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Bringing India and Latin America closer in terms of trade and investment

Transportation cost remains a major constraint for trade between the two. (Representational image)

By Viswanath Jandhyala & Akshay Dutta

In an era of global economic challenges, diversification of trade partners and access to new markets is becoming a priority for all economies, and more so for emerging market economies like India. Of late, the Latin America and the Caribbean (LAC) has emerged as an important economic partner for India, despite both the economies being geographically and culturally apart. India and the LAC have a combined GDP of $8 trillion and account for over a quarter of global population. There are mutual benefits that can be derived from partnering. For instance, having established itself as a strong services-driven economy, India can help share its expertise in developing a modern services sector in the LAC region. And LAC countries can partner India to help meet its natural resources requirements and ensure food security for its burgeoning population.

Over the last decade, India’s trade with LAC has grown three-fold—to reach $39 billion in 2018, with India’s exports to LAC amounting to $13 billion and imports reaching $26 billion. India, thus, runs a trade deficit with LAC, to the tune of $13 billion. Importantly, India’s current trade with LAC is concentrated in a handful of product categories and with a few countries—Mexico, Brazil, Colombia, Chile, Peru and Argentina absorbed more than 80% of India’s exports to LAC in 2018. Also, crude oil imports from Venezuela made it the biggest source of India’s imports from LAC during the year, constituting one-third of the total imports from the region.

The potential
There is a huge scope to strengthen India-LAC relations by deepening trade and investment ties. There is significant untapped potential for Indian exporters in categories such as machinery and mechanical appliances, electrical machinery and equipment, plastics, transport vehicles, pharmaceuticals, among others, owing to their high import demand in the region. Moreover, based on authors’ research, sectors such as communications, automotive, business and financial services, alternative/renewable energy, metals, food and tobacco, and hydrocarbons present opportunities for Indian investors for enhancing investments in the LAC region.

The challenges
Trade costs, which significantly impact trade flows, are driven primarily by tariffs, non-tariff barriers (NTBs), and inefficiencies along transport and logistics routes. Transportation cost remains a major constraint for trade between the two. Lack of direct shipping routes between India and LAC results in high transportation and allied costs such as insurance. In a study by the Export-Import Bank of India and the Inter-American Development Bank, it was found that in the medium term, with reduction in trade costs, LAC exports to India could increase by 42% (by $7.6 billion), while Indian exports could rise by 46% (an increase of $8.6 billion).

Moreover, there is a general lack of awareness among many exporters and entrepreneurs in India on doing business in the LAC region, due to the geographical distance and cultural differences; business risk is perceived to be high, which could act as a deterrent for Indian exports.

Policy imperatives
People-to-people exchanges are crucial to improve bilateral relations. Liberal visa regimes, particularly for professionals and tourists, would go a long way in easing business and increasing cultural exchange. Improving air connectivity should also be given priority as there are currently no direct flights between India and any LAC country.

Enhancing trade-facilitation measures, boosting investment in infrastructure and promoting reforms in logistics sector, reducing transaction and transportation costs, as well as undertaking proactive and targeted trade promotion activities and enhancing communication with trading partners could be key policy suggestions to improve bilateral trade relations between India and the LAC region. Increasing the coverage of bilateral and regional trade and investment agreements with partner countries could also help boost economic relations, while providing Indian entrepreneurs a gateway to new global markets, besides the potential existing in the LAC region itself.

Authors are economists with the Export-Import Bank of India. Views are personal

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Source: Financial Express