by Ben Miller
Trade and FDI flows, not to mention portfolio investments,
between India and Latin America remain modest at best, and pale
in comparison to the region's much trumpeted relationship with
China. But this is starting to change, and quickly, amid
expectations that India could play an equivalent or even more
important role in Latin America's growth story.
Latin America's abundance of fresh water, land and natural
resources are becoming increasingly important for a densely
populated India, whose growth rate may soon surpass China's.
Gaining access to food sources and raw materials will clearly
be a top priority.
Indeed, India holds much promise for Latin America,
representing a massive market for its commodities and a way to
lessen its reliance on China. While trade barriers and other
competitive disadvantages threaten to stifle investment flows,
bankers and policymakers are already touting the enormous
potential of the developing ties between the two
"If India continues to grow at the pace of the last 10
years, without necessary reforms and infrastructure
improvement, they will hit a constraint, and will start
importing a massive amount of raw material," says Mauricio
Mesquita Moreira, an economist at the Inter-American
Development Bank (IDB).
Mesquita estimates that LatAm's exports to India could reach
more than $55 billion per year by 2020, up from $8.4 billion in
2010. For now, however, trade flows between LatAm and India
remain comparatively tiny, though they have spiked in recent
For instance, trade with Brazil, India's partner in the now
famous BRIC acronym and its biggest source of exports and
imports in the region, hit about $9.5 billion in 2010, up from
less than $2 billion in 2003, according to Standard Chartered.
Yet, Brazilian trade with China over the same period surged
from nearly zero in late 2000 to around $60 billion, or six
times the amount of trade with India on an annual basis.
It's a similar story with overall investment flows to LatAm
from India, which according to TCA Ranganathan, chairman of the
Exim Bank of India, reached about $25 billion in 2010 from
virtually nothing 10 years ago. Still, that falls far short of
$140 billion from China.
Yet, the modest scale of investment flows also speaks to the
enormous capacity for growth. According to the United Nation's
Economic Commission for Latin America and the Caribbean
(ECLAC), India's share in the region's trade with Asia-Pacific
is still a relatively meager 6.2%, lower than the 8.8%
represented by the Republic of Korea, while India only accounts
for just 5.1% of LatAm's imports from the Asia-Pacific
The resiliency of Latin American economies during recent
global economic downturns and what ECLAC calls the "the
favorable mindset of Latin Americans towards India" means there
is significant potential for increasing trade between the two
regions, it says.
Food is the Key
For now, food and India's need to feed its enormous
population at a time of rapid economic growth is being seen as
the kernel of this relationship and arguably the catalyst for
its growth. India may be the world's seventh-largest country by
size, covering 3.2 million square kilometers, but it is running
out of space.
A population that will soon surpass China's is moving toward
the cities and the land it leaves behind lacks water and other
suitable conditions for farming. Space is getting tight,
particularly for non-staple crops. As with China, this is where
Latin America becomes relevant.
"At any given point of time with the limited amount of land
that India has, you will always feel competition from different
crops," says Gautam Wave, head of strategy and planning at
Shree Renuka Sugars, India's largest sugar company. "The staple
food will always get preference…[and] you realize
quickly that India has a shortage of land and a shortage of
Shree Renuka's business is water-intensive, and sugar is not
seen as one of the country's staple foods, so it is now looking
abroad to the vast arable lands in Brazil, where it has bought
four crushing mills and will soon add more.
"After two decades of evolution, India is faced with rising
food and energy prices," says Exim's Ranganathan. "It is in
food where Latin America will offer the most synergistic
Ranganathan refers to two decades of free market-oriented
policies, which have produced powerful companies, many driven
by visionary entrepreneurs, and stellar growth that has put
pressure on its own supply of natural resources. For instance,
India has already become a net importer of high-value crops,
such as sugarcane, due to shortages in water and land.
India's GDP growth rate is set to pass China's this year,
says Standard Chartered, and will be the world's fastest
growing economy from that point forward. The bank sees 9.8%
annual growth for 2011-2020.
By 2030, India could be the world's third largest economy,
with a GDP reaching $30 trillion from $1.5 trillion last year.
Urbanization and demographic trends should mean a broader
domestic economy driven by a growing middle class, and this
will present enormous challenges for the country as it seeks to
meet the increased demand for food, water and energy generated
by a more affluent population, the bank says.
"Brazil will be a natural beneficiary of this demand, much
in the same way that China has been a great source of demand
for the region's resources," Standard Chartered says.
