KNOWLEDGE PARTNERSHIP PROGRAMME

Project Report

Prospects of India-Ethiopia Investment and Trade Cooperation

Submitted to

Department for International Development (DFID)

IPE Global (P) Ltd.

November 2014

1

Table of Contents

List of Acronyms and Abbreviations 2

Executive Summary 3

I. Introduction ......................................................................................................................... 5

II .Macro Economic Performance of Ethiopia .......................................................................... 6

.IIA. Macro Ecoomic Performance of India ............................................................................. 8

III.Trade Development In Ethiopia and India ......................................................................... 10

IIIA Tade Development in Ethiopia 10

III.B Trade development in India 15

IV.A Trade Intensity Between India and Ethiopia ......................................................... 24

IV.B Trade Complementarity between Ethiopia and India ............................................ 24

IV.C India‟s DTFP Schemes fror LDCs and Ethiopian Exports ................................... 25

V. Indian Foreign Direct Investment in Ethiopia .................................................................. 27

V A. Foreign Direct Investment Policy in EthiopiaError! Bookmark not defined.

29

V B. Foreign Direct Investment inflows to Ethiopia ..................................................... 30

V.C. Indian Investment in Ethiopia............................................................................... 30

V.D. Indian Investment in Primary Sector ................................................................. 31

V. E Indian Investment in Industrial Sector ............................................................... 32

V. F. Indian Investment in Services ............................................................................ 33

VI. Hinderances to India-Ethiopia Trade and Investment Relation ......................................... 34

VII. Conclusions and Policy Recomendations......................................................................... 40

Bibliography ............................................................................................................................ 47

2

ACRONYMS AND ABBREVIATIONS

CAD - Current Account Deficit

CII - Confederation of Indian Industry

DFTP - Duty Free Tariff Preference

EIC - Ethiopian Investment Commision

EXIM Bank - Export-Import Bank

FDI - Foreign Direct Investment

FEMSEDA -Federal Micro and Small Enterprises Development

Agency

GCI - Global Competitive Index

GDP - Gross Domestic Product

GTP - Growth and Transformation Plan

HCI - Human Capital Index

HDI - Human Development Index

HS - Harmonized System

IMF - International Monetary Fund

JTC - Joint Trade Committee

LDC - Least Developed Countries

LOC - Lines of Credit

MFN - Most Favoured Nation

MOP - Margin of Preference

NSIC - National Small Industrial Corporation

NTBS - Non Tariff Barriers

STIC - Standard International Trade Classification

TCI - Trade Complementarity Index

TGE - Transitional Government of Ethiopia

WTO - World Trade Organisation

VAT - Value Added Tax

UNCTAD - United Nations Conference on Trade and Development

3

Executive Summary

Both India and Ethiopia have emerged as the two fastest growing developing countries in the

world. In recent years, bilateral trade between the two countries increased significantly since the

Bilateral Investment Promotion and Protection Agreement was signed in 2007. Bilateral trade

increased from $56 million in 2000 to over $1 billion 2013, with trade balance remaining in

favour of India. India provides Duty-Free Trade Preference (DFTP) scheme to 29 LDCs

including Ethiopia which has been the beneficiary of these schemes since April 2008.

Although India‟s export to Ethiopia increased by 19 times between 2000 and 2013, its export to

Ethiopia as ratio of its total exports is still below 0.3 percent. Similarly, Ethiopia‟s export to

India as ratio of its total exports, accounts for only 1 percent. The low trade share between India

and Ethiopia suggests that there is large scope for enhancing trade between the two countries.

The export basket of Ethiopia indicates that Ethiopia mainly exports primary goods such as food

and live animals, vegetables, leather, crude materials, and coffee, tea and cocoa and imports

mainly manufacturing products from India.

Similarly, India has emerged the second largest foreign investor in Ethiopia with approved

investments of US$ 5 billion between 1993-2014. Indian firms have been active in sectors such

as agriculture, floriculture, cotton and textiles, plastics, computer and IT, and health care. Indian

investment has resulted in 3, 04, 330 jobs in Ethiopia with the highest employment created in

agriculture sector. In addition, Indian investment has also given a boost to exports and

industrialization in Ethiopia.

The study has attempted to identify major hindrances to trade and investment between the two

countries. Among others, poor business climate, infrastructure deficiencies, high level of

corruption, lower human capital development, higher import tariff, limited scope in DFTP

schemes and limited access to trade financing have hampered Ethiopian exports to India. In

contrast, transportation and logistic support, access to finance, presence of NTBs, repatriation of

profits, exchange controls, complex tax system has affected Indian exports and investment in

Ethiopia.

4

Both the countries need to take some concrete measures to take trade and investment to a new

level. While Ethiopia needs to focus on improving biasness climate, take stringent measures to

remove corruption, removing exchange control and NTBs, infrastructure development,

simplifying tax system and develop a sound financial system; India on the contrary, needs to

broaden scope of the DFTP, move towards relaxation of rules of origin, and support greater

participation in skill, institutional and infrastructure development. In addition, India needs to

participate and share technology in building greater export capacities in Ethiopia. Similarly, both

the countries need to conduct regular trade fair and information exchanges among their investors

to increase awareness about investment and trade opportunities in both the countries.

.

5

Prospects of India-Ethiopia Investment and Trade Cooperation1

Introduction:

The overarching importance of trade and foreign direct investment (FDI) has long been

recognized as the key element of sustainable development in both developed and developing

countries. The endogenous growth theory (Grossman and Helpman 1990 and Barro and Sala-i-

Martin 1995) emphasizes on the role of international trade and FDI in achieving a sustainable

rate of economic growth. Inspired by the gains from trade, countries have long adopted an

outward looking, export-oriented development approach aiming at restoring internal and external

economic stability and enhancing efficiency of resource allocation. Trade and investment

liberalization is seen as a means of achieving industrialization and modernization through

securing economies of scale, market access, and trade expansion

On similar lines, both India and Ethiopia have been liberalizing trade and FDI policies since

early nineties to benefit from them and accelerate the process of integration into the global

economy. Further, to boost trade and investment, both countries have signed two important

agreements (Bilateral Investment Promotion and Protection Agreement in 2007 and Double

Taxation avoidance treaty in 2011). More importantly, India provides Duty-Free Trade

Preference (DFTP) scheme to Lower Developing Countries (LDCs) on the lines of Hong Kong

Declaration, 2005. According to the present status, 29 LDCs including Ethiopia have been the

beneficiary of these schemes since 2008. Given the importance of this subject, this study

critically examines the trade and investment relationship between the two countries and suggests

several measures not only to remove barriers to trade also enhance bilateral relations. This study

is divided into seven sections. The following section provides a brief review of macroeconomic

performance of Ethiopia and India. Section 3 reviews trade development in Ethiopia and India.

Section 4 presents the existing trends in trade relations between the two countries. Section 5

details FDI inflows to Ethiopia and profile of Indian investment in Ethiopia. Section 6 puts forth

the major hindrances to enhancing trade and investment relations between India and Ethiopia.

Section 7 presents concluding remarks and policy recommendations.

