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A Subtle Engagement: Ethiopia and India

September 3, 2013
Continent Observer

Even as the global economy has suffered from a prolonged crisis, a number of African countries have seen significant growth. Ethiopia stands out among them. With double-digit growth for the last decade, Ethiopians have seen their purchasing power double, from US$ 527 per capita in 2003 to over US$ 1,100 in 2011.Much of this success has come from relationships with new geopolitical giants, including the so-called BRICs nations, Brazil, Russia, India, and China. The “BRICs effect,” according to the African Progress Panel, “helped first to insulate Africa partially from the global economic downturn, and then to drive recovery.

While numerous reports and articles have pondered China’s role in Africa, India’s quiet engagement has drawn little attention. In reality, though, India is deepening ties across the continent, including in Addis Ababa, Africa’s diplomatic capital. This CAI  Insight explores Ethiopia’s relationship with India, which, although still limited and preliminary, offers incredible promise to one of the most politically important nations on the African continent.

Trade and financial flows

Modern economic and diplomatic relations between Ethiopia and India began with a trade agreement in 1997. The agreement established a Joint Trade Committee (JTC) to meet on a biennial basis. Alternating between Addis Ababa and New Delhi, the JTC has met five times to assess past ventures and examine possibilities for future economic engagement.(4) The 1997 agreement did not have immediate results. However, as shown in the chart below, bilateral trade volumes have risen sharply over the last 15 years, from less than US$ 50 million in 1995 to over US$ 600 million in 2010. Trade volumes increased significantly after 2007, when Ethiopia and India signed five major agreements, including the Bilateral Investment Promotion and Protection Agreement.

Bilateral trade: Ethiopia and India (1995-2010)(5)

Bilateral trade: Ethiopia and India (1995-2010)

The balance sheets, though, strongly favour India. Even in 2010, when Ethiopian exports to India reached an unprecedented US$ 31.8 million, they only accounted for about 5% of the total volume of bilateral trade. Generally, Ethiopia exports agricultural and animal products, such as tanned sheepskins, dried legumes, oil seeds, and ginger to India, whereas India ships machinery, electrical equipment, chemical products, medical supplies, and metals for construction, such as iron, to Ethiopia.

It is more difficult to retrieve accurate numbers about India’s foreign direct investment (FDI) flows into Ethiopia. The Indian Embassy in Addis Ababa has claimed that, as of 2011, 596 Indian companies have “secured investment licenses,” totalling US$ 4.7 billion in capital.Former Ethiopian Prime Minister, Meles Zenawi, cited this same figure during his trip to India in 2011. He said he wanted to see this amount grow to US$ 10 billion in investments by 2015. Civil society organisations opposed to further Indian investment in Ethiopian agriculture, as discussed in greater detail below, also frequently point to the US$ 4.7 billion figure.

The oft-cited US$ 4.7 billion number, however, is misleading. This total represents the projected value if every company with an investment license implemented its project or projects. Obtaining an investment license, however, is relatively cheap and easy. According to the Ethiopian Embassy in Washington, D.C., an investment license only costs 600 birr, or less than US$ 35, and can be ready in four hours. As a joint study from the Ethiopian Economics Association and Ethiopian Economic Policy Research Institute concludes, “one cannot tell about the actual FDI by looking at the number of licensed projects [because] the ratios of operational to licensed projects are drastically low.

Between 1992 and 2008, for example, Chinese companies registered 1,829 projects with officials in Ethiopia, according to the same study. However, only 195 of these proposed investments, or less than 11%, became operational.Indian companies implemented a higher percentage of proposed projects, 87 operational projects out of 311, during the same period. If the same proportion holds for current registered projects, out of the 596 licenses received by Indian companies, around 150 to 175 are operational. Accordingly, the capital inflows must also be dramatically lower than suggested. The actual figure is likely closer to US$ 1 billion, and at least one Indian official document admits as much: “India is the second largest foreign investor in Ethiopia with approved investment of US $ 4.78 billion. Of this, approximately U.S. $1 billion is already on the ground or in the pipeline.

Beyond the increase in Indian private investment,the Indian government is surreptitiously financing Indian companies operating in Ethiopia. In 2006, the government-run India EXIM Bank issued its first line of credit to Ethiopia, a twenty-year loan of US$ 65 million for rural electrification projects.This commitment preceded a US$ 640 million line of credit established in 2007 to support the revitalisation of Ethiopia’s state-run sugar industry. Through the EXIM Bank, India has transferred at least four tranches of funding, ranging from US$ 90 million to US$ 200 million,(16) to Ethiopia between 2007 and 2011 – and presumably afterwards as well, though public data is scarce.

The Indian funding has been earmarked for three state-run sugar processing plants: the Tendaho Sugar Factory in Afar, the Finchaa Sugar Factory in northern Oromia near the border with Amhara, and the Wonji-Shoa Sugar Factory, also in Oromia, but southeast of Addis Ababa. According to media reports, Ethiopia has agreed that 85% of the Indian financing for these sugar factories should be used to hire Indian companies.In 2008, the Indian firm Overseas Infrastructure Alliance Private Limited signed a US$ 345 million contract for construction of the Tendaho plant, the only greenfield project of the three. Another Indian firm, Uttam Sucrotech, won a US$ 100 million contract in 2009 for the expansion of the Wonji-Shoa Sugar Factory.

