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 India’s 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 Lagos’s 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 world’s largest producer and exporter of copper. Chile’s 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 $4 billion stimulus package has been announced in January to counter the impact of the economic crisis, while interest rates have been lowered by 3.5%. (Inputs from CIA World Factbook and news reports) 3 © Confederation of Indian Industry GDP Growth 2003-2007 1 12 1 10 8 7 6.3 6.1 5.55.7 6 5.2 Per centPer 4.1 6 4.1 3.6 5.6 4 3.2 5.1 .6 2.93 2 4.3 3.9 .9 1 2 0 2003 2004 2005 2006 2007 Year GDP Agriculture Industry Services Source: LatinFocus Table I - Select economic indicators 2008 est. S No GDP Value 1. Purchasing power parity US$ 252.9 billion 2. Real GDP growth rate 4 % 3. Per Capita purchasing power parity US$ 15,400 4. Composition by sector: Agriculture 4.8% Industry 50.5% Services 44.7% Source: CIA World Factbook 4 © Confederation of Indian Industry Table II - Industrial and agricultural production Industries Agriculture Copper Grapes Other minerals Apples Foodstuffs Pears Fish processing Onions Iron and steel Wheat Wood and wood products Corn Transport equipment Oats Cement Peaches Textiles Garlic Asparagus Table III – Chile’s global trade relationships Principal export Per cent share Principal import Per cent share destinations, 2008 in exports sources, 2008 in imports China 14.8 US 16.7 US 12.5 China 11.2 Japan 10.5 Brazil 10.3 Netherlands 5.8 Argentina 9.9 South Korea 5.7 Italy 5.1 Source: CIA World Factbook 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. Chile’s top 5 export destinations include three Asian countries, and the Asian region is its largest trading partner. Imports Chile’s imports aggregated $59.17 billion in 2008. It thus enjoys a comfortable balance of trade surplus. While its main import partners are China and the US, neighboring countries also have significant shares. This implies that Chile has been able to leverage local products for value-addition for export purposes. Chile has the largest number of trade agreements in place in the world. 5 © Confederation of Indian Industry FDI in Chile Chile has been accorded the highest sovereign bond ratings in South America due to stable and sound policies. As such, its FDI inflows have expanded dramatically over 2007 to double from the previous year. Table IV - Total annual FDI flows in US$ million FDI Flows 1990-2000 2004 2005 2006 2007 US$ million (Annual average) Inward 3393 7173 6984 7358 14457 Outward 1205 1563 2183 2876 3830 Source: World Investment Report 6 © Confederation of Indian Industry 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 India’s 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. India’s 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 India’s total exports. India’s 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 $1.8 billion. As per the PTA of 2006, India offers preferential tariffs on 178 Chilean items while Chile gives tariff concessions on 296 Indian items. Table V - India’s trade with Chile In US$ million 2008-09 \Year 2003-2004 2004-2005 2005-2006 2006-2007 2007-2008 (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 7 © Confederation of Indian Industry %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 India’s 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 other’s macroeconomic experiences by sharing data and policy interventions, especially during the crisis period. Chile’s 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.