Financing India: German companies continue to invest in India despite slowdown

Economic relations between India and Germany are five centuries old — mainly due to their trading history. Today, Germany is India’s most important trading partner in the EU and its sixth important trading partner. It may be recalled that the first telegraph service was between Berlin and Calcutta (now Kolkata).

Many German companies set-up their offices in India between the 16th and the 18th centuries. It is estimated that today, more than 1, 800 German companies are active in India, and employ more than 4 lakh people directly and indirectly. Moreover, Germany is the seventh highest source of FDI for India.

To understand how India can become an even more attractive investment and business destination for Germany investments, The Free Press Journal and NMIMS in association with Invest India organised a webinar series ‘Financing India’. The focus country for the second session of the series was Germany. The panellists for the session were (in alphabetical order) Avinash Bagdi, Head of Finance, Covestro (India); Dr. Jürgen Morhard, Consul General of Germany in Mumbai; Rajesh Nath, Managing Director, VDMA India; and Rahul Oza, Partner & Director, Rödl & Partner India. The session was moderated by R N Bhaskar, consulting editor, Free Press Journal.

Given below are edited excerpts compiled by Jescilia K:

Global scenario

Dr. Jürgen Morhard, Consul General of Germany in Mumbai: Trade conflict, climate change, future technology, new energy, digitisation, volatility risks —- these are concepts that the world is facing today. This was even before COVID-19 pandemic struck.

Now, COVID-19 is overshadowing all the global challenges. It has forced us to reassess what future business would be like going forward. This assessment is not limited to foreign investments or jobs, but goes beyond — there are questions like would world travel come back or will the global supply chain become something of the past or will it continue to build up new models around the world or will the world change economically, socially and politically after COVID-19.

During this difficult time, we have learned that we still need economic cooperation and collaboration more than ever.

No country could fight a pandemic of such a scale in isolation. The past has seen international cooperation and economic integration which have brought a lot of good and wealth to the world.

Impact of protectionism

Dr. Jürgen Morhard: It was the economic integration between the US and China which set the pace for globalisation which we have to recognise. But, now both countries have brought economic activities to a standstill due to their own economic conflicts.

Such conflicts can have profound implications on Asian countries and the European Union. It has to be seen how Asian countries, Pacific countries and European Union position themselves. However, there is no doubt that Asia will continue to be an economic powerhouse.

Avinash Bagdi, Head of Finance, Covestro (India): In the last few years, we have seen an upcoming trend — protectionism policy of state or economic nationalism — that is impacting the overall supply chain. This is pre-COVID-19.

COVID-19 has accelerated this and has led people to review their supply chain. This assessment is to find out our vulnerabilities and ways in which they will be addressed. This is where the concept of plus one jurisdiction started — where you see opportunity in the crisis.

India is not the only economy (in this race). There is competition coming from South-East Asian economies like Vietnam, the Philippines, Taiwan, Thailand, Malaysia, Indonesia among others — are doing good in terms of attracting investments.

It is interesting to see how India is playing — be it ease of doing business or other parameters. But there is a lot more to do.

If India wants to be a manufacturing powerhouse — an alternative to China — it has to look at it with an export perspective. The preparedness of the country in terms of export is an important criteria.

Infrastructure is another area that India will have to stress more on as it will attract more investments to India. At present, India is lagging behind in terms of infrastructure.

India has a huge potential, but we are unable to grow as per our right potential. At present, the few things that are working in favour of India is political stability, digitisation process, skilled workforce and other reforms.

Dr. Jürgen Morhard: India is facing uncertainty with China. India is also facing uncertainty, in case of trade policy, with the US. Due to these uncertainties, India and Indian businesses have turned around to find that there is another large market of 450-million people (European Union) even after Brexit — larger than the US market.

The EU is a single market and the governments there are not intending or signalling to close up. Thus, there is a sudden influx of Indian businesses who are looking at Europe as a market.

There are mutual benefits from both sides in terms of economical, political, and economical partnerships.

