Prime Minister Narendra Modi and German Chancellor Olaf Scholz met at the Prime Minister’s official residence in New Delhi today (25 October) for the seventh Intergovernmental Consultations (IGC) between India and Germany.
The two discussed a wide range of issues focused on bolstering bilateral strategic ties including defence, trade and clean energy.
Scholz, who is on a three-day official trip to India, was received by Union Minister of State for Home Affairs Nityanand Rai.
The development comes as Germany looks to increase investments in India to ‘de-risk’ from China. Berlin is also looking to attract skilled Indians to offset its shrinking labour force
This is his third visit to India after a bilateral visit in February 2023 and the G20 Summit in September 2023.
He succeeded Angela Merkel as chancellor in December 2021.
“In this world we need friends and allies – just like India and Germany,” Scholz wrote on social media after the meeting.
“This is the 25th year of the India-Germany strategic partnership. The upcoming 25 years will take this partnership to new heights,” Modi said at the 18th Asia Pacific Conference of German Business (APK) in New Delhi.
“On the one hand, CEOs and firms are meeting and on the other hand our navies are holding an exercise together. German naval ships are on a port call in Goa and in a little while from now the 7th Intergovernmental Consultations between India and Germany will begin. This means that at every step, at every front, the friendship between India and Germany is deepening,” he said.
Germany, India to strengthen ties at Delhi bilateral talks
But why is Germany reaching out to India?
Let’s take a closer look:
Germany ‘de-risking’ with eye on China
Germany is making investments in India as it looks to ‘de-risk’—that is reduce its exposure to – from China.
In short, looking to reduce its economic dependence on Beijing.
This is what is known as a ‘China plus 1’ strategy.
The visit comes at a delicate time for Germany, whose export-oriented economy faces a second year of contraction and worries over a trade dispute between the European Union and China that could rebound on German companies.
According to Business Standard, the EU in June levied tariffs of up to 38.1 per cent on Chinese electric vehicles.
The bloc cited giant state subsidies that were given to Chinese manufacturers as the reason for the tariffs.
The European Union’s announced increased tariffs on Chinese EV imports to as high as 48 per cent to counteract state subsidies. Image Credit: Reuters
Beijing responded by placing tariffs ranging from 30.6 per cent to 39 per cent on European brandies including brands such as Remy Martin, Martell, and Hennessey.
Germany is also reacting in the aftermath of the Ukraine invasion in 2022 when Berlin’s reliance on cheap Russian gas turned out to be more than problematic.
Harsh Pant, an international-relations professor at King’s College London, told SCMP, “That Germany is willing to make changes for India is a combination of various things, including a realisation that its bet on China has not really paid off,” Pant said.
Pant said the developments in Ukraine were a “wake-up call” to Germany to increase defence cooperation in the Indo-Pacific.
As per Bloomberg, Scholz’s visit comes amid the German economy spluttering as a result of twin blows –competition with China and the war in Ukraine
But Germany untangling itself from Beijing will be no easy feat.
China’s emergence as a market economy in the 2000s provided a massive boost to German companies and has proved a big contributor to the overall health of the German economy since.
“Over the last 40 years, the German economy has established itself on the Chinese market and built up a complex, well-functioning network of supply chains, production paths and distribution channels,” Volker Treier, head of foreign trade at German Chamber of Commerce DIHK, told DW.
“This network cannot be easily transferred to other markets. It is also important that around 90 per cent of German companies in China produce for the Chinese market — so there is a close link with the Chinese domestic market,” he added.
The United States overtook China as Germany’s biggest trading partner in the first half of 2024, according to preliminary German statistics office data, as Berlin’s drive to reduce dependency on Beijing takes shape amid a resilient US economy.
German imports and exports to the world’s largest economy totalled around $139 billion from January to June, while for China the figure was $132 billion.
The US had already overtaken China in the first quarter, after 2023 was the eighth year in a row that China remained Germany’s number one partner, by a few hundred millions.
Germany struggling with labour force
As per Bloomberg, Germany also needs to attract skilled Indians.
Berlin’s labour force is set to decline by around 7 million people over the next decade due to aging.
Labour shortages this year have already cost Germany around $54 billion.
Germany needs around 400,000 migrants every year to keep its labour force at a stable level.
Though there are around 137,000 Indians working in Germany, the government has already loosened immigration laws.
As per DW, Germany has passed over two dozen measures to boost lure skilled workers.
