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India Business Frontier

India Frontier Advisory


April 2009 Research & Strategy in and beyond emerging markets

The resilience of India’s investments in Africa


Lisa Brown, Junior Analyst at Frontier Advisory

Contents: Having been a major cog in the emerging and the auto sector, pushing industrial
The resilience of India’s investments in market growth engine, India has production downwards.
Africa .......................................................1-3 demonstrated robust growth in the past
India Inc in Africa........................................4 few years. With exceptional performance In response to the slowdown, the
in global exports of services, India is in Reserve Bank of India has, as part of
A view from the CII — Exim Bank
India-Africa Project Conclave an enviable position, compared to its a small stimulus package, decreased
..................................................................5-6 fellow rapidly developing economies. It is the reverse repo rate, eased rules for
Frontier Advisory Profile............................7 particularly its robust internationalisation commercial banks to lend to the real
efforts which have given India the edge, estate sector and extended the credit
especially in Africa. Yet, in the midst of period for exporters. Legislation relating
the global economic downturn, with trade to overseas investment, mutual funds
and capital flows changing direction, and overseas competitive bidding in
one has to wonder about the security of forex has also been passed to ensure
India’s position and the ripple effects on India’s attractiveness. In February 2009
Africa. alone, 29 foreign direct investment (FDI)
proposals worth about US$ 118.95
On a domestic level, India’s growth is million were approved.
not without limits. The last quarter in
2008 showed the slowdown in the Indian Previously restricted sectors of the Indian
economy, with declines in manufacturing economy have been opened to foreign

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India Business Frontier
India Frontier Advisory
April 2009 Research & Strategy in and beyond emerging markets

investors. In conjunction with the Export-Import Bank of India, incentives have been
offered to exporters, small and medium enterprises (SMEs) and infrastructure and
construction companies. A luring budget deficit does threaten to curb over-enthusiasm
over these supplementary measures, however. What is most concerning is the slight
slowdown in the services sector, the main driver of India’s healthy economic growth.

Industrial Production Growth (% Y/Y)

Source: Bloomberg

Despite the global economic slump and the changing flows of capital, India remains
an attractive FDI destination, boasting a 45% growth in FDI with US$ 23.3 billion
between April-December 2008.

A consumer parachute?
Domestic consumption, the health of which is seen as the key to securing growth
in developing economies, is also slowing, by as much as 2.4% per annum. This is
considerable in one of most populous countries in the world. However, many argue
that there is a significant consumer parachute in place, comprising of the large
population, many of whom are entering the workforce.

Contribution to GDP growth, FY2003-08 (%)

Private
Consumption Investment
37.2% 45.7%

Net
Exports
Government 13.1%
Consumption
4.0%
Source: Central Statistical Organisation, TS

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India Business Frontier
India Frontier Advisory
April 2009 Research & Strategy in and beyond emerging markets

Coupled with stimulus instruments like subsidies, farm loan waivers, salary increases
for government employees and declines in interest rates, this could spur demand in
sectors like the automobile industry.

Together with remittances and less of a reliance on exports compared to other


emerging economies like China, this could cushion a fall in GDP growth.

But what about Africa?


Many economists see Africa’s close relationships with India and China as becoming
even more beneficial once the global economy starts to recover, mainly because of
the commodity market accounting for 78% of the continent’s export income. India’s
growing demand for commodities seems set to accelerate as it addresses much-
needed infrastructure expansion and power demands.

At the same time, African countries have been budging their requirements for
engineering goods away from China, and towards India. This is due to problems with
expensive and delayed Chinese deliveries and India’s advantage of stronger SMEs.
This is an ideal time for Africa to participate in India strengthening its position in the
industry.

With the inauguration of the Pan-African e-network last month, a project of the Indian
government to improve connectivity and share expertise between 11 African countries
through a fibre-optic network, India has shown its commitment towards development
in Africa, beyond resources and infrastructure.