1 This study is sponspered by DFID and carried out by IPE Global.

6

II. Macroeconomic Performance: Ethiopia

In terms of Real GDP (27.2 billion in 2005 prices), Ethiopia was ranked the 77th largest

economy in the World and 77th

in terms of nominal GDP ($46.9 billion) (WDI, 2014). It is also

the 72nd

largest economy in the world with respect to the purchasing power parity (PPP). The

Ethiopian economy witnessed a double digit growth rate trajectory since 2004 except the year

2009 and 2012. Real GDP grew by an average of 11.2 and 8.7 percent in years 2011 and 2012,

which puts Ethiopia among the top performing economies not only in Sub-Saharan Africa but

also in the world and surpassing the 7% threshold growth rate required by the Millennium

Development Goals. Recent growth has largely been driven by increased private and public

investment, improved macroeconomic management, and the growth of manufacturing,

agriculture and services sectors (Chukwuka, et al. 2014). Real per capita income increased from

$141 dollar in 1990 to above $269 dollar in 2012.

Recently, Ethiopia has experienced strong economic growth and the growth has been broad-

based, with the services and the industrial sectors growing at unprecedented rates although

agricultural sector remained the major contributor to GDP. Accordingly, agriculture, industry

and services grew by an annual average of 4.92%, 17.1% and 10.9% respectively during 2012. In

term of sectoral contribution, the agricultural sector‟s contribution to GDP was the highest

followed by services and Industrial sector. Interestingly, the share of agriculture, Industry and

services in GDP remained more or less same during the period 2000-12.

Further, both domestic savings and capital formation as a percentage of GDP rose over 2000-

2012. The gross capital formation as a ratio of GDP increased from around 23 per cent in 2000 to

above 33.07 per cent in 2012. In contrast, domestic savings increased marginally from 11 percent

to 15 percent during the same period. As a result, the savings-investment gap has also widened

during the 2000s. On the fiscal front, Ethiopia has done well since 2005. Fiscal deficit as ratio of

GDP declined from 4 percent of GDP in 2005 to almost 1 per cent in 2012. Inflation rate (CPI)

has remained high, particularly in the year 2008, 2011 and 2012. The rate of inflation reached its

highest level in 2008 (44 per cent), and then declined to 23 per cent in 2012 (Table 1).

7

Table 1: Key Macroeconomic Indicators for Ethiopia

Indicator 1990 2000 2005 2006 2007 2008 2009 2010 2011 2012

Population (in millions) 48.3 65.5 74.2 76 77.7 79.4 81.2 83 84.7 86.8

GDP growth (%) 2.72 6.1 11.8 10.8 11.4 10.8 8.8 12.5 11.2 8.7

GDP, (2005 constant US $,

billion) 0.67 0.89 1.21 1.35 1.5 1.66

1.81 2.04 2.26 2.46

Per capita GDP (2005

constant US $) 141.4 135 160 172 187 202

214 234 254 269

Agriculture, growth Rate

(%) 5.42 3.05 13.5 10.9 9.44 7.50

6.36 5.13 9.01 4.92

Agriculture, value added

(% of GDP) 53 48.7 45.6 46.8 46.4 49.4

49.6 45.6 45.6 48.6

Industry, growth Rate (%) -4.8 5.34 9.4 10.2 9.5 10.1 9.7 10.8 15 17.1

Industry, value added

(% of GDP) 10 12.4 13 12.75 12.71 11.15

10.5

10.4

10.7

10.4

Services, growth Rate (%) 2.7 11.2 12.3 12.9 16 16.7 14.9 17 13.1 10.9

Services, value added

(% of GDP) 36.9 38.8 41.3 40.4 40.9 39.4

39.9 44 43.7 41

Gross Domestic Capital

Formation (% of GDP) 14.6 23.10 26.53 27.9 24.5 24.7

25.6

27.4

27.9

33.07

Gross domestic savings

(% of GDP) 11.26 11.04 5.92 4.98 4.92 4.88

7.05

7.54

12.73

15

Inflation (%) 5.51 0.66 12.94 12.3 17.2 44.4 8.46 8.13 33.22 22.72

Fiscal Deficit (% of GDP)* -6.8 -9.03 -4.2 -3.85 -3.63 -2.93 -0.94 -1.34 -1.62 -1.18

Current account balance

(% of GDP) NA NA -12.7 -11.9 -4.36 -7.05

-7.77 -1.61 -2.61 -7.15

Total forex reserves in

months of imports NA NA

2.5 1.95 2.22 1.1 2.35 NA NA NA

Export growth rate (%) -10.6 7.6 24.37 13.29 15.97 21.66 1.41 20.89 39.67 14.25

Import growth rate (%) -11 4.6 37.56 27.05 10.83 30.76 2.38 7.72 8.43 38.86

Trade over GDP (%) 14.56 36.4 51.1 51 45.2 43 39.9 47.6 49.2 45.9

FDI net Inflows(% GDP) NA 1.66 2.17 3.63 1.16 0.42 0.78 1.1 2.1 0.66

Source: World Development Indicator, World Bank, 2014 and IMF Outlook, 2014.

8

On the external front, the performance is mixed. Merchandise exports has been growing in

double digits except the year 2008 and 2012, Trade as the ratio of GDP has increased steadily

from around 14 per cent in 1990 to over 46 per cent in 2012. However, current account deficit as

a ratio of GDP has been negative and deteriorated in 2012. Similarly, FDI inflows (net) as

percentage of GDP has declined from the peak of 2006 and now stands at below 1 percent.

II.A Macroeconomic Performances: India

In 2013, India ranked 8th

largest economy in terms of real GDP ($1458 billion) and 10th

in terms

of nominal GDP ($1876 billion) (WDI, 2014). It is also the third largest economy in the world

with respect to the purchasing power parity (PPP). India is expected to be third largest economy

by 2035 and second largest economy by 2050 (Goldman Sachs, 2007). India is also the largest

economy in the South Asia with GDP share of 80 percent. India‟s economic growth, which was

5.5 per cent in 1990, increased to 9.3 percent in 2005 and declined to below 5 percent in 2012.

The recent slowdown in the growth rate GDP is mainly due to slowdown in industry and services

sector. Per capita income in USA dollar almost quadrupled between 1990 to 2012. Therefore,

economic growth has been substantial in India in the reform period. Services sectors and the

industry were the main drivers of growth in India in the 1990s and 2000s, while the growth rate

of agricultural sector remained highly volatile. Contrast to Ethiopia, majority of GDP share is

contributed by services and Industry in India. For example, services share was 55.7 percent in

total GDP while that of industry was around 26 percent in 2012.

Further, both domestic savings and capital formation as a percentage of GDP rose over 1990-

2012. The gross capital formation as a ratio of GDP increased from around 24.9 percent in 1990

to the peak of 38 per cent in 2007 and since then it has declined to 34.7 percent in 2012.

Domestic savings also shows a similar pattern. Like Ethiopia, India has also the savings-

investment gap and this gap has also widened in recent times. On the fiscal front, India has not

done well particularly post 2005. Inflation and fiscal deficit have remained high.

On the external front, the performance is mixed. Merchandise export growth rate remained

robust barring the year 2009 and 2012. Trade as a ratio of GDP has increased steadily from

around 15 per cent in 1990 to over 54 percent in 2012. Similarly, the total foreign exchange

reserve in terms of months of imports has also increased steadily from around two months in the

1990 to six months in 2012. However, current account deficit as a ratio of GDP has been

9

negative and deteriorated during the last half of the 2000s. FDI inflows (net) as ratio of GDP also

improved in recent times compared to early 1990s (See Table 2).

