A Brief Note on INDIA-CHILE ECONOMIC RELATIONS

February 2009

Prepared by

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 have similar views on a number of regional and international issues, including a free and fair trading regime under the Doha Development Round. Chile supports Indias inclusion as a permanent member in an expanded UN Security Council. A Preferential Trade Agreement was signed between the two countries in March 2006 and is in force since September 2007, to be expanded into a Comprehensive Economic Cooperation Agreement in the future. During President Lagoss visit, agreements on agricultural cooperation and sanitary and phytosanitary issues were also signed.

ECONOMY OF CHILE

An Overview Chile has a population of 16.5 million, with high human development indicators. Its GDP at purchasing power parity terms is US$ 253 billion, and per capita income in PPP terms is $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 economic liberalization 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 and enjoys high sovereign bond ratings. A key policy has been the rule-based countercyclical fiscal policy, which mandates government savings during times of expansion. This serves the country well when prices of commodities fluctuate. Copper alone accounts for one-third of government revenue, and commodities comprise three-quarters of all exports. Chile is the worlds largest producer and exporter of copper. Chiles industrial production and commercial activity has declined sharply during January 2009 and analysts expect recession or flat growth for the current year. The economy contracted for the first time in January after 15 years. A $4 billion stimulus package has been announced in January to counter 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

11

12

10

Per cent

6.3 6 4.1 3.6

2. 6

8 5.7 5.5 6

6.1 5.2

4.1 5.6 3.2 4.3

1. 9

3.9 2

0 2003 2004 2005 Year GDP Agriculture Industry Services 2006 2007

Source: LatinFocus

Table I - Select economic indicators 2008 est. Value US$ 252.9 billion 4% US$ 15,400 4.8% 50.5% 44.7%

S No GDP 1. Purchasing power parity 2. 3. 4. Real GDP growth rate Per Capita purchasing power parity Composition by sector: Agriculture Industry Services

Source: CIA World Factbook

5.1 2.9

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Table II - Industrial and agricultural production Industries Copper Other minerals Foodstuffs Fish processing Iron and steel Wood and wood products Transport equipment Cement Textiles Agriculture Grapes Apples Pears Onions Wheat Corn Oats Peaches Garlic Asparagus

Table III Chiles global trade relationships Principal export destinations, 2008 China US Japan Netherlands South Korea Italy
Source: CIA World Factbook

Per cent share in exports 14.8 12.5 10.5 5.8 5.7 5.1

Principal import sources, 2008 US China Brazil Argentina

Per cent share in imports 16.7 11.2 10.3 9.9

Exports Chile 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 agricultural products, particularly fruits and vegetables. Its long coastline means that it has a number of agri-climatic zones, and being in the southern hemisphere impart it the advantage that its seasons complement traditional seasons in the northern hemisphere with respect to fruits and vegetables. While fertile land constitutes just 2.6% of total land, it has been able to effectively utilize agri inputs, agri investments, technology and training to raise productivity. Policies have been geared towards meeting international quality and food standard norms. A major success story has been the branding and rising popularity of Chilean wine. Chiles top 5 export destinations include three Asian countries, and the Asian region is its largest trading partner. Imports Chiles imports aggregated $59.17 billion in 2008. It thus enjoys a comfortable balance of trade surplus. While its main import partners are China and the US, neighboring countries also have significant shares. This implies that Chile has been able to leverage local 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 Chile Chile has been accorded the highest sovereign bond ratings in South America due to stable and sound policies. As such, its FDI inflows have expanded dramatically over 2007 to double from the previous year.

Table IV - Total annual FDI flows in US$ million 2004 2005 2006 2007

FDI Flows US$ million Inward Outward

Source: World Investment Report

1990-2000 (Annual average) 3393 7173 6984 7358 14457 1205 1563 2183 2876 3830

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INDIA AND CHILE

Introduction India and Chile are committed to increasing economic relations, as is evidenced by the number of high-level visits between the two countries since 2005. Both Ministers of State for External Affairs have visited Chile in 2005 and 2006 respectively. In April 2008, bilateral relations witnessed further boost with the visit of HE Smt Pratibha Devisingh Patil, President of India, to Chile. She met with local academics, parliamentarians, and industrialists. The areas identified for closer cooperation were civil aviation, science and technology, sports, and research in Antarctica. Investment opportunities were also stressed.