Ashutosh Maheshvari, CEO of Motilal Oswal Investment
Banking, says that Latin America may in fact be India's last
frontier for expansion, behind Europe, US, Africa and the rest
of Asia, but that there is a sense of urgency, due to India's
need for assets in energy, minerals and food. This is most
urgent in farming, as in India corporate farming is not
permitted. Brazil, on the other hand, allows for scale.
Sensing this challenge, Shree Renuka and other Indian
agricultural companies have already begun to arrive in LatAm.
Mining and mineral operations, manufacturers and even some
consumer-focused companies have also started to set up shop.
Some have their eye on supplying India's future needs, but
others are seeing potential in LatAm's own growing middle
Like China but Different
Such needs have convinced many that over the next 10 to 20
years India will match China as a major importer of LatAm
minerals and agricultural products, bringing the region a vital
counter-balance to its reliance on its largest trading partner,
Skeptics, however, think that India's slow-moving and
bloated democracy is incapable of following the same path taken
by China, and LatAm-India trade, while poised to grow, will be
nothing more than padding on top of the real driving demand
that comes from other places.
Ostensibly, LatAm and India would appear to be natural trade
partners. LatAm has a surplus of a variety of commodities and
raw materials and a shortage of labor. India's 1.2 billion
people provide an abundant labor force, but the country lacks
essential natural resources.
Similar arguments have been made in favor of China and
LatAm's trade dynamics. However, India's involvement in LatAm
will differ in its scale, as the country is not governed by an
authoritarian regime that can direct state-owned enterprises
around the globe and make strategic long-term investments.
India's emerging class of entrepreneurs-turned-billionaires are
expected to move forward at their own pace, and in a more
"You won't see a $140 billion figure [from India-LatAm
trade, as you do with China]," says Motilal Oswal's Maheshvari.
"It's not the government driving it. These are corporates that
are accountable to those from whom they raise money."
While experienced Indian entrepreneurs may be better
disciplined and use capital wisely, Maheshvari explains, it
also means they might not be able to take a 20 to 30-year view
like the Chinese might. They also bring a different skill
Expertise in services, engineering and other specialty areas
is where India is especially poised to add value in the future,
rather than through sheer dollar size. Information technology
businesses could also make their way to Latin America, at a
time when many Indian companies have achieved the scale to fund
"Indian corporates have raised a lot of capital in the last
five years," Maheshvari says. "There is a lot of capital
available for growth."
Maheshvari's shop has advised Indian buyers in LatAm, including
on Shree Renuka's Brazil purchases, where it was joined by
Itaú on the local side. Indeed, Indian companies are
becoming more acquisitive in LatAm.
Dealogic data counts 63 M&A transactions in LatAm with
an Indian acquirer since 2000, for a total value of $6.66
billion. That is just a small portion of the $47.4 billion of
Indian acquisitions in developed countries between 2000 and
2008, according to ECLAC, but it is not insignificant and will
For now, most LatAm purchases by Indian entities have been
focused on raw materials or agriculture. For instance, Jindal
Steel and Power acquired in 2008 the development rights for 20
million tons of iron ore reserves in Bolivia. The company plans
to invest $2.1 billion in an integrated plant for steel, power,
sponge iron, and iron ore pellets.
This project will constitute the single largest investment
by an Indian company in Latin America, and also the largest
foreign investment in a single project in Bolivia. It joins
National Mineral Development Corporation (NMDC), invested in a
Brazilian iron joint venture.
Agrochemicals company Punjab Chemical & Crop Protection
(PCCPL), also acquired in 2007 an 89% stake in an Argentine
company for $10 million and plans further LatAm expansion.
Meanwhile, Arcelor Mittal has steel plants in Argentina,
Brazil, Mexico and Trinidad and Tobago, and acquired
steel-finishing and distribution companies in Argentina, Costa
Rica and Uruguay.
Indians have also joined the rush of Chinese, Europeans and
others looking to tap offshore oil reserves. ONGC Videsh
Limited (OVL) has invested $500 million in oil fields in blocks
in Brazil, Colombia, Venezuela and Cuba, mostly with other
international and regional majors. Reliance Industries, India's
largest conglomerate, recently acquired offshore blocks in
Colombia for more than $50 million and is also present in
Argentina and Peru.
This comes after Indian Oil and Natural Gas Company invested
(ONGC) $200 million in natural gas reserves in Trinidad and
Tobago and created a joint venture with Petrobras for
exploration and development projects in both India and Brazil.