Table 2: Key Macroeconomic Indicators for India

Indicator 1990 2000 2005 2006 2007 2008 2009 2010 2011 2012

Population (in millions) 847.4 1029 1114 1130 1146 1162 1178 1194 1210 1227

GDP growth (%) 5.53 3.84 9.28 9.26 9.80 3.89 8.5 10.3 6.6 4.7

GDP, (2005 constant US $,

billion) 350.2 602.6 835 911 1000 1040

1128 1244 1326 1390

Per capita GDP (2005

constant US $) 403 578 740 797 863 885

947 1031 1086 1123

Agriculture, growth Rate

(%) 4.0 0.0 5.13 4.15 5.76 0.1

0.8 8.6 5.0 1.41

Agriculture, value added

(% of GDP) 29 23 18.8 18.2 18.2 17.8

17.7 18.2 17.9 17.5

Industry, growth Rate (%) 7.33 6.03 9.71 12.1 9.7 4.44 9.2 7.75 7.8 0.96

Industry, value added (%

of GDP) 26.5 26 28.2 28.8 29 28.2

27.7 27.1 27.2 26.2

Services, growth Rate (%) 4.87 5.06 10.9 10.05 10.3 10 10.5 9.66 6.6 56.3

Services, value added (%

of GDP) 44.4 51 53 52.9 52.7 53.9

54.5 54.6 54.9 55.7

Gross Domestic Capital

Formation (% of GDP) 24.9 24.11 34.3 35.9 38 35.5

36.3 36.5 36.4 34.7

Gross domestic savings(%

of GDP) 23.5 23.2 31.5 32.7 34 30.5

30.9 32.2 30 28

Inflation (%) 8.97 4 4.25 6.14 6.36 8.35 10.9 12 8.85 9.35

Fiscal Deficit (% of GDP)* -6.5 -7.44 -7.2 -6.2 -4.40 -9.96 -9.75 -8.4 -7.96 -7.4

Current account

balance(% of GDP) -2.33 -1 -1.23 -1 -0.65 -2.5

-1.91 -3.2 -3.3 -4.9

Total forex reserves in

months of imports

2.04 6.12 8.51 8.91 11.13 7.71 9.77 7.75 6.2 5.9

Growth rate of Export (%) 9 15.9 27.00 24.33 26.56 14.16 -5.24 37.11 19.55 -0.60

Growth rate of Imports (%) 12.4 6.2 31.89 25.15 31.68 15.89 -1.07 29.61 26.23 0.58

Trade over GDP (%) 15.2 26.4 41.3 45.3 44.9 52.3 45.5 48.3 54.1 54.7

FDI net Inflows(% GDP) 0.07 0.75 0.87 2.11 2.03 3.54 2.60 1.6 1.94 1.3

Source: World Development Indicator, World Bank, 2014 and Source: IMF outlook, 2014.

10

III. Trade Development in Ethiopia and India

IIIA. Ethiopia

Ethiopia began major economic reforms in the early 1990s after the establishment of the

Transitional Government of Ethiopia (TGE) with the help of IMF and World Bank in 1992

through Structural Adjustment Programme (SAP). As a part of SAP, comprehensive trade

reforms on both export and import side were unveiled in 1992. Among others, reduction of tariff

and non-tariff barriers, harmonization and simplification of tariffs, including tariff lines and

dispersions, removal or tariffication of quotas, reduction and gradual elimination of all controls

including on domestic prices, deregulation and realignment of foreign exchange rates and

liberalization of investment policies were carried out (Hassen, 2008). The range of tariff rates in

Ethiopia narrowed, from 0-to-240 in the pre-liberalization (before 1991) period to 0-to-80 in

1995 and 0-to-35 in 2002. According to the WTO, Ethiopia‟s average applied tariff rate was 17.3

percent in 2012 with agricultural products enjoying higher tariff protection with tariff rate of

22.4 percent. Although exchange rate reforms started in1992, Ethiopia‟s central bank administers

a strict foreign currency control regime and the local currency (Birr) is not freely convertible.

Ethiopia is not a member of the World Trade Organization (WTO), but would soon accede to the

WTO. The General Council established a Working Party to examine the application of Ethiopia

on 10 February 2003. Ethiopia‟s Memorandum on its Foreign Trade Regime was circulated in

January 2007. The Factual Summary of Points Raised, prepared by the Secretariat, was

circulated in March 2012. The Working Party met for the third time in March 2012 to continue

the examination of Ethiopia‟s foreign trade regime.

Source: World Development Indicator, World Bank, 2014.

11

With the progressive trade liberalization, both most favored nation and applied tariff rate

declined significantly between 1995 and 2001. However, since then tariff rate both applied and

MFN have remained almost the same (Figure 1).

In this section, we will review the performance of export, import and trade balance of Ethiopia

during 1990-2012. Total exports, imports and trade are presented in Figure 2. It is clear that

both exports and imports have increased since 1990 and more significantly since early 2000s

although import is higher than export consistently during 1990-2012. Exports have increased

from around $671 million US dollar in 1990 to above $1139 million dollar in 2003 and further to

$5.8 billion in 2012. Similarly, imports increased from $1.1 billion in 1990 to $2.3 billion in

2003 and further to $13.3 billion in 2012. As a result, Ethiopia experienced trade deficit

consistently throughout 1990s and 2000s. Overall, total trade increased from $1.77 billion in

1990 to above $19.1 billion 2012.

0.0

5000.0

10000.0

15000.0

20000.0Figure2: Trends in Exports, Imports and Trade (in US million $)

Exports Imports Trade

Source: World Development Indicator, World Bank, 2014.

Exports and imports as ratio of GDP also shows similar trend. While exports as ratio of GDP

increased from 5 per cent in 1990 to above 12 percent in 2001 and thereafter it remained in the

range of 12-16 percent during 2000-12. On the hand, imports as ratio of GDP increased from

around 9 percent in 1990 to above 24 percent in 2001 and further to above 32 percent in 2012.

12

Source: World Development Indicator, World Bank, 2014.

As a result, trade as ratio of GDP increased from a mere 14 percent in 1990 to above 36 percent

in 2001 and further to above 46 per cent in 2012 (Figure 3). Overall, it is found that both exports

and imports have increased in the recent period following trade liberalization. Notwithstanding

the rise in exports and imports in the 1990s and 2000s, trade share of Ethiopia in the world trade

remained at a very low level.

Source: World Development Indicator, World Bank, 2014.

As seen from Figure 5, most of Ethiopian exports are dominated by agricultural items, which

accounts for 90% of the total value of exports, coffee alone accounts for 60% of the total volume

13

of exports. The share of manufacturing products remained around 10 percent over 1990-2012. In

contrast, the share of manufacturing products is dominant in import baskets. The share of

manufacturing products remained close to 70 percent over two decades. Among other, capital

goods and fuel are the two dominant import items of Ethiopia.

Source: World Development Indicator, World Bank, 2014.

The direction of trade shows that European Union remained the largest export destination with

28 percent of total exports of Ethiopia followed by China (11 percent) and Somalia (9 percent).

India is not in the top five export destinations of Ethiopia. Similarly, Ethiopia imports emanate

from China, Saudi Arabia, EU and India.

Table 3: Export and Import Destination of Ethiopia, 2012

Top Five

Countries

Export destination

(% share)

Top Five Countries Import Sources

(% share)

European Union (27) 28.4 China 21.6

China 11.1 Saudi Arabia 14.1

Somalia 9 European Union (27) 14

Saudi Arabia 6.6 India 8.3

Switzerland 6.1 Kuwait 6.2

Top five country

Share

61.2 64.2

Source: WTO Trade Profile of Ethiopia, 2014.