Bilateral trade Indias overall trade with Chile expanded from $586.65 million in 2005-06 to $2093.35 million 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 the export level is still far below potential and Chile forms a minuscule proportion of Indias total 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 $1.8 billion. As per the PTA of 2006, India offers preferential tariffs on 178 Chilean items while Chile gives tariff concessions on 296 Indian items. Table V - Indias trade with Chile In US$ million
2008-09 (Apr-Sep) 248.58

\Year 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 EXPORT %Growth India's Total Export %Growth %Share IMPORT %Growth India's Total Import %Growth 0.13 156.73 63,842.55 83.02 111.20 33.95 152.15 36.82 375.02 146.48 249.61 -33.44

83,535.95 103,090.54 126,262.67 162,983.90 30.85 0.13 345.57 120.48 23.41 0.15 434.50 25.73 22.48 0.30 1,916.34 341.05 29.08 0.15 1,843.74 -3.79

96,183.25

0.26 982.74

78,149.11 111,517.44 149,165.73 185,604.10 251,562.26 42.70 33.76 24.43 35.54

162,319.89

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%Share TOTAL TRADE %Growth India's Total Trade %Growth %Share

0.20 239.75

0.31 456.78 90.52

0.29 586.65 28.43

1.03 2,291.36 290.59

0.73 2,093.35 -8.64

0.61 1,231.82

141,991.66 195,053.38 252,256.27 311,866.78 414,546.15 37.37 0.17 0.23 29.33 0.23 23.63 0.73 32.92 0.50

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

Indias exports to Chile primarily include inorganic chemicals, vehicle parts, iron and steel and products, leather, and gems and jewelry. Exports are diversified with the largest 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, slag and 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 small values. It is evident that given the strong industrial profile of both countries, as well as synergies arising from large number of agri-climatic zones in both countries, there is high potential in bilateral trade. The two nations should use the period of the economic downturn to consolidate on existing trade and build avenues for future trade. A target of $5 billion trade by 2014 should be set, with the concomitant target of expanding and diversifying the trade basket. The two economies can benefit from each others macroeconomic experiences by sharing data and policy interventions, especially during the crisis period. Chiles sound macroeconomic management and commitment to liberalization has transformed it into one of most efficient and business-friendly environments in the region, with stable and strong macroeconomic fundamentals. The Heritage Foundation ranks it as 11th in its 2009 Index of Economic Freedom, citing its transparent and efficient regulatory systems. Similarly, Indias calibrated approach to reforms has helped protect it from the worst of the economic crisis. The chief barriers to trade that have been cited are distance, lack of information, poor connectivity 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, while Chiles trading agreements can help India access other markets in South America. Chile has 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 the Americas which seeks to create a single FTA for the region.
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Some examples of commercial exchanges: Tata Consultancy Services acquired Chilean BPO firm, Comicrom for $23 million in 2005. It has recruited 1250 employees in the country. Pharmaceutical company Claris Lifesciences has set up offices in Chile to market its brands. Jain Irrigation Company has a plant in Chile. Automaker Maruti Suzuki exports its top passenger vehicles to Chile. JSW Steel has tied up with Chilean company Minera Santa Fe for developing iron ore mines with an investment of $500 million.

