Ministry of External Affairs Government of India

Business With Latin America

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  By: Amb (Retd) R. Vishwanathan
  Venue: IIM, Trichy
  Date: August 06, 2016
  

Latin America is closer to India than you think

For those Indian businessmen who still harp on about the distance factor, here are some eye-openers from the trade statistics of 2015-16:

• India's exports to the remote Guatemala ( 255 million $) is more than the exports to the neighboring Cambodia (143 m). Both have populations of 15 million each.
• India's exports to Mexico (2.86 bn) are more than the exports to Indonesia (2.84 bn), Myanmar ( 1 bn), Russia ( 1.6 bn), Canada (2 bn) and Egypt ( 2.3 bn).
• India's trade with the distant Brazil ( 6.7 billion $) is more than the trade with Bangladesh (6.4 bn), Srilanka (6 bn), Russia (6.1 bn), Canada ( 6.2 bn) and Spain (4.8 bn). This is even after the 41% fall in the trade with Brazil which was 11.4 bn in 2014-15.
• Reliance imports crude oil from Brazil and export diesel to the same distant Brazil profitably.
• Latin America is the leading destination of India's vehicle exports, despite the freight.
• Chile, Peru and Argentina supply fresh fruits and vegetables to India, undeterred by distance.
• UPL, the largest Indian agrochemical company does more business in Brazil than in India.
• Caplin Point, a Chennai-based pharma company gets over 90% of its export revenue from Central America.
• Mann India Technologies, an IT firm from Noida, made its money in Latin America which even now provides most of the business of the company.
  

Trade

India's trade with Latin America was 29.7 billion dollars in 2015-16. For the first time ever, Mexico has overtaken Brazil as the top destination of India's exports to Latin America. Exports to Mexico were 2.865 billion dollars in 2015-16 (Indian financial year April to March) while the exports to Brazil were 2.65 billion. It is not surprising, given the economic recession and political turmoil in Brazil, the largest market of Latin America. India's exports to Brazil have fallen by 55.5% from 5.96 billion in 2014-15. On the other hand, Mexico, the second largest economy in the region has been growing and India's exports have also been steadily increasing. Mexico is the leading destination of India's car exports in the world. Mexico's share was 1.03 billion out of the total Indian exports of 5.6 bn. What is even more interesting is that the vehicle exports to Mexico have shown an impressive 31% growth from 2014-15.

Mercosur remained as the largest trading partner of India in the region with 15.9 billion dollars, followed by Pacific Alliance with 11 billion dollars and Central America with close to a billion dollars. Brazil has overtaken Venezuela to become the leading trade partner of India with 6.69 billion dollars. Trade with Venezuela was 5.8 billion, Mexico-5.1 billion, Argentina-3 bn, Chile-2.6 bn, Colombia-1.69 bn and Peru- 1.52 bn.

Exports

India's exports to Latin America have come down by 27 % to 10.05 billion dollars in 2015-16 from 13.75 billion in the previous year. Exports have shown decrease in ten out of the total of 19 Latin American countries. The region's GDP contracted by 0.4 % in 2015 while Venezuela's shrank by 7.1% and that of Brazil by 3.5%. Another particular reason for the fall in India's exports is the sharp drop in India's diesel exports to Brazil from 3155 million dollars in 2014-15 to just 564 m last year.

Colombia remained as the third largest destination of India's exports with 888 million dollars ( down from 1.1 billion last year), followed by Chile –679 m ( up from 566 m), Peru-703 m ( down from 820 m), Argentina-535 m (up from 460 m) and Venezuela-131m (down from 258 m). Among the smaller markets, exports to Guatemala were 256 million dollars (up from 229 m), Panama-201 m (down from 302 m) and Dominican Republic-175 m (up from 141 m).

Latin America has become the largest destination of India's vehicle exports accounting for 19 % (2.7 bn) of the total exports of 14.35 bn in 2015-16. The vehicle exports to the region have increased by 20% from last year. Latin America accounted for 29% of India's global motor cycle exports with 516 million dollars. Colombia continued as the top destination with 231 million dollars, followed by Mexico-88 m, Guatemala-50, Argentina-50 m and Peru- 37 m.

