Africa: can India follow China’s lead?

China has surpassed the US as Africa’s biggest trading partner and is enjoying a roaring success on the continent. Could India be next? New figures show trade between Africa and India trade could top $90bn by 2015. As with China, it’s largely about India getting hold of Africa’s resources, though Africans will gain something, too. But there are huge hurdles on both sides. And Indian businesses may have to sharpen their strategy to repeat China’s success.

India and Africa have grown rapidly closer over the past decade. Bilateral trade has exploded to more than $50bn from just $1bn in 2001.

According to Diana Layfield, chief executive for Africa at Standard Charted Bank:

India-Africa trade now stands at about $57bn and is predicted to increase to $90bn by 2015. Indian corporates are seeking higher margin returns as their domestic market becomes more competitive – and Africa is one continent which presents such upside opportunity.

Standard Chartered’s figures coincide with those from the India-Africa Trade Ministers Dialogue event in 2013, which revised a target for bilateral trade in 2015 to $90bn, up from $70bn set during the first dialogue in 2011.

Others are more optimistic. According to the Confederation of Indian Industry and the World Trade Organisation, bilateral trade could reach $176bn by 2015 if annualised growth rates between 2001 and 2011 continue.

Source: UN Comtrade, WTO

With India’s chronic energy and supply problems, Africa’s abundance of minerals and fuels are a huge pull. Africa already supplies about a fifth of India’s total crude imports (from zero in 2005). This from a joint CII/WTO report, India-Africa South-South Trade and Investment for Development:

Africa’s trade surplus with India is rising rapidly, albeit driven in large part by a narrow range of suppliers and commodities. The top six African exporters, viz., Nigeria, South Africa, Angola, Egypt, Algeria and Morocco account for 89% of total African exports by value to India thanks mainly to exports of oil and gas, ores and gold.

What’s in it for Africa? Big South African companies have invested in the Indian market, including Airports Company South Africa, Bidvest, SAB Miller, FirstRand Bank, Old Mutual and Sasol. The report says South African companies have invested $112m in India, behind companies from Morocco ($137m) and Mauritius – with a massive $64bn. The report notes that about half all US investment in India is routed through Mautitius to take advantage of an exemption in capital gains tax.

Despite the big strides made, impediments remain. Indian investors complain of a poor business environment, lack of access to capital and a smaller market size. Africans say difficulty in accessing Indian buyers is the main bottleneck, as well as access to trade finance.

There are other issues. This from Koon Chow, emerging markets strategist at Barclays:

“The relationship has shortfalls. For example, Indian portfolio investors are unlikely to make big investments in Africa. India’s domestic yields are high and sub-Saharan yields, while higher, have been trending downwards. Meanwhile, India needs to attract savings from abroad to finance its own current account deficit, which means there is not a large pool of Indian savings that can seek opportunities in Africa.”

What’s more, Chow warns:

“The China Africa relationship has been a different story, compared to India’s. China has a large pool of savings and, we think, a strategic interest in securing stable commodity imports. China and its companies have, as a result, been investing money and expertise to invest in Africa’s resource sectors (where permissable) and infrastructure as well. India has not, we think, taken a similar approach. It seems likely that while India’s investment flows and trade ties to India may strengthen, the magnitude is unlikely to approach what we have seen from China.”

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