A Brief Note India-chile

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A Brief Note on

INDIA-CHILE ECONOMIC RELATIONS

February 2009

Prepared by


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Introduction

The bilateral relationship of India and Chile was reinvigorated after the visit of HE Mr

Ricardo Lagos, President of Chile, to India in January 2005. The two countries havesimilar views on a number of regional and international issues, including a free and fairtrading regime under the Doha Development Round. Chile supports Indias inclusion asa permanent member in an expanded UN Security Council.

A Preferential Trade Agreement was signed between the two countries in March 2006and is in force since September 2007, to be expanded into a Comprehensive EconomicCooperation Agreement in the future. During President Lagoss visit, agreements onagricultural cooperation and sanitary and phytosanitary issues were also signed.


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Confederation of Indian Industry

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ECONOMY OF CHILE

An Overview

Chile has a population of 16.5 million, with high human development indicators. Its GDPat purchasing power parity terms is US$ 253 billion, and per capita income in PPP termsis $15,400.

The country has strong market economy policies in place and is heavily export-oriented.Following a military government in 1990, the democratic regime continued economicliberalization with sound policies. From 1991-97, the economy grew at an average of 8%per year.

An export crunch lowered the growth rates for several years, and since 2000, GDP has

expanded at the slower pace of 4%. Nevertheless, Chile remains a strong economy andenjoys high sovereign bond ratings. A key policy has been the rule-based countercyclicalfiscal policy, which mandates government savings during times of expansion. Thisserves the country well when prices of commodities fluctuate. Copper alone accounts forone-third of government revenue, and commodities comprise three-quarters of allexports.

Chile is the worlds largest producer and exporter of copper. Chiles industrial productionand commercial activity has declined sharply during January 2009 and analysts expectrecession or flat growth for the current year. The economy contracted for the first time inJanuary after 15 years. A $4 billion stimulus package has been announced in January tocounter the impact of the economic crisis, while interest rates have been lowered by

3.5%.

(Inputs from CIA World Factbook and news reports)


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GDP Growth 2003-2007

Source: LatinFocus

Table I - Select economic indicators

2008 est.S No GDP Value

1. Purchasing power parity US$ 252.9 billion

2. Real GDP growth rate 4 %3. Per Capita purchasing power parity US$ 15,4004. Composition by sector:

AgricultureIndustryServices

4.8%50.5%44.7%

Source: CIA World Factbook

3.9

65.6

4.3

5.1

2.6

11

7

1.9

3

4.1

5.7

4.1

3.22.9

3.6

5.5

6.3

5.2

6.1

0

2

4

6

8

10

12

2003 2004 2005 2006 2007

Year

Percent

GDP Agriculture Indus try Se rvice s


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Table II - Industrial and agricultural production

Industries AgricultureCopper GrapesOther minerals ApplesFoodstuffs Pears

Fish processing OnionsIron and steel WheatWood and wood products CornTransport equipment OatsCement PeachesTextiles Garlic

Asparagus

Table III Chiles global trade relationships

Principal exportdestinations, 2008 Per cent sharein exports Principal importsources, 2008 Per cent sharein importsChina 14.8 US 16.7US 12.5 China 11.2Japan 10.5 Brazil 10.3Netherlands 5.8 Argentina 9.9South Korea 5.7Italy 5.1Source: CIA World Factbook

ExportsChile has high export orientation with aggregate exports of $69.1 billion in 2008, or about

40% of GDP. The country has positioned itself well as an exporter of agriculturalproducts, particularly fruits and vegetables. Its long coastline means that it has a numberof agri-climatic zones, and being in the southern hemisphere impart it the advantage thatits seasons complement traditional seasons in the northern hemisphere with respect tofruits and vegetables. While fertile land constitutes just 2.6% of total land, it has beenable to effectively utilize agri inputs, agri investments, technology and training to raiseproductivity. Policies have been geared towards meeting international quality and foodstandard norms. A major success story has been the branding and rising popularity ofChilean wine.

Chiles top 5 export destinations include three Asian countries, and the Asian region isits largest trading partner.

ImportsChiles imports aggregated $59.17 billion in 2008. It thus enjoys a comfortable balanceof trade surplus. While its main import partners are China and the US, neighboringcountries also have significant shares. This implies that Chile has been able to leveragelocal products for value-addition for export purposes.

Chile has the largest number of trade agreements in place in the world.


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FDI in ChileChile has been accorded the highest sovereign bond ratings in South America due tostable and sound policies. As such, its FDI inflows have expanded dramatically over2007 to double from the previous year.

Table IV - Total annual FDI flows

in US$ millionFDI FlowsUS$ million

1990-2000(Annual average)

2004 2005 2006 2007

Inward 3393 7173 6984 7358 14457Outward 1205 1563 2183 2876 3830

Source: World Investment Report


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INDIA AND CHILE

Introduction

India and Chile are committed to increasing economic relations, as is evidenced by thenumber of high-level visits between the two countries since 2005. Both Ministers of Statefor External Affairs have visited Chile in 2005 and 2006 respectively.