Pharma exports of India to Latin America remained close to a billion dollars. Brazil continued to be the top destination of exports with 316 million dollars, followed by Mexico-153 million, Venezuela-74 m, Colombia-71 m, Peru-62 m, Chile-60 m, Argentina-44 m, Guatemala-31 m, Dominican Republic-27 m and Ecuador-24m. In these days of austerity and budget cut in the region, the affordable Indian generic medicines are preferred by Latin American consumers as well as governments.

Imports

Venezuela has remained as the largest source of imports in the region with 5.7 billion dollars, followed by Brazil- 4.04 bn, Argentina-2.47 bn, Mexico- 2.28 bn, Chile-1.96 bn, Colombia-808 million, Peru-820 m, Ecuador-564 m, Dominican Republic-479 m, Bolivia-240 m and Paraguay-112 m.

The decrease in India's imports is due to the fall in the price of oil, which accounts for 46 % of the total imports from the region. Crude oil imports were down to 9.1 billion dollars in 2015-16 from 20 bn in 2014-15. This is in line with the fall of total global crude imports of India to 66 bn dollars from 116 bn in the previous year. In 2015-16, Venezuela has maintained its position as the top supplier from the region with 5.7 billion dollars, followed by Mexico-1.4 bn and Brazil 1.2 bn.

South America accounted for 98.6% of India's soy oil imports last year. Argentina was the major supplier with 2.2 billion dollars while Brazil supplied 570 million and Paraguay 104 m.

Latin America supplied 2.1 billion dollars of copper out of the total Indian imports of 4 bn dollars. Chile has continued its position as the top supplier with 1.6 bn.

The region has emerged as a new source for India's import of gold. Imports from the region have increased to 1.77 billion dollars in 2015-16 from 1.02 bn last year.The suppliers were Peru-464 m, Colombia-442 m, Dominican Republic-379 m, Bolivia-236 m, Brazil-205 m and Ecuador-48 m.

Latin American perspectives on India

Many Latin Americans assume that India is less important for their exports than their traditional European partners such as Germany and France. I tell them 'Wake up..amigos'. India was the third largest destination for Latin America's exports in 2014. The region exported 29 billion dollars of goods to India, while its exports to Japan and Spain were 21 billion dollars each, Germany-17 bn, Italy and UK-11 billion each and France-8 bn.

In 2015, India was Latin America's sixth important export destination with 18.8 billion dollars. This was more than the export to Japan, Germany, Italy, UK and France. The reason for the fall in exports to India in 2015 was the sharp decrease in the price of crude oil.

India is the number one destination of Latin America's vegetable oil exports, with a share of 26.6% ( 2.57 bn dollars) in 2015. China, the second largest importer, bought just 0.73 billion dollars from the region.

In 2014, India was the second largest importer of Latin American crude oil exports with 20.9 billion dollars, ahead of China's 17.6 bn. In 2015, India was the third largest, accounting for 9.65 billion dollars.

India ranks third for the region's exports of copper, fourth for gold and also fourth for ores.

Crude oil

India's crude imports have doubled in the last decade from 99 million tons in 2005-6 to 202 mt in 2015-16 ( April-March, the financial year used by India). According to a 2015 report of International Energy Agency, imports are projected to reach 358 million tons by 2040. While India's crude imports are relentlessly increasing, Latin America is blessed with huge reserves, production capacity and surplus for exports. At the same time, the US which is the principal market for Latin American crude, has drastically reduced imports after the shale revolution. Although the middle eastern suppliers are nearer, India will continue its purchase of about 15-20 percent of its global imports from Latin America as part of its strategic energy security policy to be not overdependent on the politically unstable gulf countries.

Agroproducts

In the case of vegetable oil, India's imports have jumped from 0.1 million tons in 1992-93 to 8.8 mt in 2009-10 reaching 14.6 million tons in 2014-15 ( November-October used as financial year by the Indian vegetable oil industry) and is estimated to be 15.75 mt in 2015-16. Consumption has doubled from 10.1 million tons in 2001-2 to 20.08 mt in 2014-15 and is projected to reach 26.8 mt by 2025.

South America has started exporting small quantities of pulses to India which is the largest importer in the world. India's imports have reached 4.5 million tons in 2015-16 from just 0.56 mt in 1998-99 and 2.79 mt in 2007-8.

