No Alternative

Soon the World’s Fourth-Largest Economy

Economists see potential in the expansion of economic relations with India, a goal pursued by Germany and the EU. India’s economy is rapidly growing – this year probably by six percent. India recently became the country with the fifth-largest economic output in the world, surpassing its former colonial power Great Britain. In a few years, it will probably displace Germany from its position as the world’s fourth-largest economy. The financial sector, such as Goldman Sachs, predicts that, by 2075, India is poised to become the world’s second largest economy in absolute dollar values behind China and ahead of the USA. This would probably be the case much sooner, if the economic output is calculated on the basis of purchasing power parity.[1] Its market volume alone, makes this country interesting for German companies. German-Indian trade rose from €23.3 billion in 2021 to almost €30 billion in 2022. Investments are also again on the rise. For example, SAP invested €55 million and Siemens Healthineers €160 million in expanding their sites in Bengaluru in southern India, a metropolis with a population of eleven million that is considered India’s Silicon Valley because of its booming IT sector.

Sidelined in Terms of Foreign Trade

To boost trade with India, the German government is vigorously pushing for concluding a free trade agreement between India and the EU. Negotiations on this agreement were launched already in 2007, but had dragged on until they were temporarily suspended in 2013. They were resumed last year. German Economy Minister Robert Habeck discussed the issue in New Delhi. In February, the Berlin-based German Institute for International and Security Affairs (SWP) pointed out, that India is neither a member of the Regional Comprehensive Economic Partnership (RCEP) free trade area nor of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP). Thus, it is “sidelined” in Asia “in terms of foreign trade” – a disadvantage when it comes to “competing for new industrial investments.”[2] Having come under pressure as a result of this, India has stepped up its efforts to conclude new free trade agreements. In 2021, the country concluded a free trade agreement with Mauritius, and in 2022 one with the United Arab Emirates (UAE). It is also negotiating free trade agreements with the Gulf Cooperation Council (GCC, an alliance of Arab Gulf States), Israel, Great Britain and Canada. This also opens new possibilities for the EU. SWP warns however, that there is good reason to doubt whether the two parties’ differing visions of open markets, liberalization, and sustainability can be reconciled.”

Problems of Business with India

Even beyond the debate over the free trade agreement, German businesses have always held skeptical assessments of their prospects of doing business in India. As a matter of fact, German politicians have regularly sought to rally a transfer of investments from China to India or at least of making new investments there, instead of in the People’s Republic. However, persisting decades-old problems are standing in the way.[3] This is, for example, the case for the country’s “bureaucracy and a complicated regulatory environment,” says Kirsten Schoder-Steinmüller, Vice President of the German Chambers of Industry and Commerce (DIHK).[4] Among the “greatest challenges for German enterprises in India” are the widespread corruption and “lack of infrastructure,” Wolfgang Niedermark of the central administration of the Federation of German Industries (BDI) was quoted saying.[5] Just recently, out of frustration, the Foxconn enterprise in Taiwan broke off its attempt to establish along with the Indian conglomerate Vedanta a US $20 billion chip producing factory in India. The economist Ashoka Mody of Princeton University considers that “the allegation that India is booming, is completely false.”[6] In reality, that country “cannot keep pace with China’s productivity.”

Prospects in Solar Energy

However, Berlin is doing its best to vigorously boost business with India. “India is a counterweight to China,” noted Economy Minister Habeck prior to his current visit, therefore economic ties must be strengthened.[7] Possibilities for success currently lie in the solar energy sector. In India, or rather in its northwestern state of Gujarat – where Prime Minister Narendra Modi had served as head of government from 2001 to 2014 before assuming office in New Delhi – a booming solar sector has developed over the past few years, which has been quite successfully producing solar modules on a large scale. The production costs are still perceiptibly higher than those in China. However, the Indian government is subsidizing up to 80 percent of the additional costs that the industry in Gujarat encounters in comparison to the cheapest manufacturers in China.[8] On his trip to India, Habeck is accompanied by the Managing Director of the start-up Enpal, a large-scale outlet for solar systems. It is being assessed, whether Enpal can switch to Indian solar modules. However, India’s capacity is limited. The International Energy Agency (IEA) estimates that China’s share in global manufacturing capacity could decrease slightly, in the case of successful production in India and the USA, but only from a current 80‑95%, to 75-90% by 2027, depending on the manufacturing segment.[9]

Arms Exports

The German government is also seeking to expand its arms exports to India, which over the past few years has stagnated in the lower 3-digit millions. During his trip to New Delhi in early June, Defense Minister Boris Pistorius announced that he intended to push for arms exports to India being valued at the same level as those to Australia or Japan. This would greatly simplify the approval process.[10] On the sidelines of Pistorius’ visit, representatives of the German docks ThyssenKrupp Marine Systems (TKMS) and India’s Mazagon Dock Shipbuilders in Mumbai, signed a Memorandum of Understanding on the joint development of new submarines for the Indian Navy. If the two companies’ project actually materializes, they will jointly build submarines in India. Both companies had already cooperated in the construction of four submarines in the 1980s, where two had been built by the predecessor of TKMS, HDW, and two by Mazagon.[11] Berlin supports the offer, also to counter India’s close arms cooperation with Russia. It is doubtful that this objective will be attained. A few days ago, New Delhi proposed to Moscow that it would deliver BrahMos missiles to the Russian armed forces once the war is over. These were developed through Indian-Russian cooperation, and manufactured in India.[12]

[1] How India could rise to the world’s second-biggest economy. goldmansachs.com 06.07.2023.

[2] Hanns Günther Hilpert, Bettina Rudloff, Christian Wagner: Verhandlungen über ein Freihandelsabkommen zwischen Indien und der EU. SWP-Aktuell 2023/A 11. Berlin, 10.02.2023.

[3] See also „Engage India”.

[4] Dreitägige Reise nach Indien: Robert Habeck will Zusammenarbeit ausbauen. rnd.de 19.07.2023.

[5] Warum Indien für Deutschland wichtiger wird. rnd.de 19.07.2023.

[6] Mathias Peer, Klaus Stratmann: Warum Indien nicht das neue China wird. handelsblatt.com 19.07.2023.

[7] „Zeit, die Köpfe ins Wasser zu stecken und abzukühlen”. n-tv.de 19.07.2023.

[8], [9] International Energy Agency: Renewables 2022. Analysis and forecast to 2027. Paris, December 2022.

[10] Pistorius will leichtere Rüstungsgeschäfte mit Indien. tagesschau.de 06.06.2023.

[11] TKMS And MDL Join Forces To Build Submarines For And In India. navalnews.com 08.06.2023.

[12] Navya Beri: India considers selling BrahMos missiles to Russia. wionews.com 16.07.2023.