14

India stands fourth in the list of major importers with 8.3 per cent of Ethiopia‟s total imports

coming from India. The share of top five countries stands at 61 and 64 percent of total exports

and imports of Ethiopia respectively.

In Table 4 we present trade diversification and concentration index for Ethiopia. Trade

diversification index is positive suggesting that exports basket of Ethiopia is different from world

export basket. However, the value is declining over time indicating that the export basket

difference between Ethiopia and world is reducing over time. Similarly, the value of the

concentration index indicates that Ethiopia‟s export basket is concentrated on a few items like

coffee and other agricultural products.

Table 4: Concentration and diversification index of merchandise exports

1995 2000 2005 2008 2009 2010 2011 2012

Diversification 0.617 0.504 0.379 0.376 0.332 0.347 0.361 0.338

Concentration 0.546 0.57 0.64 0.78 0.79 0.80 0.79 0.77

Sources: UNCTAD online database

Notes: The diversification index (ranges between 0 to1) signals whether the structure of exports by product of a

given country or group of countries differ from the structure of product of the world. The index value closer to 1

indicates a bigger difference from the world average. Concentration index, also named Herfindahl-Hirschmann

index, is a measure of the degree of market concentration. It has been normalized to obtain values ranking from 0 to

1. An index value that is close to 1 indicates a very concentrated market.

Further, we also present trade specialization index for Ethiopia in Table 5 over 1995-2012. It is

clear that trade specialization index is negative for all products and manufacturing products,

indicating Ethiopia is a net importer from rest of the world. Even in the primary goods, Ethiopia

is a net importer. Only in agricultural raw materials2, Ethiopia has trade advantages as trade

specialization is positive.

2 According to SITC 2, these goods include; Hides, skins and furskins, raw, Crude rubber, Cork and wood, Pulp

and waste paper, Textile fibres (except wool tops) and their wastes and Crude animal and vegetable materials,n.e.s..

15

Table 5: Trade Specialization Index of Merchandise Trade

commodities 1995 2000 2005 2008 2009 2010 2011 2012

All Products -0.46 -0.446 -0.63 -0.688 -0.66 -0.57 -0.54 -0.64

Primary

commodities

0.086 0.057 -0.15 -0.40 -0.21 -0.12 -0.13 -0.247

Agricultural Raw

Materials

0.45 0.68 0.57 0.35 0.62 0.63 0.61 0.45

Manufactured

Products

-0.89 -0.90 -0.96 -0.94 -0.94 -0.92 -0.91 -0.93

Sources: UNCTAD online database

Notes: Trade specialization index varies between -1 and 1, the positive value indicates that an economy has net

exports (hence it specializes on the production of that specific product) and negative values means that an economy

imports more than it exports (net consumption). Commodity classification as per the SITC 2, UNCOMTRADE.

IIIB. India

India started partial trade liberalization in the early 1980s but full-fledged trade reforms in

1991following a balance of payment crisis in 1991. Recognizing the important linkages between

trade and economic growth, India has simplified its tariffs, eliminated quantitative restrictions on

imports, and reduced export restrictions in a phased manner. Import licensing was abolished for

capital goods and intermediates, which became freely importable in 1993. The pace of reforms

gathered momentum over the period 1991–1996 when controls over trade were relaxed

extensively. The peak rate of import duty on non-agricultural imports was gradually reduced

from as high as 150 per cent in 1991-92 to the present level of 10 percent (subject to certain

exceptions).The Government has continued to reduce applied MFN tariffs on non-agricultural

products to meet its goal of reaching ASEAN tariff levels on these products by 2009. As a result,

the overall average applied MFN tariff has fallen from over 35% in 2001 to less than 14% in

2009. Similarly, average applied tariff rate also declined from 32 percent in 2001 to less than 12

percent in 2009.The use of import restrictions, maintained under GATT Articles XX and XXI

has declined, with around 3.5% of tariff lines subject to such measures. Since 2002, India's use

of anti-dumping and countervailing measures has declined, although it is still one of the largest

users of these instruments. In 2010/11, tariffs ranged from zero to 150%. The largest proportion

of lines (71% or 8,042) was subject to a tariff rate of between 5% and 10%, while 12.8% of total

lines were subject to a tariff rate greater than zero but lower than 5% (WTO, 2011).

16

Source: World Development Indicator, World Bank, 2014.

India‟s total export of goods and services increased from $22 billion in 1990 to above $160

billion in 2005 and further to $446 billion in 2012. Similarly, imports increased from $27 billion

in 1990 to above $183 billion in 2005 and further to above 571 billion in 2012. Total trade

increased from $47 billion in 1990 to above $1.1 trillion in 2012 (Figure 7). According to WTO

(2014) in 2012 India ranked 19 and 11 in terms of merchandise exports and imports in world

respectively. In contrast, in 2012, India ranked 6 and 7 in terms of commercial services exports

and imports in world respectively.

Source: World Development Indicator, World Bank, 2014.

Due to rise in export, exports as ratio of GDP increased from just 7 percent in 1990 to close to 24

percent in 2012. During this two decades export ratio increased by 17 percent. Similarly, imports

ratio also increased from 8 percentage of GDP in 1990 to above 30 percent, 22 percent increase

17

over 23 years. Total trade as ratio of GDP increased from 15 percent in 1990 to above 41 percent

in 2005 and further to 54 percent in 2012 (Figure 8).

Source: World Development Indicator, World Bank, 2014.

The rise in exports and imports are reflected rise in India‟s share in the world trade. For example,

India‟s share in world exports increased from 0.5 per cent in 1990 to 2 per cent in 2012.

Similarly, India‟s share in world imports increased to 0.56 percent in 1990 to above 2.5 percent

in 2012. As result India‟s trade share now stands at 2.25 percent (Figure 9).

0

0.5

1

1.5

2

2.5

3

Figure 9: India's Export, Import and Trade Share in the World (%)

Export Import Trade

Source: World Development Indicator, World Bank, 2014.

In contrast to Ethiopia, India‟s export is dominated by manufactured goods. As seen from Figure

10, manufactured products accounts 70% of the total value of exports, and rest are shared

between fuels and primary products. The share of manufacturing products remained around 70

percent over 1990-2012. In contrast, the share of manufacturing and fuels products is dominant

18

in import baskets. The share of manufacturing products remained close to 50 percent over two

decades. Among other, capital goods and fuels are the two dominant import items of India.

Source: World Development Indicator, World Bank, 2014.

In term of export destination, European Union dominates India‟s export with 16.8 per cent of

total exports. Next important export destination for India is United States a, followed by United

Arab Emirates with export share of 12.8 and 12.4 percent respectively. On the other hand, India

imports around 11 percent from EU and China. UAE is third import destination of India with 7.7

percent share. Share of top five countries stands at 51 and 42 percent of total exports and imports

of India respectively (Table 6).

Table 6: Export and Import Destination of India, 2012

Top Five

Countries

Export destination

(% share)

Top Five Countries Import Sources

(% share)

EU(27) 16.8 EU(27) 11.1

United Stats 12.8 China 11.1

UAE 12.4 UAE 7.7

China 5.1 Saudi Arabia 6.7

Singapore 4.7 Switzerland 5.9

Top five country

share

51.8 42.5

Source: WTO, Trade profile of India, 2014.

19

In Table 7 we present trade diversification and concentration index for India. Trade

diversification index is positive but less than 0.2 suggesting that exports basket of India is

moderately different from world export basket. Similarly, the value of the concentration index is

close to 0.5 indicating that India‟s export basket is concentrated on few items like fuels, Gems

and Jewelry, and textile products over 1995-2012.