In April 2008, the governments of India and Venezuela also
entered into a joint venture agreement - with India putting up
$356 million for a 40% stake - to develop fields in the Orinoco
The notable trend in these initial investments is Indian
companies' preference for partnering with local know-how. Not
only do joint ventures allow them to share risks and lower
initial costs, but Indians can rely on the experience of locals
to mitigate labor, tax, and other risks. It is also
advantageous given the wide cultural gap between India and
"You have to have a local partner to help you identify
targets and sectors," says Janaki Chaudhry, head of strategy
for Tata International.
Tata's motors unit has a joint venture with Brazil's
Marcopolo to manufacture bus parts in India, while Indian
manufacturer of high voltage engines and generators WEG has
forged a similar path in Latin America.
"I would advise a joint venture over an M&A
transaction," says Michael Diaz, partner at Diaz Reus, speaking
of Indians looking for opportunities in LatAm.
He explains such an entry is preferable due to tax and labor
issues, particularly in Brazil, where there is a potential to
inherit a lot of problems when buying an asset outright, as
Punjab Chemical learned.
"We want to grow in Brazil, and we had plans to grow fast,"
says Avtar Singh, executive director of Pujab Chemical and Crop
Protection. "We have had to slow down [due mainly to legal
There is an advantage to be found in keeping local
management on board as well, explains Kapil Gulati, general
manager for lighting provider Havells Sylvania, which now has
LatAm-wide operations thanks to its purchase of Sylvania in
"The management in Latin America is very mature, very
competent and very reliable," says Vikram Shroff, executive
director of United Phospherous, which has made six investments
On the consumer products front, examples like Havells
Sylvania are fewer at this point, but Indian companies have
started to purchase assets. The pharmaceutical sector seems to
be offering the most opportunities at this early stage. Strides
Arcolabs has acquired pharmaceutical assets in Brazil for $75
million and has manufacturing units in Brazil, Mexico and
Venezuela. Dr. Reddy's Labs also acquired a pharmaceutical
plant for $60 million in Mexico in 2006.
Meanwhile, Latin Americans are also venturing into India for
the first time. For instance, Mexico's Cinépolis has
joined Marcopolo, operating movie theaters in four Indian
cities since 2009. Seeing similar opportunities to build
low-income housing as in Mexico, Homex has set up a joint
venture with Daksh Builders. Large companies like Brazilian oil
company Petrobras and steel maker Gerdau have inked joint
ventures in India, while miner Vale has set up an office
With such investments in a broad group of sectors, it is
hoped that India's relationship with LatAm will go beyond the
resource heavy dynamic that dominates trade flows and
investments with China.
"If you address those constraints, and if India keeps
growing at the rate it has been growing, it is a sure bet there
will be a trade relationship very similar to the one the region
has with China, [but] hopefully it will be more diversified,"
says the IDB's Moreira.
For LatAm, the best outcome would be to gain more inbound
FDI directed at boosting domestic manufacturing in
non-commodity products and adding value in commodity
production. This holds true for both India and China, Standard
As for exports to India, trade barriers could prove
problematic. Lacking the most-favored nation status of
countries belonging to The Association of Southeast Asian
Nations (ASEAN), LatAm is working with a competitive
disadvantage. When transportation complications and other
non-tariff barriers are factored in, exporting to India becomes
prohibitive in many cases.
According to ECLAC, such disadvantages could be lessened if
LatAm nations simply signed free trade agreements with ASEAN.
India has already inked trade accords with Chile and Mercosur,
but so far they have had limited direct impact, partly because
they cover a very narrow list of products.
At the end of the day, India's more gradualist approach to
LatAm may work in its favor.
"It won't be as fast [as China], but perhaps it is going to
be more sustainable," Moreira says.
China's state companies and development banks make big
moves, but aren't necessarily building an environment for them
to expand. India, and its private sector, may see more
"India doesn't have the war chest or reserves that China has
now," Moreira says. "I don't think this is a bad thing, because
even the infrastructure investment that the Chinese are making
just reinforces the idea that they are there for the natural
resources and nothing else. This type of FDI is very
concentrated - very few countries in a very few
India's pattern is different, Moriera explains. For
instance, IT companies don't necessarily bring much investment,
but they do import knowledge and opportunities for export. Most
of the natural resource investment is through private
companies, which doesn't raise the same concerns as might big
purchases in strategic mining assets. LF