Germany-India relations

Dr. Jürgen Morhard: Like most European countries, Germany is a small country when it comes to population but we are internationally connected. There is no European country that can live on its own, strive and create wealth. Germany is heavily dependent on the global supply chain and production chain.

Germany has developed its very own Indo-Pacific region policy guidelines, which go beyond politics.

India, like many other countries, is one of the partners and advocate of a rule-based world. India and other countries understand challenges like cyber-crime, climate change, pollution and others. It is only by abiding with international law that one country can become international or strive to become international.

Germany and India are connected not just by political values but civil societies as well.

There are more than 1,800 German companies that are present in India today. Germany is the seventh largest source of FDI for India.

The German concept is to work along with Indian institutions. We do not really talk about the work we do. Meanwhile, we work towards helping the government carry out the necessary reforms, where an upgradation is needed — it could be in areas like legislation, concepts for environmental laws, skilling concepts among others.

Rajesh Nath, Managing Director, VDMA India: Machinery sector forms one third of Germany's exports to India. The important components of German exports to India in 2019 are machinery, chemical products, electrotechnology, aircraft and airspace and metal products. Meanwhile, imports from India to Germany are textiles, chemical products among others.

The engineering exports to India from Germany have increased. They peaked in 2011-2012 when they touched 3,600 million euros. In 2019, they stood at 3,100 million euros.

In the last 20 years, there has been a six-seven fold increase in exports from Germany to India. There has been good development of export of products from India to Germany as well. This where local industry and entrepreneurs also have good potential for doing business with Germany.

The engineering exports from India to Germany saw an increase of 3 per cent in 2019, whereas there was a dip in export from Germany to India.

Avinash Bagdi: The relationship between India and Germany is almost 500 years old. We share the same cultural values — civil society and rule-based business. In addition to these, nowadays there is a focus on the environment. As a polymer company, this topic is very close to my heart.

Germany and Europe as a whole are driving environmental issues in a very big way. If you look at history, there are a lot of German countries that are present in India and have established in India centuries ago. For instance, Covestro, an offshoot of Bayer, started business in 1896 in India.

Rajesh Nath: German organisations have been quite active in India. They have been more inclined towards working rather than talking about their work. Germans have been engaging with Indian partners to support India’s ambitious renewable energy targets and other areas.

Rahul Oza, Partner & Director, Rödl & Partner India: There are many German companies that are investing in various renewable projects in India. But the change in norms can hurt businesses.

Investments: Bearing fruits

Dr. Jürgen Morhard: We have seen a constant inflow of investments between India and Germany. It is very difficult to qualify and quantify it.

In 2019, every second week —at least in my jurisdiction covering Gujarat, Madhya Pradesh and Maharashtra — there was an opening ceremony of new German investments. I found that quite remarkable. This has continued in 2020 but virtually. These are outcomes of the investments that were made in the past.

Recently, I was trying to reassess the German companies in India. It was found that fresh investments are being made by these companies. This shows that, despite the economic slump, German companies have long-term commitments towards India. These companies are convinced that India will rebound. German companies are not here for short-term quarterly results. They are here for a marathon and not for a sprint. German companies have a long-term approach.

India is a very important partner and opportunity, despite many problems that we face in India. Investing in India is not easy. It is not easy anywhere in the world wherever you go abroad. But German companies are convinced that challenges outweigh opportunities that India is offering to them.

Rajesh Nath: FDI coming from Germany to India for the last 19-20 years has been approximately around 10.5 billion euros. 2018 was a very good year — there was an investment of 931 million euros coming from Germany to India. In 2019, there was a dip in investment coming to India from Germany. It could be due to the slowdown of the economy.

German companies are looking at India as a long-term partner. There is a willingness to invest in India; to have a base in India. In the case of FDI, the largest chunk has come to the automobile industry in India.

Many well-known German brands are operating in India. Automobiles, followed by the services sector, attracted the largest investments — then there are pharmaceuticals & drugs, electrical, equipment and other sectors.

In the case of bilateral trade among both countries, the total trade stands at 21.43 billion euros. The exports from Germany are in tune of 12.5 billion euros and from India to Germany, it is 9 billion euros.