In April 2008, bilateral relations witnessed further boost with the visit of HE Smt PratibhaDevisingh Patil, President of India, to Chile. She met with local academics,parliamentarians, and industrialists. The areas identified for closer cooperation were civilaviation, science and technology, sports, and research in Antarctica. Investmentopportunities were also stressed.

Bilateral trade

Indias overall trade with Chile expanded from $586.65 million in 2005-06 to $2093.35million in 2007-08. However, trade has been fluctuating with the price of commodities,particularly copper.

Indias exports to Chile have gone up by almost three times since 2003-04. But theexport level is still far below potential and Chile forms a minuscule proportion of Indiastotal exports.

Indias imports from Chile have risen by more than ten times in the same period,quadrupling between 2005-06 and 2006-07. However, the next year, imports moderated

somewhat to $1.8 billion.

As per the PTA of 2006, India offers preferential tariffs on 178 Chilean items while Chilegives tariff concessions on 296 Indian items.

Table V - Indias trade with Chile In US$ million

\Year 2003-2004 2004-2005 2005-2006 2006-2007 2007-20082008-09

(Apr-Sep)

EXPORT 83.02 111.20 152.15 375.02 249.61 248.58

%Growth 33.95 36.82 146.48 -33.44

India's Total Export 63,842.55 83,535.95 103,090.54 126,262.67 162,983.90 96,183.25

%Growth 30.85 23.41 22.48 29.08

%Share 0.13 0.13 0.15 0.30 0.15 0.26

IMPORT 156.73 345.57 434.50 1,916.34 1,843.74 982.74

%Growth 120.48 25.73 341.05 -3.79

India's Total Import 78,149.11 111,517.44 149,165.73 185,604.10 251,562.26 162,319.89

%Growth 42.70 33.76 24.43 35.54


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%Share 0.20 0.31 0.29 1.03 0.73 0.61

TOTAL TRADE 239.75 456.78 586.65 2,291.36 2,093.35 1,231.82

%Growth 90.52 28.43 290.59 -8.64

India's Total Trade 141,991.66 195,053.38 252,256.27 311,866.78 414,546.15

%Growth 37.37 29.33 23.63 32.92%Share 0.17 0.23 0.23 0.73 0.50

Source: Exports Import Databank, Ministry of Commerce & Industry, Government of India

Indias exports to Chile primarily include inorganic chemicals, vehicle parts, iron andsteel and products, leather, and gems and jewelry. Exports are diversified with thelargest component of inorganic chemicals at about one-fifth of the total.

On the import side, items of trade are heavily concentrated in the category of ores, slagand ash, of which India imported $1.7 billion in 2007-08. $1.67 billion was copper ore,while other ores made up the remaining. India also imported about $20 million of fruits

and nuts from Chile, while the rest of the imports are highly diversified and of very smallvalues.

It is evident that given the strong industrial profile of both countries, as well as synergiesarising from large number of agri-climatic zones in both countries, there is high potentialin bilateral trade.

The two nations should use the period of the economic downturn to consolidate onexisting trade and build avenues for future trade. A target of $5 billion trade by 2014should be set, with the concomitant target of expanding and diversifying the tradebasket.

The two economies can benefit from each others macroeconomic experiences bysharing data and policy interventions, especially during the crisis period. Chiles soundmacroeconomic management and commitment to liberalization has transformed it intoone of most efficient and business-friendly environments in the region, with stable andstrong macroeconomic fundamentals. The Heritage Foundation ranks it as 11 th in its2009 Index of Economic Freedom, citing its transparent and efficient regulatory systems.Similarly, Indias calibrated approach to reforms has helped protect it from the worst ofthe economic crisis.

The chief barriers to trade that have been cited are distance, lack of information, poorconnectivity of air and shipping lines, language, unfamiliarity with local trade regulations,etc. However, these factors have not deterred robust trade between Chile and key

exporting nations in Asia.

Both countries should view each other as stepping stones for their respective regions.India is geo-strategically situated at the center of East, West and Central Asia, whileChiles trading agreements can help India access other markets in South America. Chilehas FTAs with Canada, USA, EU, and Mexico and is a member of Mercosur and Latin

America Integration Association. It is a participant in the Free Trade Area of theAmericas which seeks to create a single FTA for the region.


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Some examples of commercial exchanges:

x Tata Consultancy Services acquired Chilean BPO firm, Comicrom for $23 millionin 2005. It has recruited 1250 employees in the country.

x Pharmaceutical company Claris Lifesciences has set up offices in Chile to marketits brands.

x Jain Irrigation Company has a plant in Chile.

x Automaker Maruti Suzuki exports its top passenger vehicles to Chile.

x JSW Steel has tied up with Chilean company Minera Santa Fe for developingiron ore mines with an investment of $500 million.