In addition to these projects, the government of India has launched two other initiatives in Ethiopia. First, the Indian Ministry of External Affairs chose Ethiopia as the pilot site for its Pan-Africa e-Network Project, a venture with the African Union. India offered a US$ 2 million loan to upgrade CT scanners at Black Lion Hospital in Addis Ababa and to strengthen medical telecommunications.This small start will serve as the basis of a US$ 1 billion project spanning the entire continent.Second, and more importantly for its economic relations with Ethiopia, India has announced a US$ 300 million line of credit for a new railroad linking Addis Ababa to Djibouti. As a landlocked country, Ethiopia relies on Djibouti as a link to the Indian Ocean and international shipping. A previous rail line crossing into Djibouti is in disrepair, and this project, if seen to fruition, would be a major boon to Ethiopia’s export ambitions.

Food security, land leases and civil society

According to a recent poll from the Lowy Institute, 80% of Indians consider food shortages a major threat to their country’s security. They rank this threat, along with water and energy shortages, as more dangerous than conflict with Pakistan, confrontations with China, or home-grown terrorism.Indians are right to be worried. According to data from the 2012 Global Hunger Index, 19% of the population is malnourished.A shocking 43.5% of Indian children under five years of age are underweight, the second highest rate of this measure in the world, outdone only by impoverished Timor-Leste.

India’s food security woes have spiked as the Ethiopian Government has made a notable policy shift away from an exclusive focus on smallholder farming. When the current ruling party, the Ethiopian People’s Revolutionary Democratic Front (EPRDF), came to power in the early 1990s, they committed Ethiopia to a policy of Agricultural Development Led Industrialisation (ADLI). The ADLI strategy primarily focused on increasing crop yields on small family farms, usually less than one hectare in size. To this end, the government increased public spending on agricultural technology, public education and research, and extension services.

ADLI saw limited success, and in recognition of its shortcomings Ethiopian policymakers began to make changes. In 2002, the government began laying the groundwork for a new wave of large-scale commercial agricultural investments in Ethiopia. As one 2002 policy document, the Sustainable Development and Poverty Reduction Program, reads, “The federal government, in collaboration with regions, will work hard to allocate land for commercial farming, make sure that there are adequate infrastructure facilities, and streamline and make efficient land lease procedures for entrepreneurs who wish to set up large-scale commercial farms.In addition to attracting much-needed hard currency into the country, the government sees these investments as an opportunity to transfer technology, improve management skills, spur innovation, and create jobs – the traditional benefits of FDI.

In recent years, numerous companies have responded to government incentives such as land lease rates as low as 20 birr, or about US$ 1.10, per hectare and multiyear tax holidays for exporters. Officially, the government has set targets of leasing 3.6 million hectares, a little more than 3% of its vast total area, to foreign investors.Estimates of the actual extent of implemented land deals range wildly. Most studies of Ethiopian land deals come from groups ideologically opposed to commercial farming, and their analysis often relies on media reports of proposed deals that never become operational. A rigorous review by the author of academic scholarship, available government contracts, and multiple civil society reports puts the total amount of land leased to private companies at close to 1 million hectares, a third of the government’s goal.

Out of this figure, about half of the land has been leased to Indian companies, which have very large projects, often exceeding 20,000 hectares of farmland. Karmjeet Sekhon, Project Director for the Karuturi Global project in Gambella, claims the incentives were so good that his company signed its lease for 100,000 hectares without even seeing the land. “They gave it to us, and we took it,” he told The Guardiannewspaper. Along similar lines, S.N. Pandey, director of Agro Technology Division at Lucky Group, has said, “Cost of agricultural production in Africa is almost half that in India. There is less requirement of fertiliser and pesticides, labour is cheap and overall output is higher.

Ethiopia’s agriculture policies may be welcomed by Indian investors but civil society groups, such as the Oakland Institute and Solidarity Movement for a New Ethiopia, have opposed large land leases to private companies. These opponents to commercial land acquisitions fear foreign investment in agriculture will exploit lack of political power among rural farmers, steal their source of livelihood, and marginalise them even further. Measures to address India’s food security concerns may also contribute to the reverse effect in Ethiopia. In an open letter to United States president, Barack Obama, the Oakland Institute’s executive directors, Anuradha Mittal and Obang Metho, write that “large-scale land investments by foreign investors” constitute “the single largest man-made contributor to food insecurity on the continent today.

Activism against private land leases, or ‘land grabs’ as they are often called, has spawned an intriguing new civil society relationship between Ethiopia and India. In February 2013, the Oakland Institute organised the Indian-Ethiopian Civil Society Summit on Land Investments in Delhi. One of the first events of its kind, the summit brought together civil society organisations, scholars and members of the public from both countries to discuss the role of Indian companies operating in Ethiopia. The panel discussions and conference papers generated a great deal of media coverage in both nations and further afield.

Concluding remarks

If current trends continue, the trade relationship between Ethiopia and India will continue to grow in importance. As its economy modernises and exports increase, Ethiopia will send a steadily larger number of products East. Through its EXIM bank, India has made several significant investments in the Ethiopian state-run sugar industry and in reconnecting Addis Ababa and Djibouti by rail. Indian FDI into Ethiopia has also grown in recent years as Indian companies take advantage of fire-sale land rates and tax holidays. Civil society groups in both countries, though, have raised serious concerns about the fates of the farmers who used to till the land now leased to large companies.

Ethiopia will only increasingly feature in India’s Africa strategy, just as policymakers in Addis Ababa will only increasingly look to India for investment and as a development partner. Ethiopia wants to move beyond its traditional relationship with Western donors, but does not want to become beholden singly to China. A deepening relationship with India offers profound rewards for both countries.