However, the strong relationships that India has with large African economies like
South Africa and Nigeria could be hampered with liquidity shortages on both sides, if
the February and March legislation does not have the desired effect.

There have been announcements of a preferential trade agreement with the Southern
African Customs Union (SACU) being finalised at the end of 2009, which would allow
South Africa and other SACU members greater access to the Indian market. For
South Africa, this could be an accelerator in increasing trade in especially minerals
and services with India.

If India is to compete more aggressively with China in Africa, it must use an “India
Inc” approach more energetically as means of increasing investment into the
continent. Indian authorities expect trade with Africa to triple over the next five years,
announcing plans in January this year to increase lines of credit to the amount of US$
5.4 billion and announcing projects across all sectors.

Despite the overall slowdown in the domestic and global economy, India seems set
to remain one of the fastest growing economies with 6% GDP growth, the highest
after China. But the space exists for this position to be strengthened. Whether India’s
new government directs its advantage of steady stream of investment into improving
infrastructure domestically and in Africa and in favour of strategic industries, will
greatly affect the resilience of that position.

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April 2009 Research & Strategy in and beyond emerging markets

India Inc in Africa


Frontier Advisory tracks India’s commercial movements in Africa. This section provides an overview of key investments in the
last two months.

Mali
Indian company invests in
cement works Kenya
The Malian government and an Opportunities for Indian
Indian company, West African investment in Kenya
Cement SA have agreed on a US$ Indian investors have been
Cameroon 231mn investment in an integrated encouraged to consider
Indian firms to assist cement works in Diamou. The investment into Kenya, along
Cameroon with hydro projects project will create 1052 permanent the sides of the recent Vibrant
Indian firm, Angelique jobs and aims at an annual capacity Gujarat Global Investment
International, will build two hydro of at least 1 mn tonnes of cement. Summit. The Economist
power plants in Cameroon, part projects 3.5% GDP growth for
of a US$ 251mn aid agreement, 2009, and with infrastructure
in cooperation with the Export- the cornerstone of Kenya’s
Import Bank (EXIM Bank) of future development plans,
India. The loan will also finance opportunities in road and rail
drinking water and sanitation construction and gas and oil
projects.. exploration abound.

Zambia
Two Indian firms in bid for
South Africa key Zambia mine
Tata Group, Sasol shortlisted for coal conversion Vedanta Resources and Nava
project Bharat have both qualified
The Tata group’s joint venture with Sasol SA and for the final bid for Zambia’s
Jindal Steel and Power, has been shortlisted for largest coal mine, Maamba
a prestigious US$ 6.8bn pilot project in India to Collieries. Both companies
convert coal into liquid petroleum. The project aims submitted proposals to operate
to produce 80,000 barrels of crude oil per day, by the mine, and to construct a
liquefying coal reserves. The combined venture thermal power plant nearby. The
pipped Reliance Industries and GAIL, whose latter project aims to improve
proposals were not accepted due to the processes the erratic electricity supply,
put forward. a result of increased demand
due to new mines and industrial
Tata increases Neotel stake expansion. Vedanta already has
Tata Communications has bought a 30% stake in a strong footprint in Zambia,
South African company Neotel, resulting in Tata as the majority shareholder in
Comms becoming a controlling shareholder in the the country’s largest copper
company. The stake was previously held by Eskom producer, Konkola Copper
and Transnet, and reaffirms the Indian company’s Mines.
commitment to investing and expanding in emerging
regions and allows Neotel to utilise their global
network of technologies.

Tata to manage Seacom International undesea


cable
Tata Comms. also struck a deal for Neotel to become
the ‘anchor tenant’ on the Seacom International Africa
undersea cable. As a result, Tata will manage the CII-EXIM Bank conclave considers US$ 12 billion
cable, its billing systems and customer relations as projects for Africa
well the management of the landing at Mumbai and More than 400 delegates from government bodies
Marseilles. Neotel will manage the South African and businesses from Africa have gathered in New
landing at Mtunzini. The presence of this cable aims Delhi to discuss project partnerships between India
to decrease bandwith costs and improve connectivity and Africa. Agriculture, minerals, mining and SME
across Africa, already prompting a 80% decrease in promotion and human capital formation sectors are
data costs by Telkom. the aim of projects worth over US$ 12bn.

