Update Country Report Curaçao 28 Nov 2018

On November 30th-December 1st the Indian prime minister, Narendra Modi, will attend the G20 summit in Buenos Aires, the capital of Argentina, marking his third ever visit to the Latin America and Caribbean (LAC) region since taking office in 2014. Notwithstanding Mr Modi's own active approach to foreign policy, India's political and strategic engagement with LAC-with the exception of Brazil-has largely stagnated in recent years. Instead, trade and investment form the bulwark of the India-LAC relationship. Although strong economic complementarities will underpin growing bilateral economic ties, in the absence of a larger strategic agenda, India's interactions with the region will mostly remain on an ad hoc basis.

A significant hindrance in improving India-Latin America ties is the lack of interest expressed by both sides with regards to the relationship; India's diplomatic ties with most of LAC have shown no meaningful progress in recent years. By contrast, a number of Latin American countries are part of China's Belt and Road initiative, pushing them closer to that rising power. Countering China's influence has been a key pillar of India's foreign policy in recent years; for instance, India has made efforts to expand its presence in Africa, including through investment and commercial outreach.This is also linked to India's desire to expand its commercial footprint in the continent, but efforts (such as a credit line to the Seychelles for defence and maritime security co-operation) indicate that India does have a deeper diplomatic interest in Africa. India also announced in early 2018 that it was opening 18 new embassies in Africa; once the process is completed, India will have a diplomatic presence in 47 African countries.

Although India proposed opening three more embassies in LAC in 2010, it has yet to make good on this promise. This is linked partly to financial constraints, which inhibit India's capacity to match China's global sway. The Indian government has therefore carefully calibrated its response to China's growing global influence, largely limiting its diplomatic outreach to its immediate neighbourhood, the Association of South-East Asian Countries (ASEAN) countries such as Vietnam, and to countries in Eastern Africa. India's influence is also limited by capacity constraints in its diplomatic corps, an issue that cannot be quickly resolved.

Trade is limited by tariffs

Given that political engagement between India and LAC has largely been relegated to the realm of 'South-South' co-operation, bilateral ties have primarily been defined by mutual economic interest-in particular, trade. In 2005 total trade between India and Latin America amounted to US$5.2bn. Despite a number of challenges, such as the lack of direct shipping routes, bilateral trade flows have grown exponentially since then, and in 2017 they stood at US$36bn. By sector, LAC exports to the Indian subcontinent are largely focused on natural resources and primary products, including crude oil and biofuels, copper and other minerals, sugar, soy, and vegetable oil. Meanwhile, Indian exports to the LAC region are comprised largely of engineering goods (including auto parts), chemicals, pharmaceuticals, textiles and refined oil products.

Although India-LAC trade continues to be concentrated in the three largest economies in the region, namely Argentina, Brazil and Mexico, India has made significant advances with subregional blocs, as well as with individual countries in recent years. India has already entered into preferential trade agreements with Mercosur (a customs union comprising Argentina, Brazil, Paraguay and Uruguay) and Chile, and it is in the midst of negotiating free-trade agreements (FTAs) with Mexico and Peru.

Nonetheless, despite a significant improvement in bilateral commercial ties, India is far from being a major player in LAC. For context, in 2017 trade flows between India and LAC accounted for about 5% of India's total trade and only about 1.8% of LAC's total trade. Meanwhile, trade flows between China and LAC, which amounted to about US$280bn in 2017, accounted for 6% of China's total trade and 14% of LAC's total trade. In this regard, progress on FTAs will be essential to facilitate greater trade growth. High tariffs in particular pose a major impediment: according to an Inter-American Development Bank report, in 2010 India's tariffs on Latin American agricultural goods were approximately 65% (compared with China's 12.5%), while Latin American tariffs on Indian manufactured products averaged 9.8% (compared with the OECD average of 4-6%). Although Latin America has made strides in tariff reduction since 2010, India's progress has been much slower. A stable environment for trade policy, generated through FTAs, would also be of mutual benefit insofar as it would provide businesses with much-needed predictability.

Potential for investment is high

India's commercial relationship with LAC also pales in comparison with China's in terms of foreign direct investment (FDI). According to the Export-Import Bank of India, Indian FDI in LAC between 2011 and 2017 is estimated to be around US$15bn. This figure overestimates the scale of investment tied to real economic activity, as a significant share of this investment is in offshore financial centres (OFCs) like the British Virgin Islands and Cayman Islands. Excluding these countries, the stock of Indian investment is reduced to under US$4bn, although it is possible that some Indian investment in the region is being routed through the OFCs. By contrast, Chinese FDI in LAC is estimated to be over US$50bn.

The bulk of Indian investment in LAC has been commodities driven: according to the Export-Import Bank of India, agriculture and mining had the largest sectoral share of Indian FDI in LAC as at November 2017. Indian companies like ONGC Videsh (an Indian state-owned oil and gas company) also enjoy major equity relationships in energy with companies in Brazil, Colombia and Venezuela. That being said, Indian firms do have a significant presence in LAC's automobiles (Tata Motors), pharmaceuticals (Torrent Pharmaceuticals and Glenmark Pharmaceuticals) and information technology (Infosys and Tata Consultancy Services) sectors.

FDI from Latin American countries in India is estimated to be around US$3bn, according to India's Ministry of External Affairs. Although multilatinas (Latin American multinational corporations) have raised their global profiles significantly over the past two decades, they tend to be disproportionately engaged in the energy, mining and agricultural sectors-all sectors in which India has regulatory restrictions on investment by foreign firms.

In terms of development financing and bilateral lending, China's involvement in the region is significantly higher. The Inter-American Dialogue, an American think tank, estimates that Chinese lending to the region is over US$150bn, in contrast to a meagre US$500m provided by India in project financing. This cannot simply be attributed to the smaller scale of development financing by India, as India has extended lines of credit worth over US$7.7bn in Africa.

Commerce will continue to lead engagement

Looking ahead, there is considerable potential for commercial relations between India and LAC to develop, especially as a US-China trade war disrupts existing global trade networks. Structural factors also favour greater economic integration. Both India and LAC have a growing population of middle-class consumers and the two regions enjoy a high degree of complementarity in the energy, natural resources, pharmaceuticals, and business services sectors. Challenges to greater economic integration stem from differences in business and trade culture, as well as from the geographic distance and concomitant problems of connectivity.

In addition, the two main groupings under the auspices of which Indian leaders regularly interact with their counterparts from LAC - the non-aligned movement (NAM) and BRICS (Brazil, Russia, India, China and South Africa)-are under threat of becoming irrelevant. In 2016 Mr Modi became the first Indian prime minister since 1979 to not attend a summit-level meeting of the NAM. The decision was widely interpreted as a sign of India's growing closeness with the US and strengthened the perception that the NAM is becoming irrelevant. The BRICS grouping may face a similar fate. Brazil's right-wing president-elect, Jair Bolsonaro, was highly critical of China during his campaign and is likely to view BRICS and the concept of South-South co-operation unfavourably, owing to the association with the left-wing Partido do Trabalhadores administration that was in power in Brazil from 2003 to 2016.

Notwithstanding India's lack of strategic interest in LAC, as well as uncertainty about inter-regional groupings, India's importance in LAC will continue to grow. This will be driven an evolving global economic landscape in which India becomes an increasingly important source of trade and investment. However, progress on these fronts will in all likelihood be gradual, and on a country-by-country basis, driven by pressure from business lobbies. India will not actively pursue the kind of cheque-book diplomacy favoured by China, which suggests that India's presence in the region will remain well below potential for the foreseeable future.