SOUTH AFRICA AND INDIA STRENGTHEN ECONOMIC

C O N F I D E N T I A L SECTION 01 OF 04 PRETORIA 000589

SIPDIS

SENSITIVE BUT UNCLASSIFIED
SIPDIS

DEPT PLEASE PASS TO USTR FOR P.COLEMAN
DEPT OF COMMERCE FOR J.DIEMOND

E.O. 12958: DECL: 03/17/2018
TAGS: ECON ETRD EINV IN SF
SUBJECT: SOUTH AFRICA AND INDIA STRENGTHEN ECONOMIC
RELATIONS

REF: 07 PRETORIA 0003772

Classified By: Ambassador Bost for reasons 1.4(b) and (d).


1. (C) Summary. India and South Africa have made major
inroads in re-establishing ties and strengthening economic
relations since 1995. Trade statistics, the number of joint
ventures and the amount of foreign direct investment are all
indicative of the rapid growth in economic relations,
especially over the last five years. India's vibrant economy
and increasing demand for commodities at record-breaking
prices have fueled South Africa export growth while South
Africa's high consumer demand has provided for increased
imports. Foreign direct investment has flourished for both
countries with current Indian projects in South Africa
estimated at USD 2.5 billion. The Indian Consulate General
thinks South-South Cooperation and the India-Brazil-South
Africa Forum have little to do with spurring economic
relations. The Southern African Customs Union (SACU) and
India launched Preferential Trade Agreement (PTA)
negotiations in October 2007, but negotiations are limited to
tariff lines and remain in their infancy. End Summary.

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BOOMING TRADE RELATIONS
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2. (U) India and South Africa have made major inroads in
re-establishing ties and strengthening economic relations
following a complete cessation of bilateral ties from 1948 to

1994. Trade statistics, the number of joint ventures and
the amount of foreign direct investment are all indicative of
the rapid growth in economic relations, especially over the
last five years. Growth is expected to continue its upward
rise as South Africa holds its position as India's largest
trading partner in Africa. India Consul General Navdeep Suri
told Deputy Economic Counselor and Trade and Investment
officer that India's trade statistics indicate that
India/South Africa bilateral trade will reach USD4.7 billion
in 2008, reflecting 40 percent growth over the previous year.


3. (U) India ranks as South Africa's 14th largest market
for exports and 11th partner for imports. India's vibrant
economy and increasing demand for commodities at
record-breaking prices have fueled South Africa export
growth. South Africa's high consumer demand have provided
for an increase in imports. SAG's Department of Trade and
Industry shows growth from 2006 to 2007 at 63.5 percent for
exports and 17.7 percent for imports. The growth over the
last five years is best demonstrated in the table below
(figures in million USD):

South Africa/India Trade
2003 2004 2005 2006 2007
SA Exports 443 576 1,163 824 1,345
SA Imports 413 705 1,105 1,588 1,774
Total Trade 857 1,281 2,268 2,412 3,119
Trade Balance - 30 - 129 57 - 795 - 429

While trade has more than tripled in five years, the growth
is more dramatic when compared to 1995. Bilateral trade in
1995 stood at only USD55 million compared to USD3 billion in
2007, a 60-fold increase in 12 years. The trade data also
does not reflect trade in gold, which is recorded by both
countries through an international exchange. Suri noted that
India purchases approximately 70 percent of South Africa's
gold. The most recent figures accessible indicated that
South Africa exports of gold to India totaled 1.8 billion
rand in 2005, which would have accounted for an additional 16
Qrand in 2005, which would have accounted for an additional 16
percent of total exports. South Africa would thus have a
substantial trade surplus if gold were included in the
official trade figures.


4. (C) Exports to India consist mainly of coal, organic
chemicals (mostly phosphoric acid for the fertilizer
industry),pulp and waste paper, and precious stones. Suri
explained that India is interested in South Africa coal, its
largest import, because it is less expensive to bring the
coal from South Africa to India's western region than to
transport coal from East India, where India's coal deposits
are located. Imports from India are mainly comprised of
mineral fuels, automobiles, rice and other cereals, iron and
steel, machinery and instruments, organic and inorganic
chemicals, and fabrics and yarn. Both countries believe that
current trade is still well below its potential. Suri
commented that India expects trade to grow 20-25 percent for

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the next several years, although he did express concern that
South Africa's exports may stagnate for lack of a diversified
export basket. A Joint Statement made during the Indian
Prime Minister's visit to South Africa in October 2006 and
reaffirmed at the October 2007 India-Brazil-South Africa
(IBSA) Forum set the ambitious goal to treble trade to USD15
billion by 2010.

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SOUTH AFRICA/INDIA INVESTMENT-A TWO-WAY STREET
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5. (U) As with trade, foreign direct investment has
flourished since the two countries restored relations.
Indian companies are drawn to South Africa's large market,
good infrastructure, and its prime location as a regional
base, according to Suri. Tata, the first large Indian
conglomerate, has paved the way for Indian business in South
Africa. Tata first entered the market in the truck business,
but rapidly diversified its holdings. Today these include
Tata Steel, which has set up a ferrochrome smelter in
Richard's Bay with an initial cost of USD110 million and a
bus body building plant in Pretoria. Other projects in
process include a proposed USD120 million automobile plant
for TATA Motors and construction of two hotels by a Tata
group company for USD50 million each. In addition, the Tata
group company, VNSL, has won the USD300 million bid to become
South Africa's second national Telecom operator.