Table 7: Concentration and diversification indices of merchandise exports

1995 2000 2005 2008 2009 2010 2011 1012

Diversification 0.138 0.146 0.129 0.158 0.148 0.164 0.182 0.172

Concentration 0.58 0.57 0.49 0.51 0.48 0.50 0.49 0.50

Sources: UNCTAD online database

Further, trade specialization index which indicates whether a country is net exporter or importer,

suggest that India remained net importer from rest of the world. India has negative trade

specialization index for all products, primary and manufacturing items. Only in agricultural raw

materials, India has turned net exporter for last two years.

Table 8: Trade Specialization Index of Merchandise Trade

Commodities 1995 2000 2005 2008 2009 2010 2011 2012

All Products -0.07 -0.11 -0.16 -0.26 -0.20 -0.22 -0.21 -0.25

Primary

commodities

-0.16 -0.34 -0.13 -0.35 -0.34 -0.29 -0.33 -0.38

Agricultural Raw

Materials

-0.57 -0.59 -0.45 -0.16 -0.27 -0.06 0.0 0.20

Manufactured

Products

-0.05 0.02 -0.12 -0.16 -0.08 -0.10 -0.06 -0.05

Sources: UNCTAD online database

To sum up, it is found that exports and import have achieved higher growth rate in 2000s in both

India and Ethiopia. Trade as ratio of GDP has increased from 15 percent in 1990 to above 50

percent in 2012. However, both the countries are running trade deficit consistently over 1990-

2012. India export and import is dominated by manufactured products while Ethiopian exports

basket is dominated by agricultural products. India‟s trade share increased while that of

20

Ethiopia‟s trade share remained constant during 1990-2012. Trade diversification index

indicates that both countries remained net importer. Similarly, concentration index is more than

0.5 suggesting that exports basket of both countries are dominated by few items.

IV. Trade between India and Ethiopia

India and Ethiopia relations go back to about 2,000 years of recorded history. Trade between the

two countries flourished during the ancient Axumite Empire (1st century AD), which is seen to

be origin of modern Ethiopia. Diplomatic relations between India and Ethiopia were established

in 1950. In recent years, with the opening up of the Ethiopian economy, investment and trade ties

between the two countries have grown significantly. In first step, a Trade Agreement between the

Government of India and Ethiopia was signed on March 6, 1997 and a Joint Trade Committee

(JTC) set up. Various bilateral agreements have been signed by the two countries. These include: 3

Air Services Agreement (1967) which was signed again in March 2008.

Agreement on Technical, Economic and Scientific Cooperation (1969)

Cultural Agreement (1983)

Trade Agreement (1997). This agreement is under negotiation for revision.

Agreement on Cooperation in Micro Dams and Small Scale Irrigation Schemes (2002)

Agreement on Establishment of Joint Ministerial Commission (2007)

Bilateral Investment Promotion and Protection Agreement (2007)

Agreement on Cooperation in the field of Science and Technology (2007)

Educational Exchange Programme (2007)

Protocol on Foreign Office Consultations (2007)

Double Taxation avoidance treaty (2011)

Memorandum of Understanding between NSIC, India and FEMSEDA (2011)

Memorandum of Understanding between the Indian Council of Agricultural Research and

the Ethiopian institute of Agricultural Research (December 2011).

In addition, a bilateral Investment Promotion and Protection Agreement (BIPPA) was signed on

July 5, 2007. India and Ethiopia also have signed Double Taxation Avoidance Agreement

3 Indian Ministry of External Affairs (2013). Available from http://mea.gov.in/Portal/ForeignRelation/Indian-

Ethiopia_Relations.pdf

21

(DTAA) on May 25, 2011 during the second India-Africa Forum Summit held in Addis Ababa

from May 24-25, 2011. More importantly, during the India-Africa Forum Summit of April 2008,

India had announced the Duty Free Tariff Preference Scheme (DFTP) for LDCs and Ethiopia

was among the first countries that utilized the DFTP Scheme.

With recent agreements and actions, trade between two countries has increased from a meagre

$53 million in 2000 to $261 million 2010 and further to $1 billion in 2013. Annual Export from

Ethiopia to India increased from $2 million in 2000 to above $28.6 million in 2010 and remained

the same in 2013. On the other hand, India‟s annual export to Ethiopia increased from $51

million in 2000 to $974 million in 2013. Notwithstanding growing trade between India and

Ethiopia, trade balance remained highly in favour of India. This is the major concern area

between the two countries.

Table 9: India’s Export from and Import to Ethiopia (in $million) 2000 2005 2006 2007 2008 2009 2010 2011 2012 2013

Import 2.03 10.4 9.7 13.13 11.56 15.7 28.6 32.7 30.5 28.7

Export 51.2 66.3 105.9 163.5 216.5 283 261.6 425 643 973.8

Total Trade 53.23 76.7 115.6 176.63 228.06 298.7 290.2 457.7 673.5 1002.5

Trade Balance -49.2 -55.9 -96.2 -150.4 -204.9 -267.3 -233 -392.3 -612.5 -945.1

India‟s Exports to

Ethiopia as ratio

of India‟s total

export (%) 0.12 0.07 0.09 0.11 0.12 0.16 0.12 0.14 0.22 0.29

Ethiopia‟s Exports

to India as ratio of

Ethiopia‟s total

export (%) 0.42 1.12 0.93 1.03 0.72 0.97 1.23 1.25 1.05

NA

Source: UN COMTRADE Database using Standard International Trade Classification (SITC) Revision 2

Although India‟s export to Ethiopia increased by 19 times between 2000 and 2013, its export to

Ethiopia as ratio of total exports is still below 0.3 percent. Similarly, Ethiopia‟s export to India as

ratio of total exports, counts only 1 percent. The low trade share between India and Ethiopia

suggests that there is large scope for further improvement.

22

The import basket of Ethiopia from India indicates that Ethiopia mainly imports manufacturing

products like chemical, machinery and transport equipment‟s, iron and steel, pharmaceutical

products, miscellaneous manufactured articles and road vehicles.

Table 10: India’s Major Export Commodities to Ethiopia

2005 2013

Chemicals and related products, nes

Manufactured goods classified chiefly by materials

Machinery and transport equipment

Medicinal and pharmaceutical products

Miscellaneous manufactured articles

Artificial resins and plastic materials, and cellulose esters

etc.

Iron and steel

Professional, scientific, controlling instruments, apparatus,

nes

Paper, paperboard, and articles of pulp, of paper or of

paperboard

Rubber manufactures, nes

General industrial machinery and equipment, nes, and

parts of, nes

Other machinery, equipment, for specialized industries;

parts nes

Glycosides, glands, antisera, vaccines and similar products

Textile yarn, fabrics, made-up articles, nes, and related

products

Road vehicles

Manufactured goods classified chiefly by materials

Chemicals and related products, nes

Machinery and transport equipment

Iron and steel

Medicinal and pharmaceutical products

Universals, plates, and sheets, of iron or steel

Miscellaneous manufactured articles

Commodities and transactions not classified

elsewhere in the SITC

Food and live animals chiefly for food

Cereals and cereal preparations

General industrial machinery and equipment, nes,

and parts of, nes

Road vehicles

Electric machinery, apparatus and appliances, nes,

and parts, nes

Tube, pipes and fittings, of iron or steel

Wheat and meslin, unmilled

Rice

Source: UN COMTRADE Database using Standard International Trade Classification (SITC) Revision 2

The export basket of Ethiopia to India indicates that Ethiopia mainly exports primary goods such

as live animals, vegetables, pulses, oilseeds, food crops, leather goods, crude materials, and

coffee, cotton, spices and scrap metals. Over the years, export and import basket has not

changed significantly between the two countries. The patterns of Ethiopia‟s exports to the world

and to India are relatively similar. Indeed, food and live animal, vegetable and fruit,

manufactured goods classified chiefly by materials, Crude materials are the predominant exports

23

to both India and to the world. Overall, Ethiopian exports to India have shown limited signs of

diversification since 2005 (Table 10 and 11).