India's production of oil seeds and pulses is unable to cope with the increasing demand due to a number of issues, although the country is self-sufficient in cereals.

Chile, Peru and Argentina have started supplying fruits and vegetables (both fresh and dried) to India. These are not considered as competition to domestic production but seen as complementary since they come during India's off-season from South America which is in the southern hemisphere.

Indian agriculture faces daunting challenges caused by the diversion of agricultural land for other purposes, shortage of water and low productivity due to inadequate investment by most farmers whose land sizes are small. On the other hand, South America has vast tracts of fertile land, abundant water, technologies and best practices with which the region has emerged as a global agricultural powerhouse.

Minerals

Gold is one of the major imports of India, which is the third largest importer after Switzerland and Hongkong/China. In 2015, India's imports were 35 billion dollars. India's imports have had a fourfold increase from 245 tons in 1997-98 to 957 tons in 2015-16.

India has been importing mostly from non-producing third countries such as Switzerland and UAE. It is only in the last few years that India has started direct imports from Latin American producers such as Colombia, Peru, Bolivia, Ecuador, Dominican Republic and Brazil. The imports from the region will go up in the coming years.

India's import of Copper and other ores and minerals are also set to rise, given the rapid industrialization, boosted by the 'Make in India' campaign. Imports of copper concentrates have seen an increase of twenty times from 0.08 million tons in 2000-1 to 1.8 million tons in 2015-16.

Beyond commodities..

Some critics complain that Latin America's exports to India are mostly commodities and raw materials. But they should be realistic and recognize the fact these are the main exports of the region except for the manufactured goods exported my Mexico to NAFTA partners. The number one item of exports of the region is crude oil, which stood at 115 billion dollars in 2015. This complements the number one item of India's import which is also crude oil. India's imports were 105 billion dollars in 2015-16. Latin America has in abundance what India lacks.

Latin America has started exporting finished goods to India, although the figures are not that high. In 2015-16 the exports of electrical and electronic equipments were 401 million dollars, iron and steel items- 364 million, machinery and boilers- 196 million, organic chemicals- 195 million and even pharmaceuticals worth 58 million dollars. Embraer has sold planes to India and is set to increase its share in the fast growing aviation sector of India. Brazilian Marcopolo buses, made in joint venture with Tatas, are ubiquitous in Indian roads.

The 'retail revolution' of India has opened an unprecedented opportunity for Latin America to export processed foods and other consumables to fill the supermarket shelves. The new Indian middle class has developed taste for typical Latin American products such as quinoa and stevia. A Brazilian company 'Surya Brasil' imports henna ingredients from India and exports branded Henna products to many countries including India. A Peruvian firm 'Aje' has set up a plant in India to bottle and market its Big Cola drinks. Cinepolis from Mexico has become the fourth largest operator of multiplexes in India. A dozen other Latin American companies in sectors such as steel, auto parts and electrical motors have manufacturing and assembly units in India. There are a few Latin American software companies which provide services to Indian clients.

Uruguayan architect Carlos Ott has designed the largest office complex in India for TCS in Chennai. Another Uruguayan executive rose to the level of executive vice president of TCS for emerging markets, a reward for his success in establishing the company's operations across Latin America.

Entertainment and sports business

Mexican actress Barbara Mori and half a dozen Brazilians starlets have acted in Bollywood films. The famous Argentine music director Gustavo Santaolalla composed music for an Indian film Dhobi Ghat in 2010. There are a number of models from South America active in the Indian advertisement and fashion business. A Uruguayan model Carolina has married an Indian male model and settled in Mumbai as Carolina Grewal.

Colombian soap operas such as the Ugly Betty were shown in Indian TV, after adaptation. Mexican ' Kidzania' has set up edutainment theme parks in Mumbai and Delhi in collaboration with the famous actor Shahrukh Khan. Latino music is regular fare in Indian discos and gyms. There is good business for Latino music bands and pop stars, who are yet to realize the potential. The Latin Americans can explore further opportunities in the Indian entertainment business which is seeking out the exotic.

There are over twenty Latin American football players and coaches in the clubs of India where football's popularity is soaring. Tata Motors has contracted Messi as their global brand ambassador. Cuban coaches have been training Indian athletes for olympics.

