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Enter the Elephant

Jan 19, 2012

India could represent a massive market for LatAm commodities. But can it act as a real driver for the region’s growth and lessen South America’s reliance on China?

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 continents.

"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 years.

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 region.

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 water."

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 relationship."

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 classes.

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, China.

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 incremental fashion.

"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 set.

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 expansion.

"Indian corporates have raised a lot of capital in the last five years," Maheshvari says. "There is a lot of capital available for growth."

Merger Stakes

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 likely grow.

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 basin.

Cautious Approach

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 LatAm.

"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 issues]."

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 2007.

"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 in LatAm.

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 there.

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 Chartered says.

Export Barriers

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 goodwill.

"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 industries."

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

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  • fuad Jan 5, 2013

    Wonderful story I wish you success

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