Mint reported that Germany is planning to increase the number of visas for skilled workers every year from 20,000 to 90,000
Germany views India as an especially important partner when it comes to the issue of skilled labour migration,” Labor Minister Hubertus Heil, part of the delegation visiting India, was quoted as saying by Bloomberg.
Germany’s investments in India
Germany’s direct investments in India were around $27 billion in 2022.
While that figure seems impressive, it’s just around a fifth of the number invested in China, said Treier. He thinks that share could rise to 40 per cent by the end of the decade.
“China will not disappear, but India will become more important for German companies,’ said Treier.
“India is the litmus test, so to speak. If de-risking China is to work, India is the key to it, because of the size of the market and the economic dynamism in the country.”
German companies see a bright future in India, with 82 per cent expecting their revenues to grow in the next five years. Some 59 per cent are planning to expand their investments, compared to just 36 per cent in 2021.
For example, German logistics giant DHL plans to invest half a billion euros in India by 2026, tapping into a fast-growing e-commerce market.
“We see enormous growth potential in the Asia-Pacific region, of which India has a significant share,” said division head Oscar de Bok.
Olaf is betting that greater access to the vast Indian market can reduce Germany’s reliance on Beijing even if India does not turn out to be the “new China.”
“India, the most populous country in the world, is a key partner of the German economy in the Indo-Pacific and plays a key role in the diversification of the German economy,” Economy Minister Robert Habeck was quoted as saying by Business Standard
India-Germany trade
India is already Germany’s biggest trading partner in Europe.
New Delhi is also Berlin’s seventh biggest trading partner.
According to South China Morning Post, India and Germany’s bilateral trade was at $26 billion as of March 2024.
This after it hit a record high in 2023 and was valued at $22 billion in 2020-21, hit a new record in 2023.
India is expected to overtake Germany and Japan to become the world’s third-largest economy by the end of the decade, as per Bloomberg.
As per Business Standard, there are around 2,000 German companies in India.
A Volkswagen logo is seen during the New York International Auto Show, in Manhattan, New York City, U.S., April 5, 2023. File Photo- Reuters
Negotiations for an EU-India free trade deal, years in the making, still have no end in sight.
“The hurdles to gaining a foothold in the market are high,” said BCG’s Brown. “But once you’re there, you have great potential. What doesn’t work is just selling German products locally.”
Volkswagen, which has been hit by falling sales in China and high production costs at home, is considering new tie-ups in India for joint production. It has two factories already and signed a supply deal with local partner Mahindra in February.
“I think we shouldn’t underestimate the potential in India in terms of a market … and in terms of regulatory uncertainty between the US and China,” said the group’s finance chief Arno Antlitz in May.
Similarly, Cologne-based engine maker Deutz announced a deal this year with India’s TAFE, the world’s third-largest tractor maker, for subsidiary TAFE Motors to produce 30,000 Deutz engines under licence.
“The main arguments for India are political stability and low labour costs,” said Jonathan Brown, a managing director at BCG. “So you should have a ‘China 1’ strategy in which India plays an important role.”
But it’s not all smooth sailing.
Bloomberg reported that a survey from the Indo-German Chamber of Commerce released in June showed over 60 per cent of German businesses complained about red tape such as such as protectionist measures and procurement rules as the biggest problem about India.
The survey also cited corruption and India’s tax system as other investment hurdles.
What do experts say?
That the relationship between the two nations has undergone a sea change.
“We have seen a dramatic strategic convergence and changes within Germany, about Germany wanting to play a larger role in the Indo-Pacific and wanting to have more forward looking partnerships with countries like India,” Harsh V Pant, vice president, Studies and Foreign Policy, Observer Research Foundation told DW.
“That has made a lot of difference to the texture of the relationship which used to be primarily focused on economics but now it has become more strategic. These consultations are important in terms of the direction that they would provide for the future of this relationship,” he added.
Germany earlier bestowed special status on India for military purchase approvals.
It is awaiting the Indian government to complete its decision making processes with regard to the P-75I submarine deal, German Ambassador Philipp Ackermann said on Wednesday.
In the past, though around 95 per cent of India’s requests for military purchases were granted, it took some time, Ackermann noted.
He said the process would now be expedited by the special status for India.
Content retrieved from: https://www.firstpost.com/explainers/india-germany-overreliance-china-13829058.html.