Table 11: Ethiopia’s Major Export Commodities to India and world

Exports to India Export to world

2005 2013 2012

Crude materials, inedible, except

fuels

Hides, skins and furskins, raw

Food and live animals chiefly for

food

Manufactured goods classified

chiefly by materials

Refractory bricks and other

refractory construction materials

Vegetables and fruit

Spices

Coffee, tea, cocoa, spices, and

manufactures thereof

Metalliferous ores and metal scrap

Non-ferrous base metal waste and

scrap, nes

Textile fibres (not wool tops) and

their wastes (not in yarn)

live animals chiefly for food

Vegetables and fruit

Pulses, oilseeds and food crops

Manufactured goods classified

chiefly by materials

Leather, leather manufactures, nes,

and dressed furskins

Crude materials, inedible, except

fuels

Sheep and lamb skin leather

Coffee, spices, and manufactures

thereof

Metalliferous ores and metal scrap

Crude animal and vegetable

materials, nes

Chemicals and related products, nes

Inorganic chemicals

Commodities and transactions not

classified elsewhere in the SITC

Machinery and transport equipment

Crude fertilizer and crude minerals

Miscellaneous manufactured articles

Hides, skins and furskins, raw

Food and live animals chiefly for

food

Coffee, tea, cocoa, spices, and

manufactures thereof

Crude materials, inedible, except

fuels

Vegetables and fruit

Commodities and transactions not

classified elsewhere in the SITC

Manufactured goods classified

chiefly by materials

Live animals chiefly for food

Meat and preparations

Miscellaneous manufactured articles

Machinery and transport equipment

Cereals and cereal preparations

Chemicals and related products, nes

Leather, leather manufactures, nes,

and dressed furskins

Textile fibres (not wool tops) and

their wastes (not in yarn)

Source: UN COMTRADE Database using Standard International Trade Classification (SITC) Revision 2

IV A. Export Intensity between India and Ethiopia

Export intensity measures the relative importance of a given country in total exports to a trading

partner. More specifically, it compares a given country‟s share of exports to a specific trading

partner to its share of global exports. Export intensity values range from zero and upwards.

24

Values greater than one indicates an „intense‟ trade relationship or a bilateral trade flow that is

larger than expected between two countries. The intensity of Ethiopian exports to India is

presented in Table 12. It is clear that the intensity of exports to India remained less than one

during the period 2000-2012. It rose between 2000 and 2005 but declined thereafter. On the

other hand, India‟s export intensity remained more than 1 although declined from the peak value

of 6.05 in 2000. In recent time export intensity of India to Ethiopia is increasing showing the

dominant position of India in Ethiopia-India bilateral trade relation. The decline in export

intensity of Ethiopia to India is due to two reasons. First, first Ethiopia‟s export basket remained

same over time and second is increased competition from other suppliers in East African

countries, notably Tanzania and Kenya (Chukwuka, et al. 2014).

Table 13: Export Intensity between Ethiopia and India

2000 2005 2006 2007 2008 2009 2010 2011 2012

Ethiopia

to India 0.502 0.81 0.620 0.637 0.358 0.444 0.519 0.477 0.370

India to

Ethiopia 6.05 1.64 1.99 2.61 2.14 2.44 2.04 2.79 3.20

Source: Authors estimation using UN COMETRADE data.

IV B. Trade complementarity Index (TCI) between Ethiopia and India

While trade intensity assesses the importance of a trading partner relative to the rest of the world,

trade complementarity assesses the extent to which two countries are natural trading partners. A

perfect positive correlation between the two sectoral shares yields an index of one, while a

perfect negative correlation yields zero. The critical value of TCI is 0.40, meaning any value

less than this level will lead to lack of trade complementarity. As evident from Table 14,

Ethiopia clearly lacks the export complementarity with India as TCI is less than 0.2 for all years.

This is mainly justified by comparing the composition of Ethiopia‟s exports and India‟s imports.

While Table 11 shows that Ethiopia‟s major exports are food and live animals, coffee and tea,

crude materials and vegetable and fruits, India‟s major import items are manufactured products

and fuels. Thus Ethiopia‟s exports are not diversified enough to meet the import demands of

India.

25

Table 14: Trade complementarity between Ethiopia and India

2000 2005 2009 2010 2011 1012

0.082 0.081 0.12 0.14 0.09 0.12

Source: Chukwuka, et al. 2014.

IV C. India’s DFTP Scheme for LDCs and Ethiopian Exports

The decision to provide Duty Free Quota Free (DFQF) market access to the Least Developed

Countries (LDCs) was one of the most important decisions reached at WTO Hong Kong

ministerial. India became the first developing country to extend this facility to all Least

Developed Countries (LDCs). India‟s Duty Free Tariff Preference (DFTPI) Scheme for LDCs

came into effect in August, 2008 with tariff reductions spread over five years. The Scheme is

open to all the LDC members (a total of 49, including 34 LDCs in Africa), named as

“Beneficiary Country” under the Scheme.

As per the scheme, applied duties on about 85 per cent of India‟s total tariff lines would be

removed over a period of 5 years with 20 per cent reduction each year. In addition, preferential

market access as per Margin of Preference (MOP) is also available on about 9 per cent tariff

lines (458 items). The MOP ranges from 10 per cent to 100 per cent on different items and is

available on the applied rate of duty as on the date of imports. Six per cent of total tariff lines

(326 items) are included in the exclusion list. No tariff preference is available on these products.

The imports are allowed at only MFN rates4.

The scheme offers preferential treatment for many products exported by LDCs. For instance, the

scheme gives a preference to products such as cocoa, cane sugar, cotton, fish fillets, readymade

4 On April 1, 2014, the Government of India has notified the amendments to the DFTP scheme announced on

August 13, 2008. The notification includes two tables that are meant to replace the corresponding lists of preference

products (that is, products on which lower-than-MFN tariffs are applied) and excluded products in the original

notification. With these changes, the DFTP scheme will now effectively provide duty treatment to about 98 per cent

of tariff lines, up from 85 per cent initially. The number of tariff lines in the exclusion list has shrunk from 326 to

97; the new MOP list features 114 tariff lines compared to 468 originally. The majority of them now enjoy duty-free

status; only a few products – notably fresh tomatoes, almonds (shelled) and walnuts – have been shifted from the

exclusion list to the “positive list” with a margin of preference (MOP) of 25 per cent. Howe the revised DFTP will

benefit Ethiopia marginally as its major export items like coffee, sesame Seeds and sweet corn is in the exclusion

list.

26

garments, and ores (aluminum and copper). Despite the comprehensive coverage of the scheme,

many products of key importance to LDCs, such as fruits and vegetables, coffee, spices, cereals,

teas, tobacco products, oil seeds, iron and steel, and other metals, are on the exclusion list5.

