Africa is among the world’s most rapidly growing economic regions, emerging relatively unscathed from the global economic crisis. India is Africa’s fourth-largest trading partner behind the EU, China and US, and a significant investor in the continent. It is estimated that more than 200 Indian companies are doing business in Africa across sectors.
Trade between India and Africa goes back to the 16th century when Indian traders sailed to the east coast of Africa in search of mangrove poles, elephant tusks, gold and gemstones. During the colonial period, many Indian immigrants were brought in to work on the railways in East Africa, and on sugar and other plantations in Mauritius, Madagascar and southern Africa.
As emerging economies, India and Africa have a lot in common – rich natural resources, similar demography and large domestic markets. This provides a natural synergy for building partnerships. The relationship between India and Africa has been marked by mutual respect and sensitivity to shared compulsions and developmental needs.
India has significantly increased its economic and diplomatic footprint in Africa. India’s style of doing business with Africa is multi-pronged and has gained momentum; it aims at increasing trade volumes and investment, alongside developmental activities. Bilateral trade between Indian and Africa has risen from US$3 billion in 2000 to about US$70 billion during the current financial year and is expected to touch US$90 billion by 2015.
Bharti Airtel’s acquisition of 15 telecom operations in Africa for US$10.7 billion opened a new chapter in the history of the India-Africa relationship. India’s annual foreign direct investment in Africa touched US$15 billion as some of its largest conglomerates have turned to Africa for their expansion and growth. Companies such as Tata, Vedanta, Godrej, and Jindal Steel & Power have lined up greenfield investments and Indian oil companies are geared to acquire oil and gas assets. The world’s largest rose exporter, Karuturi, has also forayed in Kenya and Ethiopia.
India’s engagement with African countries is driven mainly by the presence of natural resources and a search for new markets, supported by diplomatic initiatives and strategic partnerships. Apart from energy, Indian companies are investing in mining, telecommunications, agriculture, healthcare, pharmaceuticals, infrastructure and information technology. Many Indian manufacturers are also negotiating pacts to acquire back-end facilities in these sectors.
Nigeria, Angola, Algeria and South Africa have trade surpluses with India and account for 68.6% of the total Africa-India trade. Of India’s top 10 trading partners in Africa, seven export oil to India. India has also executed bilateral investor protection and promotion agreements with Mauritius, Kenya, Ethiopia, Uganda and Ghana.
Mauritius offers investors a strategic platform for inbound and outbound Indian investments which is blended with institutional, cultural, geographical and geopolitical comfort. It acts as an ideal jurisdiction for locating a holding company mainly because of the following reasons: (i) uniquely favourable tax treaty with India; (ii) offers flexible choice of entities; (iii) effective tax rate is only 3% and no capital gains tax; (iv) corporate laws allow flexibility for repatriation of capital; (v) no exchange controls so repatriation of income is easy.
China story differs
While Chinese and Indian companies have similar interests in African markets, they function in different ways. Chinese companies operating in Africa are mostly state owned or controlled, while Indian ones are largely privately owned or are private-public partnerships. The Indian companies are less vertically integrated and prefer to procure both materials and labour from local governments.
India has been seen as a counterbalance to China in Africa. Although investment is smaller in scale, a much longer historical presence of an Indian diaspora in Africa has enabled smoother and less controversial economic involvement in Africa than is the case for China.
While trade and investment between India and African countries are on a rise, India’s trade relationships with Africa suffer from a few weaknesses. These include: (i) India’s Africa policy lacks a strong and proactive diplomatic thrust; (ii) engaging with politically unstable yet resource-rich African countries could threaten India’s interests in the long run and taint the perception of India’s engagement with African countries; (iii) India sometimes appears to be emulating China’s aid-for-resources strategy (by providing loans in exchange for access to the natural resources of African countries), which may not be the best long-term approach.
In the future, India could play increasingly important and diverse roles in all aspects of African life. Nevertheless, investors are advised to ensure that a detailed due diligence is conducted and proper strategies are formulated for complying with local government regulations and structuring finances.
OP Khaitan & Co is a 40-lawyer law firm, based in New Delhi. Gautam Khaitan is the firm’s managing partner and Nidhi Mathur is a junior partner.
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