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. -------------- BOOMING TRADE RELATIONS -------------- ¶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 PRETORIA 00000589 002 OF 004 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. -------------- - SOUTH AFRICA/INDIA INVESTMENT-A TWO-WAY STREET -------------- - ¶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 PRETORIA 00000589 003 OF 004 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 -------------- POLITICAL TIES SPUR ECONOMIC BOOM? -------------- ¶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." -------------- TRADE AGREEMENT NEGOTIATIONS AT INFANT STAGE -------------- 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 PRETORIA 00000589 004 OF 004 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). -------------- COMMENT -------------- ¶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