Under the DFTP, preference products (duty-free products or MOP products) can be exported to

India at concessional rates provided they comply with the rules of origin regime. In particular, to

be eligible for tariff preferences, products need to simultaneously satisfy the following

conditions:

a. at least 30% domestic value addition;

b. a change in tariff heading; and

c. the final process of manufacture performed in the territory of the exporting country.

Moreover, cumulation of value is allowed only with inputs from India and not with other parts of

the world. As of June 2014, 29 LDCs are beneficiaries under the DFTP scheme. Of the 29 LDCs,

7 are in the Asia-Pacific region and 22 are in Africa. Ethiopia was among the first LDCs who

applied to join the scheme.

To assess the impact of India‟s DFTP scheme, we divide Ethiopia‟s exports pre-DFTP period

(2004-2007) with the post-DFTP period (2009-20112), using 2008 as a cut-off point. Table 15

provides the average exports of Ethiopia‟s top 30 exports to India and compares the growth rates

of exclusion, MOP, and duty-free products between the post- and pre-DFTP periods. Between

the two periods considered, the export of duty-free products observed the highest growth rate

(251 per cent), followed by exclusion products (235) and MOP products (148 per cent). Even

though the combined share of duty-free and MOP products over total top-30 exports had a slight

decline in the post-DFTP period (1.6 percent), preference products still make almost 85 percent

of Ethiopia‟s export basket to India. In particular, duty-free products make almost half of the

5 In particular, vegetable, base metals and articles, prepared food products and tobacco products and Chemical and

allied products 40 percent, 17 percent, 16 percent and 6 percent respectively (ICTSD 2014). . Many of the products

in the exclusion list, such as coffee, are of key interest for Ethiopia.

27

export value in the post-DFTP period and their share increased by almost 7 percent in

comparison with the period immediately before the came into effect of the DFTP.

Table 15: Ethiopian Exports to India by Product Export Status (USD Millions)6

Pre-DFTP (2004-2007) Post-DFTP (2009-2012)

Product

Classification

Average

Exports

(In $ millions)

Percentage

of Top 30

Exports

(%)

Average

Exports

(In $

millions)

Percentage of

Top 30

Exports

(%)

Growth

(%)

Duty-Free 5.3 42.7 18.6 49.2 250.9

Exclusion 1.7 13.7 5.7 15.1 235.3

MOP 5.4 43.6 13.4 35.5 148.2

Total Avg. Exports

of top 30 Products

12.4 37.8 204.8

Total Avg. Exports 13.0 42.0 223.1

Source: ICTSD

Note: Table based on HS2002 data.

Overall, it looks like the DFTP scheme has stimulated Ethiopia‟s exports of preference products

to India, particularly duty-free products. However, the benefits could be bigger if India would

eliminate or reduce tariffs on agricultural products and other products of export interest to

Ethiopia that are currently in the MOP or exclusion lists.

V. Indian Foreign Direct Investment

V A. FDI policy in Ethiopia

Ethiopia has been following a liberal foreign investment policy since 1992. It has amended its

investment code7 six times (1992, 1996, 1998 and 2002, 2012 and 2014) and has gradually lifted

sectoral restrictions. The code has been amended several times in order to meet the demands of

both domestic and foreign investors (Selemon, 2008). In 2012, Ethiopia has planned to establish

12 industrial development zones (2 are already established and 2 are in the process) to attract

higher FDI to Ethiopia in order to enhance competitiveness, and facilitating export-led growth.

6 HS2002 data was used for the calculations. Blanks in the COMTRADE dataset are treated as missing data as

opposed to no trade. 7 Ethiopia‟s primary law relating foreign investment is called Investment Proclamation on Investment Code.

28

According to EIC8 (2013) foreign investment FDI in strategic sectors, such as financial services,

and telecom, are not allowed. Other sectors such as telecommunications, transport, power,

infrastructure, and postal services (except for courier services) are allowed under tender. In

power sector private sector are allowed but they will sell the power to national grid. Despite a

latest round of liberalization, foreign direct investment remains regulated and many sectors are

still closed for foreign investors.

V B. FDI inflows To Ethiopia

Despite being one of the fastest growing economies not only in Africa but also in world, Ethiopia

has faced fairly extreme swings in FDI inflows over the last decade. FDI inflows to Ethiopia

increased from $135 million in 2000 to $545 million in 2006. But FDI inflows declined in 2007

and 2008 mainly due to global economic crisis in 2007-08 and high inflation. In 2008, FDI

inflows declined to their lowest level, USD 109 million, in more than a decade. Between 2009

and 2011, FDI flows increased steadily before reaching their highest level, USD 970 million, in

2012. FDI inflows as ratio of GDP indicate that, the ratio declined from the peak of 3.64 percent

in 2006 to the lowest of below one percent (0.43 percent) in 2008 and since then it has

consistently increased. FDI stock as ratio of GDP also shows the same trend during the period

2000-12. Mention the period. FDI stock as a ratio of GDP increased from 2009 onwards after

falling from 2005 peak.

Table 16: FDI inflows to Ethiopia

2000 2005 2006 2007 2008 2009 2010 2011 2012

FDI inflows (in $

million)

135

265 545 222 109 221 288 627 970

FDI inflows as

ratio GDP (%) 1.66 2.18 3.63 1.17 0.43 0.78 1.10 2.10 2.33

FDI inflows as

ratio GFCF (%) 7.22 8.20 13.00 4.69 1.66 2.71 3.57 7.17 6.85

FDI stock (in $

million)

941

2821 3366 3588 3697 3918 4206 4833 5803

8 Ethiopian Investment Commission.

29

FDI stock as ratio

of GDP (%) 11.7 23.19 22.47 18.89 14.44 13.90 15.99 16.14 13.95

FDI stock as ratio

of GFCF 50.33 87.34 80.32 75.82 56.33 48.09 52.18 55.29 40.98

Source: UNCTAD online database,

GFCF: Gross Fixed capital formation.

FDI inflows as ratio of gross fixed capital formation is quite substantial in Ethiopia averaging 4

to 5 percent during 2000-12 except the year 2008 and 2009 when it dipped below 3 percent level.

More importantly, FDI stocks as ratio of GFCF remained close to 50 percent of gross fixed

capital in the second half of 2000 (Table 16).

Sector-wise investment indicates that, manufacturing sector attracted the maximum investment

followed by agriculture, Real estate, renting and Business activities and hotel and restaurant.

Recently, construction sector also attracted high investment in Ethiopia. (Table 17).

Table 17: FDI by Sector (% share) Sector 2009-10 2011-12

Manufacturing Sector 36.9 31.1

Agriculture 22.4 15.9

Real estate, renting and

Business activities 12 15.8

Hotel and restaurants 10.8 8.4

Construction 10.2 20.3

Education 1.5 0.31

Health and social work 2.6 1.9

Electricity, gas, steam and

water supply 0.03 4.8

Source: Ethiopian Investment Commission

The major sources of FDI include Turkey, China, Saudi Arabia, India, Sudan, Britain, Germany

and Netherlands during July 2012 to July 2013. In term of projects, China and India have the

highest number FDI projects in Ethiopia. Other countries have 345 FDI projects. Together total

712 FDI projects worth of $3.5 billion are under implementation during July 2012 –July 2013

(Table 18).