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CII AND CHILE

CIIs institutional partners in Chile Chile-India Business Forum Sociedad De Fomento Fabril FG (SOFOFA)

CII initiatives with Chile H.E. Dr Ricardo Lagos, President of Chile, visited India along with a very high level official and business delegation. CII organised business sessions in honour of President Lagos on 19th & 20th January, 2005 in Mumbai and New Delhi respectively. A seminar on Chile-India: Opportunities for Business was held in New Delhi for the 60-member business delegation. The Confederation of Indian Industry (CII) and Sociedad De Fomento Fabril FG (SOFOFA) launched the Chile-India Business Forum to deepen ties and facilitate regular contacts between their respective members. H.E. Mr Alejandro Ferreiro, Minister of Trade and Commerce, Chile participated in the Partnership Summit 2007, held in Bangalore from 17-19 January. The Minister was here with a large business delegation from the IT sector, to promote Chile as an outsourcing destination for global Indian IT companies, in their efforts to reach out to the American market. CII accompanied President Patil on a historic first-time visit ever of a business delegation accompanying an official presidential visit. In Santiago, Chile India Chamber of Commerce organised a business interaction with the CII delegation and received the Hon. President. The business meetings were a success as member companies discussed JVs and investments especially in Mining and ITES and IT education sector. NIIT tied up with yet another company for IT education

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CIIS RECOMMENDATIONS AND THE WAY FORWARD

A holistic examination of the potential of trade would include a partnership on services where India can provide expertise, and on agriculture, where Chile has acknowledged strengths. Besides, sectors of mutual interest in manufacturing such as auto components, electrical machinery, textiles, leather and others should be identified. Chile should look at providing access to the Indian services sector including IT. The sectors of its interest could be education, healthcare, training and skill development, software services, etc. This might involve mutual recognition of professional degrees, facilitation of travel and work permits, access to higher education, and greater movement of personnel. Chile is particularly interested in positioning itself as an outsourcing hub with the help of Indian companies. While TCS, Evaluserve, NIIT and other companies already have operations in the country, these can be substantially stepped up. In addition, IT education and training as well as language training could be an area of opportunity for Indian companies. India needs to learn about raising agricultural productivity from Chile. Best practices in commercial agriculture management, supply chain linkages including cold storage, warehousing and transport, setting up a robust infrastructure for meeting international quality and sanitary and phytosanitary norms, and strengthening the link between agriculture and industry can be focus areas. Experts from Chile could provide consultation, advice and handholding to Indian corporates as well as government in these areas. For Chile also, this would be a profitable area to consider as Indias natural advantages 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 high wastage in the supply chain. With the help of Chile, India can expand its international agricultural activities. The two countries need to actively explore newer areas of cooperation in areas such as Mining, Manufacturing, Railways, and Textiles. Indias engineering goods, machinery, equipment and machine tools may find a good market in Chile. Defence production and trade is also an area of high potential. The two countries need to expedite the proposed Comprehensive Economic Cooperation Agreement that can cover protection of bilateral investments, services, and education.

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Trade facilitation issues such as direct shipping, aviation links, and non-tariff barriers need to be addressed. A protocol on trade and business facilitation should be set in place, which could include agreements on rule of origin measures, valuation and standards. Such a protocol could facilitate certification by industry associations for easier and faster implementation. Regarding transportation, direct sea links are absent, and shipments need to go through ports in West Asia or East and South East Asia. Strategic partnerships between major carriers could be created and incentives may need to be given to encourage carriers and shipping lines. For movement of fruits and vegetables, it would be necessary to set up faster air linkages between the two countries. Customs facilitation and mutual recognition of standards would also have to be part of a comprehensive agreement. Although Chile's weighted average tariff rates are low, it has set high approval requirements and stringent sanitary and phytosanitary regulations on imports of agricultural products and processed food. It also has rules for protection of intellectual property rights which add to transaction costs. India also needs to further lower its peak tariffs to ASEAN levels as long envisaged, and address tariffs to agriculture trade in line with its development imperatives. A bilateral Trade and Investment Promotion Forum could expedite identification and harnessing of potential economic linkages. Such an institutionalised Forum should have the active participation of both governments as well as industry leaders in key sectors. A Chile-India Business Forum was set up between CII and Sociedad De Fomento Fabril FG in 2005. Continuous interaction and dialogue between governments and industry of both countries will create further opportunities to increase bilateral trade and economic cooperation. It is suggested that trade offices be opened by industry associations such as CII with government support.

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