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April 2009 Research & Strategy in and beyond emerging markets

A view from the CII — Exim Bank India-Africa Project Conclave


Abdullah Verachia, Head of India Frontier Advisory at Frontier Advisory

More than 400 delegates from government He also urged for supplementing
bodies and businesses from Africa gathered government’s effort with those from
in New Delhi, from the 22nd to the 24th of the industry, civil society and private
March 2009 to discuss project partnerships institutions in order to widen and deepen the
between India and Africa. The conference foundation of India’s growing partnership
looked at various projects, worth over US$ with the African continent. Mukherjee also
12 billion, in an array of sectors including mentioned that India was committed to
agriculture, minerals, mining and SME helping Africa bridge the digital divide and
promotion. help spread the benefits of development,
especially in sub-Saharan Africa.
Increase in India-Africa Trade
The conclave also called for an increase Pan African e-Network Project
in India-Africa bilateral trade to reach US$ In this connection, he pointed to India’s Pan-
70 billion over the next 5 years, continuing African e-Network Project, the first phase
the growth trajectory that began in 2000-01 of which he had inaugurated last month.
when trade was a mere US$ 3 billion and He said this project aims at linking major
shot up to US$ 36 billion in 2007-08. universities and centres of excellence in
Africa and India, as well as major hospitals
Mr Pranab Mukherjee the Indian external with super-speciality hospitals in India to
affairs minister said “Given the concrete improve higher education and medicine
opportunities that exist between the two facilities. The project, which currently covers
sides, India-Africa trade could easily be 11 countries, will be extended to 22 more by
doubled to US$ 70 billion over the next five the middle of this year.
years. I would urge this conclave to accept
this challenge and plan out strategies to The African Drum and the Indian Sitar
achieve it.” In his address, Ambassador Jonathan
Wutaunashe, Dean of the African Group

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April 2009 Research & Strategy in and beyond emerging markets

of Heads of Mission, emphasized that relations between India and Africa today
represented the growth paradigm. “The African drum and the Indian sitar are today
producing beautiful music and this is clearly evident in the growth in bilateral trade
between the two regions.”

Pointing out that India was the place where the economic action was taking place,
Wutaunashe said that relations between the two regions had graduated from simple
merchandise trade to investing in assets and jointly working towards achieving the
Millennium Development Goals (MDGs).

Meanwhile, in his welcome address, Chandrajit Banerjee, CII Director-General, noted


that while India remained a key contributor to the development of Africa’s mineral and
mining sectors, it could now enter into long-term partnerships in several new areas
like agriculture, pharmaceuticals, alternative fuels and energy.

India EXIM Bank to increase lines of credit


India’s EXIM Bank also announced a plan to capitalise on infrastructure projects in
Africa that offer lucrative opportunities despite the global financial crisis.The bank
which has already provided lines of credit to the tune of US$ 2 billion to Africa, is
considering another US$ 600 million for the continent.

In his address to the conference Executive Director of the Bank, SR Rao mentioned
that “Africa is the focus area of our operations”. Rao mentioned that credit would
be extended to areas such as infrastructure, power generation and transmission,
construction of roads, agriculture and education.

The conference concluded with a commitment to building trade and investment links
between India and Africa despite the global financial crisis - a very positive sign given
the state of the global economy.

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April 2009 Research & Strategy in and beyond emerging markets

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operate in emerging market economies. We have worked with an array of multinational firms,
small & medium enterprises as well as public sector clients and have assisted them to analyse,
formulate and execute their business strategies in these new markets.

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fast providing new markets for traditional market capital, technology and management expertise.
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