The hurdles to German investments in India

Gurjit Singh | Updated on June 02, 2021

Growing ties RV Moorthy   -  The Hindu

India and Germany marked the 70th anniversary of the establishment of diplomatic relations in March. The relationship has progressed satisfactorily but not spectacularly.

Cumulatively Germany has invested $12.39 billion in India since 2000, mainly in automotive, transportation, electrical equipment, metallurgy, insurance, services, chemicals, and construction and trading. 1,600 German companies are reportedly functioning in India, including 600 joint ventures.

Germany is the seventh largest FDI provider in India since April 2000. The fast-track mechanism of problem resolution, however beneficial, has not led to a quantum leap in German investments.

Let us analyse some of the reasons for this. First, inter-governmental collaboration led to an increasing support for India's development through governmental funding.

However, Germany does not tie its ODA to its enterprises, unlike Japan, whose companies use ODA projects to create business in India. This is detrimental to converting ODA projects into greater trade and FDI into India.

Secondly, large old German companies such as Siemens, Bosch, Bayer and Daimler have been in India for more than a century, reinvesting profits more than bringing in new FDI.

Out of 30 companies in the German DAX, 26 are present in India. But of the mid-sized companies on the MDAX only 28 out of 60 are in India.

The Mittlestand of Germany is the core focal point, if Indo-German economic relations are to expand. The Make in India Mittlestand program launched in 2015, focused on select Mittlestand and led to a FDI of $1.35 billion from 135 companies, showing the potential. However, the German Mittlestand remains insular and isolated. They have a preference for self finance over debt and often view India as a challenge than an opportunity.

German trade peaked at $24.07 billion in March 2019, before dipping to$ 21.64 billion in March 2020. This focused on a few sectors — automotive, machinery and chemical segments. Now start-ups are emerging and more R&D centres, but the FDI/trade link is not really enhancing manufacturing.

In Germany, the role of the states and the cities is important. This requires an effort to deal with them.

There is also a regional dimension to this lack of diversification. Maharashtra and Karnataka have had sister state relationships with Baden Wurttemberg and Bavaria for nearly 50 years. German companies have converged around Pune and in parts of Karnataka. Efforts to bring in other German states into this matrix are slowly succeeding with North Rhine Westphalia developing a relationship with West Bengal while Thuringia also looking at India.

There is also the problem of the lack of a bilateral investment treaty. The new agreement with India will be negotiated through the EU. However keen Germany is a BTIA with India, it does not have the competence to negotiate it separately. This has hit the Indo-German relationship.

In Germany, there was great expectation after the launch of Make in India in 2015 at the Hannover Messe in the presence of Prime Minister Modi and Chancellor Merkel. However, within a year the BTIA was abrogated leading to confused signals.

This prevented German companies from obtaining Hermes guarantees for their trade and investment in India. This has now resumed since 2019.

Indian investors seem to be more adept at understanding the German system and adapting to it, including the stringent labour conditions. German companies continue to see India as a challenge. This perception issue needs critical handling at local and state levels in Germany.

The writer is Former Ambassador to Germany

Published on June 02, 2021

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