India keen on Africa’s potential, despite challenges
The country has historically strong expertise in sectors that require growth and investment in our continent
Indian Prime Minister Narendra Modi said on his recent visit to the continent that “Africa is at the top of our priorities”. And while India and African countries have long enjoyed strong bilateral trade relations given our very comparable histories, it’s no surprise that many African countries have developed close cultural, political and economic ties with India.
As the investment in African strategic infrastructure gathers pace, India’s role as a strategic partner to unlock potential and growth in African economies is becoming more prevalent. Over the past two decades, we’ve experienced robust growth in bilateral trade between the pair, making India Africa’s fourth-largest national trading partner.
Total trade between Africa and India has increased more than eight-fold, from $7.2bn in 2001 to $59.9bn in 2017, accounting for more than 6.4% of total African trade in 2017, up from 2.7% in 2001. Trade with Africa now represents just over 8% of India’s total trade.
Primary commodities and natural resources make up about 75% of Africa’s total exports to India, while India’s exports to Africa are dominated by refined petroleum and pharmaceutical products. Over the past five years these two products have accounted for about 40% of total exports into African markets. Among the African nations, Mauritius is the leading country in terms of receiving the highest foreign direct investment, followed by Mozambique, Sudan, Egypt and SA.
Historically, strategic infrastructure investments have altered the trajectory of a country’s economic and social development. Whether it be providing increased access to electricity and water, connecting cities via improved transportation infrastructure, opening trade possibilities through improved access via ports, connecting people to new opportunities through broadband, or reducing geographic divides with world-class airports, investments in 21st-century infrastructure have the potential to transform prospects and growth across the continent.
The disruptive power of infrastructure goes a long way. In India, significant infrastructural development has aided economic growth such that it is likely to become the fifth-largest economy in the world in 2019 and has the potential to expand faster than China from 2020 to 2030, steadily increasing its growing global influence.
A major focus to mobilise infrastructural development includes improved road access, such as the 17km Mumbai Eastern freeway and the proposed bus rapid transit system corridor that is due to cover 120km, coupled with technology as fare collection includes smart cards.
This bus corridor has also been cited as a case study for how this development will not only address climate change, due to the planned reduction of emissions, but also improve air quality and urban connectivity, not to mention job creation. These are just two examples of several infrastructural developments, such as various rail, road, solar and urban developments linking smart-city strategies.
Closer to home and on African soil, the sheer scale of the opportunity for investment and related challenges will require a collaborative effort between private investors, governments and development finance institutions. According to the World Bank, collectively these partners will need to invest nearly $100bn a year over the next decade to fully reap the benefits available in the power, transportation, telecommunications, water and sanitation, and irrigation sectors.
Africa entered a phase of high growth in the 2000s and countries such as Ethiopia, Kenya, Rwanda, the Democratic Republic of Congo and Angola experienced an economic turnaround at the same time. Africa quickly became an attractive investment destination for its high rate of growth, a rising middle class and its resource abundance, particularly in energy. Private Indian corporations saw the opportunity and made large investments in many African countries, beyond a multitude of small and medium-sized Indian firms operating on the continent.
We see Indian subsidiaries really entrenching themselves in their African investment and setting up fully fledged operations, from staff complements to infrastructure. In terms of financing structures, many Indian corporations have an Africa holding company that runs the financing of the subsidiaries across the continent. In most instances we see a mixture of raising local capital and shareholder loans, so advanced financing structures are starting to evolve here, driven by Indian companies, with some taking a step further and looking at an initial public offering of the African holding company.
It’s estimated that Africa-India trade could double by 2021, especially if appropriate steps are taken by government and corporate entities that want to realise the full potential and growth benefits offered by the two trading partners.
Indian companies maintain historically strong expertise in the telecommunication, infrastructure, pharmaceutical and agricultural sectors, to name a few, and these are the sectors that require growth and investment in Africa. The investments that help less-connected economies overcome geographic disadvantages, lower transportation costs and engage in trade will open new opportunities for millions of people living across the continent, which is like the road travelled by India itself.
Compared to other developing regions, the growth potential in sub-Saharan Africa is even greater. About 40% of the region’s population lives in landlocked countries, and many economies are largely isolated from global market centres. Bridging the quantity and quality gaps in infrastructure could increase GDP per capita by 1.7 percentage points each year, excluding SA. For lower-income countries in the region, the power sector offers the largest potential gains, while lower-middle-income countries could see particularly large gains from transportation sector investments.
India is not naive to Africa. Our South Asian partners acknowledge that Africa is in a state of development, they appreciate the nuances in how we operate, and most importantly they can apply their own key learnings to the economic journey our continent is on. With multiple parallel drivers — such as a burgeoning middle class that is fast becoming financially included, rising per-capita income, industrial expansion and a huge push for better electrification — we can certainly draw strong similarities to what we’re experiencing here on home soil.
Sustained economic growth in the years ahead is likely to have a positive effect on poverty reduction and consumer markets across both Africa and India. But while greater integration between India and Africa presents mutually beneficial opportunities, it won’t be without its challenges.
Doing business in Africa is tough, cyclical and risky. It’s not an “in and out” market. Profitability is realised in the long term, but the profitability is there. Our Indian partners can clearly see the big growth opportunities and are comfortable managing the risk and exposure to realise the return we can offer.
With India set to become the world’s fifth-largest economy in 2019, we have every confidence its investment into Africa will continue to grow.
• Buss is managing principal of global clients Africa at Absa Group.