in developing good SPS (sanitary and phyto-sanitary) and TBT (Technical Barriers to Trade) standards in which India can provide assistance.

Way Forward and Recommendations

To build durable partnerships, three important areas where India and Africa need to focus, in order to strengthen their trade relationships are:

• Mutually beneficial resource partnerships

• Solving the raw material conundrum

• Agriculture and food security

The following are key recommendations that this study makes, based on data analysis and overall assessment of existing trade relations between India and Africa:

1. Africa-India Summit is already a regular platform which has been created. The platform needs to be further strengthened and formalised with defined engagement terms.

2. In the light of formation of Tripartite Free Trade Area (TFTA) and the proposed African Free Trade Zone, India should immediately engage itself with all trade blocs and associations, including African Union. The objective should be to come into a common understanding of promoting mutual trade and investment. Wherever possible, bilateral arrangements also need to be explored for the same objective.

3. While trade agreements are important, investment treaties have to be taken up equally seriously to further enhance and nurture bilateral and/or multilateral trade agreements.

4. Confidence and trust building measures from Indian side, like establishing skill building institutes and research facilities, more direct business-to-business interactions, workshops and seminars, have to be further increased with immediate effect – to create a conducive atmosphere for talks.

5. While initiating investment treaties, other bottlenecks for free capital flow have to be cleared also through double taxation treaties or other arrangements. Otherwise, the engagement process may get stalled in future.

6. Indian government may have to take an active part in creating additional capacities on African soil, particularly in those which will be part of confidence building measures.

7. Instead of only utilising individual channels, India also should make an effort to engage itself with African nations through the platform of BRICS, since South Africa is a partner in that platform. This may create additional catalysts for development.

8. Once negotiations progress to a satisfactory level, care should be taken by the Indian government to identify key sectors, in which capital and trade flows (both ways) can be prioritised and facilitated. In immediate future it seems that consumer goods, wholesale and retail, construction, housing, telecom, financial and banking services are the sectors where India can engage itself with African nations at various levels.

9. A sizeable section of African diaspora is present in India – in the form of students, diplomats, workers of different governments of Africa and tourists. African companies can easily export African processed food to cater to this population. Urban India is increasingly showing tendencies to consume foods of different continents, and therefore food and agro-based exports from Africa have a potential market in India. Indian and respective agricultural ministries of African countries should have an active cooperation for such exports of African foods and agro-based products.

10. Healthcare, tourism and travel are other sectors where African nations want to venture. India should facilitate such endeavours both in India and anywhere in African soil.

11. Pharmaceutical sector is another sector, where Indian companies have potential to be the “pharmacy of Africa.” Presence of more generic Indian drugs, lack of awareness, and health standards are some issues hindering further expansion of Indian pharma companies, which is probably why Indian presence is mainly limited to Eastern African region. Development in biotechnological research, compliance to international health standards, and awareness programmes, like exhibitions or pharma fairs, are needed to remove these barriers. Indian government can play a positive and pro-active role in this process.

12. Social sectors, including cultural interactions (music, dance, theatre) and particularly education, create opportunities for India. Direct investment in education also has the ability to build trust. However, there needs to be a mixture of investment and philanthropy from Indian side in education.

13. In sports and related activities, African nations can help out India, and that can form one of the bases of a reverse trust building exercise.

14. Deeper research into bilateral and multilateral trade and economic aspects warrants good quality data. India would do well if it can get into information sharing understanding with as many African countries as possible. This will hugely facilitate future progress of talks and other economic and political interactions.

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This joint study was prepared by the Associated Chambers of Commerce and Industry of India (ASSOCHAM) and Thought Arbitrage Research Institute (TARI).