Avinash Bagdi: With more and more focus on capacity expansion, FDI inflows to India will increase. German companies are looking at increasing their position in India — Covestro is one of the examples. In the last 20-25 years, the company has been investing in the country every four-five years. This is to step up expansion to cater to the demand locally.

R&D is important. Lately, we have seen a lot of companies investing in India to develop their R&D base here. This is because India should not become a manufacturing base for low-end products but value-added products. R&D will play a significant role here.

Faster clearance from government and law implementation will be critical to attracting investments. The government has introduced a lot of reforms like the relaxation of FDI, changes in taxation and others. Production-linked incentive by the government has seen a lot of traction.

Rahul Oza: To limit the hide and seek approach of India, we need to unify laws which India did as in case of Goods and Services Tax (GST). There is no need to abolish tax laws, but unify them. From 2019, for all new companies that are incorporated, the taxes are 17 per cent with all surcharges.

The significant change in FDI rules, new tax regime and easing of ECB (external commercial borrowings) laws have been a good move of the government.

India is coming up to a new economy standard. India has to be straight (strict) in compliance. This will be a good change for the economy. The government is trying to build an economy where its citizens follow the rules. It is a very important factor when it comes to inviting investments to the country.

A law can be good or bad but a good judicial system provides security (investors feel safe). Meanwhile, the judicial system in India is now accepting pleas digitally and there has been significant reform. However, the duration involved in reaching a judgment has hurt businesses.

Law of the Land

Rahul Oza: Indian system is rule based. Laws in any country can be nonsensical and can be good. There is no country that can claim the monopoly of having good or perfect laws.

We always talk about simplification of laws. This is not possible. I haven’t seen any jurisdiction in the world which majored in abolishing laws to simplify laws. It is not in the nature of any government or human beings. Any law has to be applied to many cases before it is simplified. Human beings are complex in nature. So, we need complicated rules. So, it is a myth that only Indian law is complicated — laws of other countries are complex too.

In India, it is the hide and seek format that we follow that makes law complex. We are used to living in a country where we differentiate between applied law and applicable law. It is time that all applicable laws are applied. This is something that is hurting the Indian economy. But today, the government is asking you to abide by the law that has been applicable for some years.

IT talk

Dr. Jürgen Morhard: We need rules. So is the case of IT-related businesses as well — data protection and various other regulations.

Countries like the US and China are at the two ends of the spectrum in this. This is being discussed at the G-20 level. Germany and many other countries are involved to find a middle ground in this.

In the end, we do not know if the US and China will be ready to address this.

Nevertheless, if two partners opt-out of the regulations or trade systems, still there are 200 other countries that have to move forward.

Work on this is being done. But now all discussions have been dropped in the shadow of COVID-19. This is an important topic in the G20 discussions.

Rajesh Nath: The potential in the IT sector is to integrate the German hardware with Indian software. That is where we see collaboration between both countries.

Germany has a lot of technological strength, it can be combined with the Indian workforce of IT/ITES services.

While China’s strength lies in mass production, India has never been an economy of mass production. Our economy of scale has been low. The biggest opportunity for India will be if we are able to move to Industrial 4.0 or automation.

We are moving from mass production to mass customisation — this is where India has the opportunity and can benefit.

Arbitration: A tricky affair

Rahul Oza: Like many other foreign companies, German companies also prefer arbitration outside of India. But I do not agree with this idea mainly because having an arbitration overseas just increases the cost as you end up taking an Indian arbitrator to that international arbitration centre. So, might as well conduct the process in India.

Avinash Bagdi: Investment safety is the major contention of the bilateral treaty between India and Europe which is under discussion. The discussion started somewhere in 2007 and went on till 2013 — later it was suspended. Recently, the discussion started again.

There is a certain clause in the treaty which is not accepted by either of the parties. For instance, India said it will allow arbitration outside of India only after foreign companies have exhausted the existing legal provisions in India.

This is one reason some disputes are prolonged. You provide an avenue where you need to fight and then you go for international arbitration. One such example is Vodafone.

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