Indo-German ties stronger, but more is needed

The visit of German Chancellor Olaf Scholz for the seventh intergovernmental consultations (IGC) has created a buzz in India about the direction in which Indo-German relations are moving.

This was his third visit in two years. Prime Minister Narendra Modi and Scholz have met five times now, including Modi’s visit to Berlin in 2022 for the previous edition of the IGC. What has happened since then is that a carefully crafted policy is in place to work beyond the constraints of each other’s strategic vision and have a deeper bilateral relationship.

Two of these important areas are the growing defence engagement and the desire to increase economic engagement with each other.

Germany has not been a major partner in defence. It is now deeply interested in securing a contract for six API submarines. Spain is also vying for this significant contract. Spanish President Pedro Sanchez was on a visit to India from October 28-29. Germany has taken steps to remove logjams in the supply of small arms that are prone to entanglements in domestic approval systems. India is satisfied that weaponry purchases from Germany are now easier. Earlier, India had wanted German engines for its light tank, but it shelved the plan as it could not get them quickly due to German regulations. Germany now seems intent on not losing such opportunities and wants to engage with India more aggressively.

The limitations of German defence production are clear as supplying weapons to Ukraine remain its priority. Supplying weapons to India will, thus, take more time, even as now the intent to do so is evident.

What, perhaps, is of greater value is the strategic coherence on the Indo-Pacific. Germany’s Indo-Pacific guidelines never mentioned China; even now, Chancellor Scholz, while identifying the East and South China Seas as areas of concern for violation of international rules and norms, did not mention China, though he was not reticent about mentioning Russia and Ukraine.

Scholz specially flew to Goa on the last day of his visit to see the two German naval ships participating in joint exercises with India as part of their Indo-Pacific deployment. The German Navy is small, but its greater regularity in coming to the Indo-Pacific and standing with regional powers to keep the area free and open is an important commitment. Germany will soon post an officer at the International Financial Centre in Gurugram to facilitate in having a logistics agreement with India to supply ships and possibly their repair and maintenance in the region. Exercises with Indian ships are taking place around Indian shores and anti-piracy drills are being conducted around the Gulf of Aden. In August 2024, for the first time, the German Air Force participated in Tarang Shakti, India’s largest multilateral air exercise.

The expanded German vision for the Indo-Pacific has a special place for India. This has been clearly stated in its ‘Focus on India’ strategy. Enunciated before the Chancellor’s current visit, this strategy looks at the whole-of-government approach for the future of India-Germany partnership. A full section in this policy is devoted to defence, and it is expected to bear fruit when practical steps are enhanced over time.

The other big issue is economic. Germany is of significant value to India as it is India’s best economic partner within the EU. Indo-German trade has now climbed to $30 billion and mutual FDI is about $20 billion. It is not a one-sided economic relationship. The German industry is quite keen to have a closer engagement with India in research and development, IT and other services and innovation and startups. A whole-of-government approach to critical and emerging technologies, skill development and innovation is underway.

It is, therefore, important to note that parallel to the IGC, the Asia-Pacific Conference of German Business 2024 in New Delhi was held. Nearly 800 businesses and CEOs from Germany participated in it. The attention it brought to India and the fact that the conference was addressed by both leaders gave it a focus, which, otherwise, seemed to be lacking. It was similar for the CEOs’ conference held alongside.

However, unlike the preparation that Japan makes for such important events held concurrent with summits, the Germans do not come up with large private-sector announcements as they believe that the private sector is separate from government.

In 2022, Japan had announced a 5-trillion yen ($42 billion) investment in India over the next five years. No such announcement came out of the German conference. They are still in a study mode. It is seen that they prefer to work independently rather than set up joint ventures.

Big German companies have been in India for years. The Make in India Mittelstand programme of the Indian Embassy, Berlin, has brought to India many technology champions. However, there is no rush of German investment to India despite talk about derisking from China, or finding a China Plus One solution. In 2023-24, German FDI in India was worth $505 million. Germany needs to get a greater comprehension about India as a base for manufacturing. It can then access India’s preferential arrangement with Africa and the ASEAN Free Trade Area to tap into much larger markets.

Despite the growing German ODA (Official Development Assistance) under the sustainability partnership of ^10 billion and much happening under the Green Urban Mobility Partnership — mainly for metros and regional trains — German companies do not convert their ODA projects into FDI. This is again a difference from the Japanese who use the ODA as a springboard for FDI.

Recognising that German businesses work differently means that the impatience on the Indian side needs to be tempered. At the same time, German companies need to look at India afresh. This is where the German government is ahead of its private sector about engagement with India. The German industry is still trying to play catch-up.

It must be noted that the German industry has been the most vocal against its government’s desire to distance itself from China because German industries’ profits still largely come from China. They must now see how to make profits in India and develop a strategy for that. If such a strategy had come out of the recent Asia-Pacific Conference, it would have contributed immensely to the guns-and-butter engagement that India and Germany seek at the governmental level.