Western Europe Has Long Been an Important Source of Finance into India. Investment Is Now Starting to Flow in the Opposite Direction, as Indian Firms Acquire Manufacturing and Service-Sector Assets in Europe

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There are more dimensions to life than mundane economics, however loathe some economists may be to acknowledge it. For India, Europe matters not only for good reasons of economics but also in terms of strategic interest and for reasons of culture. I will focus on the reasons mundane, in the full knowledge that there are others better equipped to deal with the subtler dimensions.

Western Europe has always been an important trading partner and source of overseas financing for India's trade deficits. In times past, the latter took the form of development assistance; as we shed the burden of underdevelopment, the financing source has switched from aid to private investment - both direct and portfolio. Indian companies are also investing in manufacturing and service-sector assets in Europe, making investment, like trade, the two-way street that it perhaps always ought to be.

Viewed from the European end, the Indian market is yet small - just 1.5 per cent of imports into Europe and 1.9 per cent of its exports. However, from the Indian perspective, Europe looms larger. In fiscal 2005/06 (April to March), Western Europe bought 22 per cent of India's exports and supplied 20 per cent of India's imports, leaving a trade balance in favour of Europe of [euro]3.6bn. By geographic region, Western Europe was the single largest block in India's trade. North America absorbed 18 per cent of Indian exports and supplied six per cent of India's imports. With East Asia, both exports and imports were 16 per cent of India's global totals; with South East Asia it was ten and seven per cent for exports and imports respectively.

Western Europe is particularly important for certain important categories of products. Cotton textiles and apparel are a major component in India's export portfolio. Western Europe bought 39 per cent in 2005/06, more than the 32 per cent shipped to North America. In leather goods, garments and footwear, the European market accounted for as much as 70 per cent, while North America took 17 per cent; in handmade woollen carpets the proportions were 42 and 46 per cent respectively. These are all consumer goods; they also happen to be labour intensive and draw from a large pool of indigenous skill and talent. For this kind of product, it is Europe and North America that are, and will continue to be, by far India's biggest markets. On the import side, Western Europe was the biggest supplier of capital goods, supplying 44 per cent of India's imports during 2005/06, with the ratio being as high as 50 per cent for general machinery. The proportion of such items imported from North America was smaller at 12 per cent.

Even if present volumes viewed from Europe may be small, the initial conditions for future expansion are extremely favourable. The prospective needs of India's growth will boost the demand for capita! goods. To this we can add the widely known purchases of civil and military defence equipment and airplanes, which often do not show up in the trade statistics.

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Not surprisingly, Western Europe has been an important source of foreign direct investment (FDI) into India. …