The comprehensive agreement will allow both partners access to market and technology.
As we move into the endgame of negotiations over the comprehensive India-EU trade agreement, it is becoming clear that this pact will provide powerful public acknowledgement to the importance of the future trade relationship between these two natural trade partners.
While at just under €70 billion in 2009, the EU is already India’s largest trade partner, this represents a fraction of what is achievable, and continues to remain in shadows of the older and more-established trade relationships with the UK and the US, largely because the EU and India have more diverse language and cultural barriers that have historically complicated the process of relationship-building.
To understand the enormous potential of this relationship, it is important to know that the India-EU trade agreement represents a highly-nuanced negotiation because it is effectively a multilateral trade agreement masquerading as bilateral one. The EU, as a bloc of member states, in many ways mirrors the relative autonomy of the Indian states as diverse, independent economies that remain ultimately interdependent.
Also, it is expected that this framework will lay the groundwork of cooperation that would lead to bilateral pacts, especially in areas such as defence and power. In the EU, India has a trade partner to match its diversity and growth, and the potential for cross-border technology-sharing and market access is staggering. Like healthcare and technology, more sectors will see enhanced cross-border activity:
• Retail: This sector is set for rapid growth. European hypermarkets such as Carrefour and Metro, and large retailers such as IKEA are waiting for changes in India’s FDI policy before accelerating their plans in a country with aconsumer group that is limitless in potential. While some of them are already established in India in wholesale cashand-carry (Metro and Carrefour) and have potential partnerships in place, these are more placeholders and less an illustration of their India strategy.
• Agriculture, dairy and food processing: One of the knock-on effects of the entry of global retailers in India is the effect on local supply chains. The dairy cooperative system across Europe in some ways mirrors India’s networks. We have seen joint ventures in this space before, notably between French dairy major Bel and Indian major Parag. We have also seen Indian retail assets with strong dairy supply chains such as Nilgiris (currently owned by private equity house Actis) attracting interest because they offer all the benefits of a ready supply and sale infrastructure, which has significant local and, ultimately, global benefits.
The EU-India trade agreement will likely see tariff reductions in European products such as wine, cheese, olives and processed meats, whose demand in India is rising and remain important export industries for Italy and France. Liquor tariffs in India are 150% and considering that this sector represents one of the largest farm exports for the EU at $6 billion a year and that India is the world’s largest whisky market, significant tariff reductions are expected.
•Luxury:Brands owned by LVMH and other European luxury majors have been in India for years. One interesting example is of Herméson opening its smallest boutique at the Ista Hotel in Pune and, in parallel, reported to be opening a mega-boutique amongst some of Asia’s most-expensive real estate in Colaba (Mumbai). This is in addition to building a local brand identity and product line in India, which demonstrates a deep commitment to localising its brand to suit the growing sophistication of consumers across India.
Given the attractiveness of India as a market, the 37% tariff on the product value of luxury goods remains high, especially considering that the correspondent tariff in China is 17%. We expect a strong push from the EU to reduce this tariff which, in turn, will encourage its luxury groups to increase their investment plans in India.
Another example is LVMH acquiring shareholding in Indian luxury leather company Hidesign and the proposed acquisition by L Capital — the investment vehicle in which LVMH is an investor — of shareholding in jewellery company Geetanjali Gems. This shows the potential of India not only as a market, but also as a potential producer of worldclass luxury products which, when paired with the marketing knowledge and retail leverage of European luxury groups, can grow into global brands.
• Infrastructure: While this sector already has significant European investment, the potential continues to increase. Prime Minister Manmohan Singh has revised upwards the investment India needs in infrastructure by 2017 to $1 trillion. Key areas of development will be nuclear power (French major Areva is a pioneer in India), clean energy and transport (Alstom’s $400-million supply agreement with the Chennai metro rail is a prime example).
We will also begin seeing more crossborder acquisitive activity in niche technologies, both by Indian and European majors looking for highly-specialised technical advantages in infrastructure ancillary businesses. A recent example is the acquisition by Hyderabad-based tunnel engineering firm Coastal Projects of 26% in Italian boring machine maker and contractor Societa Esecuzione Lavori Idraulici S.p.A.
We are looking forward to a period of unparalleled growth in the EU-India commercial relationship. Regulatory issues can be stumbling blocks (India’s evolving FDI policy and France’s labour laws, for example) and certain much-reported broken relationships (Wadia-Danone) can colour sentiment, though the trade potential is important enough for all sides to push forward.
For India, the EU is home to technology and management expertise, which will help globalise its businesses. For the EU, India represents a booming consumer class of every level, underpinned by infrastructural growth, which needs to be managed by global best practice. The India-EU trade agreement will be an important step in acknowledging the potential of this relationship and providing a platform for future cooperative growth.
A legendary professor at Harvard Business School for 40 years, Georges Doriot was a pivotal player i..