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Forty-four countries sign historic African Union free trade agreement

Forty-four out of fifty-five African countries have signed a historic trade agreement aimed at paving the way for a liberalized market for goods and services across the continent.

The African Continental Free Trade Area (AfCFTA) was signed during the 10th Ordinary Session of African Union Heads of State summit held in the Rwandan capital, Kigali.

AfCFTA will form the world’s largest free trade area since the World Trade Organization which was formed in 1995. It will lead to creation of a trade bloc comprising 1.2 billion people with an overall GDP of over USD 2 trillion. It requires the members to remove tariffs from 90% of the goods to enable free access to goods and services across the continent. It is estimated that the agreement will increase the intra-African trade by 52% [United Nations Economic Commission for Africa] by 2022.

India –Africa Trade Relations

India and Africa share a long and rich history of interaction marked by cultural, economic and political exchanges. They both have long been trading partners and have deepened their trade and economic ties since the advent of globalization and liberalization. Both India and Africa aim at integrating their trade with the Global Value Chains (GVCs) and increase their bilateral trade, along with increasing their share in the world trade.

India has undertaken numerous initiatives to foster economic relations between the two regions. The Government of India launched the “Focus Africa” program in 2002 to strengthen trade ties with the African countries by identifying potential areas for bilateral trade and investment.

Another major initiative by India in recent years has been the India-Africa Forum Summits, held since 2008. These summits aim at strengthening the friendship and engagement between the two regions and are the official platform of Indo-Africa relations.

In 2009, India launched the Pan African e-Network Project (PAENP), which has a budget of approximately USD 125 million and is completely funded by India. It provides satellite connectivity, tele-education and tele-medicine services to the African countries and also supports e-commerce, e-governance, infotainment, resource mapping and various other services.

India has also provided Duty Free Tariff Preference Scheme (DFTPS) to Least Developed Countries (LDCs), which has progressively eliminated custom duties imposed by India on its imports from LDCs. This scheme offers a considerable access of Indian market to African LDCs, which has further helped in increasing the India-Africa trade volume.

India-Africa Trade in the Past Few Years:

Total trade between India and Africa increased considerably over the last decade. The total trade between India and Africa increased from USD 30.75 billion in 2007 to USD 58.77 billion in 2017[2]. India’s exports to Africa increased from USD 12.44 billion in 2007 to USD 23.52 billion in 2017, registering an impressive compound annual growth rate (CAGR) of 5.96 per cent[3]. Indian exports to Africa were at a peak in 2014 at USD 37.44 billion.

India’s imports from Africa also increased from USD 18.31 billion in 2007 to USD 35.25 billion in 2017, registering a CAGR of 6.14%, reaching a high of USD 37.44 billion during 2012.


Figure 1: India-Africa trade pattern over the past decade

Major Export and Import Partners

Table 1: Major African export and import partners or India in 2016-17

South Africa continued to be the leading export destination for India during 2017 with total exports to the country accounting for around 16 percent of India’s total exports to Africa. India’s other major export partners in 2017 include Kenya, Egypt, Tanzania and Nigeria. These regions together account for around 34 per cent of total Indian exports to Africa.

The value of imports from Nigeria to India stood at US$ 7.7 billion in 2017, making it the top import source for India. Nigeria accounts for about 22 per cent of India’s total imports from Africa. The other major importing countries from Africa include South Africa, Angola, Ghana and Botswana. These African countries together account for about 32 per cent of India’s total imports from Africa.

Major Export Items (Data from Trademap)

India’s key export in 2017 to Africa was petroleum products, which was around 17 per cent of the total exports. Other major export items included pharmaceutical products, vehicles other than railway or tramway, cereals and machinery and equipment. Figure 2 provides a break-up of the top 5 export items from India to Africa.

Note: HS Codes: 27: Petroleum Products; 30: Pharmaceutical Products; 87: Vehicles & Parts; 10: Cereals; 84: Machinery and Equipment

 Major Import Items

Among the key imports from Africa to India, petroleum products dominated India’s import basket in 2016-17, with a significant share of 52 per cent of India’s total imports from Africa. Other major import items include gems and jewellery, edible fruit and nuts, inorganic chemicals and organic/inorganic compounds, and copper and articles. Figure 3 provides a break-up of top 5 import items from Africa to India.