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CII AND CHILE

CIIs institutional partners in Chile

x Chile-India Business Forumx Sociedad De Fomento Fabril FG (SOFOFA)

CII initiatives with Chile

x H.E. Dr Ricardo Lagos, President of Chile, visited India along with a very highlevel official and business delegation. CII organised business sessions in honourof President Lagos on 19th & 20th January, 2005 in Mumbai and New Delhirespectively. A seminar on Chile-India: Opportunities for Business was held inNew Delhi for the 60-member business delegation.

x The Confederation of Indian Industry (CII) and Sociedad De Fomento Fabril FG(SOFOFA) launched the Chile-India Business Forum to deepen ties and facilitateregular contacts between their respective members.

x H.E. Mr Alejandro Ferreiro, Minister of Trade and Commerce, Chile participatedin the Partnership Summit 2007, held in Bangalore from 17-19 January. TheMinister was here with a large business delegation from the IT sector, to promoteChile as an outsourcing destination for global Indian IT companies, in their effortsto reach out to the American market.

x CII accompanied President Patil on a historic first-time visit ever of a businessdelegation accompanying an official presidential visit. In Santiago, Chile IndiaChamber of Commerce organised a business interaction with the CII delegationand received the Hon. President. The business meetings were a success asmember companies discussed JVs and investments especially in Mining andITES and IT education sector. NIIT tied up with yet another company for ITeducation


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CIIS RECOMMENDATIONS AND THE WAY FORWARD

x A holistic examination of the potential of trade would include a partnership onservices where India can provide expertise, and on agriculture, where Chile hasacknowledged strengths. Besides, sectors of mutual interest in manufacturingsuch as auto components, electrical machinery, textiles, leather and othersshould be identified.

x Chile should look at providing access to the Indian services sector including IT.The sectors of its interest could be education, healthcare, training and skilldevelopment, software services, etc. This might involve mutual recognition ofprofessional degrees, facilitation of travel and work permits, access to highereducation, and greater movement of personnel.

x Chile is particularly interested in positioning itself as an outsourcing hub with thehelp of Indian companies. While TCS, Evaluserve, NIIT and other companiesalready have operations in the country, these can be substantially stepped up. Inaddition, IT education and training as well as language training could be an areaof opportunity for Indian companies.

x India needs to learn about raising agricultural productivity from Chile. Bestpractices in commercial agriculture management, supply chain linkages includingcold storage, warehousing and transport, setting up a robust infrastructure formeeting international quality and sanitary and phytosanitary norms, andstrengthening the link between agriculture and industry can be focus areas.

Experts from Chile could provide consultation, advice and handholding to Indiancorporates as well as government in these areas.

For Chile also, this would be a profitable area to consider as Indias naturaladvantages in climate and other conditions are very different from those of Chile.India is the worlds second largest producer of fruits and vegetables, but has highwastage in the supply chain. With the help of Chile, India can expand itsinternational agricultural activities.

x The two countries need to actively explore newer areas of cooperation in areassuch as Mining, Manufacturing, Railways, and Textiles. Indias engineering

goods, machinery, equipment and machine tools may find a good market inChile. Defence production and trade is also an area of high potential.

x The two countries need to expedite the proposed Comprehensive EconomicCooperation Agreement that can cover protection of bilateral investments,services, and education.


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x Trade facilitation issues such as direct shipping, aviation links, and non-tariffbarriers need to be addressed. A protocol on trade and business facilitationshould be set in place, which could include agreements on rule of origin

measures, valuation and standards. Such a protocol could facilitate certificationby industry associations for easier and faster implementation.

Regarding transportation, direct sea links are absent, and shipments need to gothrough ports in West Asia or East and South East Asia. Strategic partnershipsbetween major carriers could be created and incentives may need to be given toencourage carriers and shipping lines. For movement of fruits and vegetables, itwould be necessary to set up faster air linkages between the two countries.

Customs facilitation and mutual recognition of standards would also have to bepart of a comprehensive agreement. Although Chile's weighted average tariffrates are low, it has set high approval requirements and stringent sanitary andphytosanitary regulations on imports of agricultural products and processed food.It also has rules for protection of intellectual property rights which add totransaction costs. India also needs to further lower its peak tariffs to ASEANlevels as long envisaged, and address tariffs to agriculture trade in line with itsdevelopment imperatives.

x A bilateral Trade and Investment Promotion Forum could expedite identificationand harnessing of potential economic linkages. Such an institutionalised Forumshould have the active participation of both governments as well as industryleaders in key sectors. A Chile-India Business Forum was set up between CIIand Sociedad De Fomento Fabril FG in 2005.

x Continuous interaction and dialogue between governments and industry of bothcountries will create further opportunities to increase bilateral trade and economiccooperation. It is suggested that trade offices be opened by industry associationssuch as CII with government support.

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A Brief Note India-chile