Beyond the Rafale deal

Indian Prime Minister Narendra Modi began his maiden trip to Europe with a three-day visit to France starting on April 9. Media coverage in India and in France mainly focused on the $20 billion sale of the Dassault Rafale fighter jets deal. With negotiations now running for three years, the topic has become a running joke in France –journalists sarcastically comment on the chances of the deal being signed every time there has been a high-level visit of Indian officials to France or vice-a-versa.

Thankfully, there is much more to the India-France relationship than just the Rafale deal.

India and France have had friendly relations for more than a century. On Saturday, Modi paid tribute to the thousands of Indian soldiers who fought and died alongside the French during the two World Wars. After Independence, the decolonisation of the Pondicherry Territory was conducted in a peaceful manner, and today its French-speaking population serve as a bridge between the two countries. The strategic partnership launched in 1998 has led to deep cooperation in key areas such as defence, nuclear energy, space, and security. France has also supported an increasing role for India in global multilateral institutions, for example in the UN Security Council, the Nuclear Supplier Group and the Missile Technology Control Regime. France has always been helpful to India on nuclear issues, stepping in with fuel for Tarapur after the U.S. reneged following the 1974 tests.

While India and France enjoy a remarkably close political relationship, this has failed to translate economically. Bilateral trade €7.09 billion between the two countries is below potential. France ranks only ninth in terms of foreign investments in India and this has decreased annually—from being India’s 25^th largest trading partner in 2012-2013 to a low 28^th in 2014. Likewise, India’s share of total French trade is only 0.8%, and India has fallen from 13^th place to 18^th between 2012 and 2013.

Recently though both governments have decided to place an emphasis on economic diplomacy to promote investments and exports. India’s renewed economic dynamism and the unveiling of the 2015 budget was closely watched by the French business community, which is waiting to see the reforms implemented.

Will Modi’s visit revitalise the bilateral and take advantage of complementary needs?

Make in India

Modi’s ‘Make in India’ campaign is aimed at attracting investments by opening India’s manufacturing sector to foreign investors. In a recent Facebook post, Modi highlighted two specific sectors in which he wishes to enhance cooperation with French companies: infrastructure (especially railways), and defence manufacturing. Both these areas offer excellent opportunities for French companies that have an expertise in both and looking to expand abroad.

Some French companies have already taken advantage of the recent changes to India’s FDI regime which allows 49% FDI in the defence sector. Since September 2014, two joint ventures have been announced: Thales and Bharat Electronics (BEL) will manufacture military radars in India, while SNECMA and Hindustan Aeronautics Limited (HAL) will produce aero-engine parts. The Prime Minister’s visit will be an opportunity to reassure French investors about the economic reforms he intends to implement, build confidence and strike future deals.

Make in France?

Conversely, France too offers opportunities for Indian companies.

In France, to counter a grim economic context, in 2012, the Ministry of Foreign Affairs launched the motto “diplomatie économique”(economic diplomacy)  which aims to enhance economic partnerships based on France’s  from its widespread diplomatic network. French ambassadors now have the mission to promote the “Marque France” (the Brand France) to increase French exports and attract FDI.

In this regard, Modi’s planned visit to Airbus headquarters in Toulouse could lead to the inking of important orders from Indian airline companies. India is a promising market for Airbus, as last November IndiGo which bought 250 A320Néo planes. This will  help reverse the trend of Indian investment in France. India can invest in R&D activities, and benefit from a well-educated and creative population as well as tax incentives.

It will also be an opportunity for France to change the negative perception that Indian businessmen have of the country, alluded to by a French diplomat who remarked that the Indian business community is too much influenced by the Anglo-Saxon media who are prone to indulge in ‘French bashing’.

It is true that French labour conflicts are well documented, and that the government started its term by sending negative signals to investors, but it is now working hard to change France’s image abroad . The government has implemented a research and development tax credit (crédit impôt recherche) that is judged very attractive by foreign investor, and has encouraged job creation by granting exemptions on social contributions on low salaries.

These measures are paying off for France. For the first time after a three-year decrease since 2012, FDI in France was up by 8% in 2014, mostly in manufacturing, R&D, engineering and design, whereas KPMG ranked Paris as the third most attractive city in the world (Global Cities Investment Monitor 2014) citing the decisive impact of tax incentives for R&D activities, an improvement from seventh in 2013. Anand Mahindra, chairman of Mahindra & Mahindra, declared last December, after acquiring Peugeot scooters, that “France could be Europe’s next emerging market”[9], provided that new business-friendly measures are implemented. Maybe French PM Manuel Valls, who when speaking to an audience in Berlin and in Shanghai, stated in German and Mandarin how much he loved business, will have a go at saying “mujhe business pasand hai”.

The France-India relationship must not be focus exclusively on the Rafale deal. Modi’s visit can be the opportunity to add fresh energy in the economic relationship by harnessing economic complementarities.  French and Indian multinational are currently the backbone of the relationship, but a change in perceptions in both countries, led by both governments will deepen the engagement by bringing the  small and medium enterprises of both countries together, thus unleashing the economic potential of ‘Make in India’ and Marque France”.