India as a base for regional and global business

The Latin American business could use India as a base for the Asian markets. Techint, a renowned Argentine steel firm has an outsourcing centre in Mumbai to service their engineering projects in West Asia. Three Latin American IT firms have acquired Indian software companies for their global delivery operations. The Argentine cofounder (along with Fabrice Grinda of France) of the online classified advertisement firm OLX launched the services not in Argentina or France but first in India where it remains as the largest in classified services. After its Indian success, the cofounders took it to other countries and now the firm has become one of the largest global players.

Latin American market

Latin America will suffer a GDP contraction of 0.8% in 2016, according to the 26 July 2016 report of ECLAC, the UN Commission for Latin America and Caribbean. In December 2015, ECLAC had predicted decline of 0.6%. But the year 2016 is turning out to be worse than 2015 when the region's GDP shrank by 0.5%. The total GDP of the region has come down from 6.13 trillion dollars in 2013 to 4.88 trillion in 2015.

The deterioration is due mainly to low global prices and demand of Latin American commodities and weak domestic consumption. Global prices of crude are expected to be lower in 2016 by 21%, iron ore-23%, soybean flour-14% and copper-13%. But the fall in prices are good for India, though..India's import of crude oil from Latin America halved to 10 billion dollars in 2015-16 from 20 billion in 2014-15

The region is expected to recover growth next year, except for Venezuela. Brazil is already showing signs of recovery. The macroeconomic fundamentals of the region are healthier with average inflation of just 5.5 % and external debt at just 39% of the GDP.

Here are some positive statistics. The average inflation (cumulative for the 12 months from May 2015) of the region was just 6.1% in April 2016. Exceptions: Venezuela's inflation stood at the world's highest figure of 181% ( IMF estimate is much higher); Argentina's, despite the best efforts by Macri administration stood at 43% in May 2016. The external debt of the region in December 2015 was 1443 billion dollars which was a mere 29% of the total GDP. No country in the region needs any IMF rescue or likely to default on its external debt. The total foreign exchange reserves of the region are over 800 billion dollars, which are adequate to face any unexpected external shocks.

This is a good time for acquisitions in countries like Brazil and Argentina where the asset prices are lower due to local currency depreciation and other such issues. This explains the FDI of 129 billion dollars received by the region in 2015. Brazil received the maximum FDI of 62 billion dollars in 2015.

The Indian business need not be unduly deterred by the negative numbers. It is just a cyclical downturn. Except for the disaster of Venezuela, all the other economies have stronger macroeconomic fundamentals and have built up the capacity for resilience. During this time of austerity, Latin Americans import more generic medicines from India than the patented ones from the developed countries and look for more such affordable products from India.

Conclusion

India, as a major export market for Latin America, is not a wonder of one or two years. India has emerged as a large and growing market for Latin American goods in recent years and is going to continue its ranking in the years to come. India has already overtaken China in GDP growth rate and is set to surpass China in population too.

While Latin America's share in India's global trade is 4.6%, India's share in the region's external trade is just 1.5%. There is potential for India to increase its share to 5% of Latin America's foreign trade which was 1.88 trillion dollars in 2015 with 914 billion dollar exports and 974 bn imports. The Latin Americans are keen for more trade with India as part of their strategic policy to reduce overdependence on China and diversify their trade partnership.

Petroleum crude, copper, gold, ores and vegetable oil are among the top global exports of the region and at the same time these are the major imports of India from the world. India is going to increase its imports of these items in the future both globally and from Latin America in view of the of the growing gap between domestic demand and production. The increasing Indian population and consumption power of the new middle class as well as the need for fuelling the high growth of the economy will continue to drive the rise in imports. This Indian need is complemented by Latin America's potential to export more with its ample resources.

India can count on Latin America as a reliable long term contributor to its energy security and also for agro products such as vegetable oil and pulses. The Latin Americans are excited about India as a large and growing market for their exports. More and more new complementarities and synergies are being discovered and explored by the business on both the sides. India and Latin America are on course for a sustainable long term business partnership.

It would be useful for the IIM students to include Latin America in their study of international business and develop understanding of the new Latin American market. They need to understand the Latino culture as part of their development of multicultural skills needed for the globalized business of India.