Note: HS codes: 27: Petroleum Products; 71: Gems & Jewellery; 8: Fruit & Nuts; 28: Chemicals & Metals; 26: Ores, slag and ash

TOP 5 Exporting Items (Data from Trademap):

TOP 5 Importing Items (Data from Trademap)

India-Africa Investment Relations

The attractiveness of Africa as an investment destination has increased due to its strong growth, improved business environment, increased rate of return on investment and a growing consumer demand. Additionally, Indian investment in Africa is also driven by concerns on domestic food and energy security and a growing demand for natural resources.

India has undertaken significant investment initiatives in recent years to strengthen its strategic partnership with Africa. India has become one of the largest investors in Africa. The major investors include Indian Multinational Enterprises (MNE’s), Indian construction and telecommunications companies, and several auto industry majors. These investors have been participating in diverse sectors including telecommunications, energy, computer services, power, automobile, infrastructure, etc. in Africa. In addition, Exim Bank of India has in place Lines of Credit (LOC) extended to a number of institutions/agencies in Africa. The total number of operative LOCs to Africa stood at 154 as on December 31st, 2016 amounting to US$ 7.7 billion as extended to 44 countries.

Between 2010 and 2014, investments from India to Africa amounted increased from USD 11.9 billion to USD 15.2 billion. Among the African nations, Mauritius is the leading country in terms of receiving highest FDI inflows, followed by South Africa, Mozambique, Nigeria and Libya.

Mauritius is also the top African emitter of FDI into India. It is so due to the nation’s advantageous tax conditions and suitable financial facilities.

Consequences on India of This Recent Free Trade Policy

Africa and India are significant trade partners. In 2016, India accounted for 4.67%[1] of total African imports and 7.5%[2] of total African exports. So, along with the creation of AfCFTA, if the current tariff rates for Indian products in African countries and vice versa remain same, the trade value will see a dip due to trade diversion as there would be an increase in intra-Africa trade and Indian products will be at a relative disadvantage. So, in the short term, India might need to lower its tariffs for African goods in order to get a reciprocal deal from African countries, which might help India export more to Africa.

However, India has proposed to sign a Free Trade Agreement with Africa, which will be negotiated with African countries as a whole and will lead to the creation of a unified African market for India. This will help India trade uniformly with African countries and thus lead to a further increase in the India-Africa bilateral trade.

Looking at a broader picture, AfCFTA offers great opportunities for Indian firms and investors. It provides a potentially larger, unified, simplified and robust African market for India to deal with. Engagement with India can also help Africa accelerate the process of development by addressing supply-side constraints and bottlenecks and building or moving up the value chains. Since AfCFTA is expected to drive the structural transformation of African economies, i.e. transition from low productivity and labour-intensive activities to higher productivity and skill-intensive industrial activities, it will lead to growth of manufacturing sector and will in turn provide an opportunity to Indian corporates to invest in African countries.

So, it is only after the establishment of AfCFTA would Africa and India be able to effectively enter into an economic integration partnership implying market access reciprocity. This increased trade and investment could even help to rebalance the composition of traded products by presenting opportunities to exploit value chains and enhance the structural transformation.

Effect on corporates and Intueri’s offerings

The implementation of AfCFTA is going to bring its own set of challenges for companies wanting to export their items to Africa or importing from there. Also, organizations that want to invest in Africa or expand their operations there by introducing their products in the African market need to understand the implications of AfCFTA and the resultant change in demand of their product due to increased intra-Africa trade.

Intueri Consulting LLP, with its deep understanding of GVCs and the various underlying global macro-economic, socio-cultural, geo-political and regulatory frameworks, can help organizations understand implications of the implementation of AfCFTA and mitigate expected risks to safeguard their business plans. It can advise organizations and frame strategies to ensure that they utilize the opportunities AfCFTA presents to increase their engagement with the African market.

© INTUERI CONSULTING LLP 2018. All rights reserved.
Disclaimer: This is only a write up and not intended for application to any specific circumstance without seeking professional advice. Intueri disclaims all liability for any loss caused due to any such act/ omission.

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