6. (U) Approximately 40 other Indian companies have
followed suit and operate in sectors ranging from tires to
pharmaceuticals to tourism through either greenfield projects
or acquisitions. A sampling of current projects include the
following:

-- Acquisition of BEE Tabs, a major pharmaceutical generics
manufacturing unit, by Ranbaxy for about USD70 million

-- Marico acquired the consumer projects business of Enaleni
Pharmaceuticals for about USD14.3 million

-- Acquisition of Dunlop SA by Apollo Tyres for
approximately USD60 million. Apollo has doubled plant
capacity.

-- KGK and Rosyblue, two leading Indian diamond companies,
have established cutting and polishing facilities

-- Establishment of breweries and acquisition of game lodges
by the UB Group

-- Sahara Group's USD21 million property development in coal
mining

-- Presence of three major Indian banks

-- Several software companies have a strong presence
including training programs for South Africans

Suri estimated that Indian companies are involved in current
projects worth about USD2.5 billion. This figure includes
debt and does not include investments from Indian companies
that are headquartered in third countries (such as Mittal),
so it is difficult to measure actual FDI.


7. (C) Despite this boom, Indian companies still face
investment barriers, according to Suri. He identified the
biggest hurdle to investment as business visas. "A U.S. visa
is easier to get than a South Africa one," he lamented, and
also explained that most South Africa visas were only valid
for one trip during a three month window. Other major
concerns include Black Economic Empowerment (BEE) and
government bureaucracy. Suri noted that businesses had
difficulty finding reliable partners for BEE. The perception
among the companies is that local BEE partners are just "rent
seekers" that provide no value to the deal, which has
consequently slowed investment. Suri called government
Qconsequently slowed investment. Suri called government
bureaucracy a "nightmare", citing several examples of major
deals that had been halted or scrapped because express
commitments by the SAG were not honored. For instance, Tata
Power, which is still not online, has been unable to obtain a
power connection from Eskom, the SA parastatal energy
company, despite government commitments. Although crime and
electricity are often cited in the press as major deterrents
to investment, Suri stated that Indian companies have already
accounted for security issues in their cost estimates. He

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also noted that Indian companies experience far more serious
infrastructure problems at home than SA's recent energy
crisis.


8. (SBU) South African investments in India are also
growing. Suri noted that there was an information gap at
first, which hindered SA investment, but that SA companies
now prefer to invest and produce in India rather than export
the same products from South Africa. The following is a
sample of some SA investments:

-- Standard and First National Bank have applied for banking
licenses in India.

-- SAB Miller has emerged as India's second largest brewer
with investments expected to exceed USD1 billion by 2010.

-- Airports Company of South Africa (ACSA) is the prime
operator of Mumbai airport and is responsible for its
expansion.

-- Intertoll is building the first toll road in India

-- Shoprite, a retail company, has established itself in
Mumbai

-- Joint venture between SANLAM and Old Mutual in the
insurance sector

-- ALTECH has set up a facility to manufacture set top boxes
for DTH broadcast

-- Adcock Ingram has established a joint venture to
manufacture pharmaceuticals

-- SASOL has opened an office with the possibility of
constructing a major coal-to-liquid plant near coal deposits

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POLITICAL TIES SPUR ECONOMIC BOOM?
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9. (C) Department of Trade and Industry's Deputy Director
General Iqbal Sharma told Trade and Investment Officer that
while political strategies were initially behind South-South
Cooperation and the IBSA Forum, these mechanisms have also
opened "huge economic opportunities." The new political
alliances play on strong relations emerging from the shared
history of British colonial rule, and have also opened trade
doors. Sharma said that Standard Bank had been
unsuccessfully trying to obtain an Indian license for over
six months without any movement. DTI advised Standard to
approach India as a South African company, not a British one,
where it is headquartered, to capitalize on the SA-India
alliance. According to Sharma, after Standard waived the SA
flag, it obtained a license within six weeks.


10. (C) Suri, on the other hand, conceded that IBSA has
"not played a big role" nor was it a "significant element" in
trade and investment relations. He noted that he was
"skeptical" that any government could really influence trade,
which, in his opinion, is controlled by the market and
business. He complimented business chambers, rather than
government, for helping to facilitate investment and trade.
He provided a listing of business events for 2007, which
showed a total of 24 trade missions, mostly sponsored by
business or chamber organizations.


11. (C) A South African mergers and acquisition attorney,
who specializes in SA and India investment, told Trade and
Investment Officer that South African companies' attempts to
capitalize on political relations between the countries,
voicing the slogan "we gave you Ghandi back," usually fell on
deaf ears. He said that Indian government officials and
businesses were "tired of this line." In his opinion, they
were not effected by political ties in one way or another;
they just wanted to "get down to business."

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TRADE AGREEMENT NEGOTIATIONS AT INFANT STAGE
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Q --------------


12. (SBU) The Southern African Customs Union (SACU),with
South Africa as the designated lead, and India launched
Preferential Trade Agreement (PTA) negotiations in Pretoria
in October 2007 in an effort to expand trade between the

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countries. The PTA is to be the first step towards a
trilateral free trade agreement between India, Brazil, and
South Africa. According to Sharma, the PTA will initially
only cover tariff lines, similar to the Mercosur agreement,
and that talks were just in the preliminary stages. He
intimated that the first draft will include products that are
easy win-win items for both countries. Suri noted that any
trilateral agreement has a "long way to go." Other U.S.
Embassy contacts echoed Suri's statement that an IBSA trade
agreement would not be completed in the near future (reftel).

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COMMENT
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13. (SBU) South Africa-India trade and investment is a
South-South cooperation success story. The countries have
rocketed from zero relations in 1994 to USD2.5 billion of new
projects in South Africa alone. Growth in their respective
economies has fueled the increasing trade and investment,
with little assistance from trade agreements or bilateral
forums. Once IBSA and the PTA graduate beyond their infancy,
economic relations could soar even higher.
BOST