30

Table 18: FDI Inflows by Countries (July 9, 2012 – July 5, 2013)

Country No. of Projects FDI (in million USD)

Turkey 34 1513.53

China 155 358.64

Saudi Arabia/Ethiopia 11 318.18

India 47 302.99

Sudan 97 125.08

Britain 2 114.32

South Africa/Ethiopia 2 112.49

Saudi Arabia 19 107.66

Germany/Ethiopia 5 100.69

Netherlands/Ethiopia 4 40.94

Others 345 458.23

Total 712 3552.69

Source: http://www.state.gov/e/eb/rls/othr/ics/2014/228384.htm#

V C. Indian Foreign Direct Investment in Ethiopia

Between June 2003 to May 2014, close to 632 Indian firms have invested around USD 5 billion

in Ethiopia. Indian firms have been active in sectors such as agriculture, floriculture, cotton and

textiles, plastics, leather, I.T., mining and health care. In Addis Ababa, Indian firms are

particularly engaged in engineering services, consultancy services, ICT services, manufacturing,

water management services, and education services.9 It is estimated that 632 Indian firms are

currently operating in Ethiopia on around 608 projects. The Ministry of External Affairs,

Government of India, in a July 2014 note on India Ethiopia Relations estimates that out of the

$5billion invested so far, approximately US$2billion is already on the ground or in the pipeline.

About 48% of Indian companies are in Manufacturing and 21% in agriculture and rest are in

services sector10

.

9 The Embassy of India. 2014. India-Ethiopia Commercial Bilateral Relations.

http://www.indembassyeth.in/eoi.php?id=Commercial 10

http://www.mea.gov.in/Portal/ForeignRelation/Ethiopia_July_2014_.pdf

31

V. D. Indian investment in Primary Sector

Since 1993, India has invested more than USD 1.5 billion in the primary sector of which

approximately 97 per cent has been directed towards the growing of crops: fruit, vegetables,

flowers, and beverage crops. The next largest destination for Indian investment, a little more than

1 per cent, was animal farming. Mining and quarrying, the third largest location for FDI attracted

USD 7.3 million. 11

Some of the major firms that have invested in the Ethiopian agriculture

sector are Karaturi Global, Shampoorji, BHO agro, White Field, Ruchi Soya etc. (Table 18). In

addition, Indian investment, according to data provided by the Ethiopian Investment Agency, has

resulted in the creation of nearly 20,161 permanent jobs and roughly 220,593 temporary jobs.

India also made a commitment to raise Lines of Credit facilities to Ethiopia‟s agricultural sector.

According to the Exim Bank Report, the largest single LOC approved by the Exim Bank so far is

the one to Ethiopia (US$ 640 million) for its Tindaho Sugar Project, $65 million a power

transmission and distribution project under rural and US $300 million for a railway line project.

Table 19: Indian Investments in the Ethiopian Agriculture Sector

Company Size in hectares Crops

Karaturi Global 100,000 Palm oil, Cereals, Pulses and sugar cane

JVL Overseas PTE ltd 5000 Cotton

Green valley Agro PLC 5000 Cotton

Shampoorji 50,000 Cereals, pulses, oilseeds and spices

BHO Agro plc 27,000 Cereals, pulses, edible oils

White Field 10000 Cotton

Ruchi Soya 25,000 Soya bean

Sannati Agro Farm Enterprises 10,000 Rice

Vedanta Harvests 3,012 Tea and allied crops

CLC 25000 Cotton

Saber farm PLC 25000 Cotton and Soybean

Total 285012

11

Figures are based off of investment data provided by the Ethiopian Investment Agency quoted in local currency

(Barr). Average exchange rates, sourced from the IMF, were applied. Average rates were used in order to take into

account recent volatility in the Barr-USD exchange rate.

32

Source: Ministry of Agriculture, Ethiopia

V. E. Indian Investment in Industrial Sector

Between 1993 and the first quarter of 2014, the Industrial sector attracted the lion‟s share,

roughly 54 per cent, of total Indian investment in Ethiopia.12

In contrast to investments in the

primary sector, FDI flows to the secondary sector were more diversified with significant

investments being made in a variety of industries including leather tanning, textiles, chemicals,

food processing, mining, paper products and metal products. In addition, employment creation

was more evenly distributed between permanent employees (28,386) and temporary employees

(24,833) than employment related to Indian investments in the primary sector.

The textile industry attracted the largest share, 46.6 per cent of total manufacturing-related

investment, from Indian investors. In addition to investing in the cultivation of cotton, Indian

firms have also introduced value-addition activities in the textile and garment industry by

investing in cotton processing and manufacturing. In 2011, Sara Cotton Fibres Private Ltd

established a cotton grinning facility and plans to export its products to India.13

Indian firms have also invested heavily in food and beverage processing and manufacture. Since

1998 they have invested more than USD 124 million in the industry and created more around

2,500 permanent jobs and more than 3,000 temporary jobs.14

In addition to providing

employment opportunities and much needed foreign investment, Indian firms have also been

engaged in technology transfer. For example, in 2014, the Allana Group, largest food processor

in Addis Ababa, revealed plans to establish a meat processing factory. Having secured 72

hectares of land, the investment plan for the Allana Group includes the import of slaughtering

machineries, temperature controlling systems, and refrigerators.15

Indian investors have been attracted to Ethiopia‟s growing non-metallic mineral industries

(potash, clay, salt, gypsum) and these industries have attracted nearly USD 370 million or 14 per

cent of total manufacturing investment, and have created over 5,500 jobs (both temporary and

12

Ethiopian Investment commission, 2014. 13

http://www.indiaafricaconnect.in/index.php?param=news/3181/agriculture-energy/104 14

Ethiopian Investment Agency (2014). 15

All Africa. 2014. Ethiopia: Largest Indian Meat Processor Starts to Import Machineries. Published March 29,

2014. http://allafrica.com/stories/201403310723.html

33

permanent). In order to facilitate the exports of these products (and presumably to feed India‟s

growing demand for raw materials) and to encourage further Indian and foreign investment in the

sector, India‟s Exim Bank will provide Ethiopia USD 300 million for the construction of a

railway line to Djibouti.16

V. F. Indian Investment in Service Sector

Indian firms have invested in a variety of industries including: computer and IT related activities

(24 per cent of total services investment), machinery rental (21 per cent), hotels and restaurants

(15 per cent), health and social work (13 per cent), education (9 per cent), construction (9 per

cent), and real estate (9 per cent). Cumulative Indian investment in the services sector is valued

at approximately USD 720 million between 1993 and 2014. Indian investment in services sector

has created roughly 4,220 permanent jobs and 6,188 temporary jobs. Overall, Indian investment

in Ethiopia has created 3, 04, 330 jobs in Ethiopia (Figure 11).

Figure 11: Employment Creation by Indian Investment (1993-2014)

0

50,000

100,000

150,000

200,000

250,000

Agriculture Industry Services

No

. o

f Em

plo

ymn

et

permanent Temporary

Source: Ethiopian Investment Commission

16

Bloomberg News. June, 2013. Available from http://www.bloomberg.com/news/2013-06-19/india-exim-bank-

lends-ethiopia-300-million-for-rail-to-djibouti.html.

34

VI. Hindrances in India-Ethiopia Trade and Investment Relation

Notwithstanding growing trade and investment relationship between India and Ethiopia, there are

many hindrances which are affecting their bilateral ties.. In this section we discuss these factors

in detail.

Investment Climate: As per the World Bank doing business report, 2014, the investment

climate remained very poor in both the countries as indicated by their respective ranks. Out of

189 members, rank of India and Ethiopia has declined to 134 and 125 respectively as compared

to their respective position in 2013. Among sub indicators, India scores well in registering

property, receiving credit and investors properties, while Ethiopia scores well in dealing with

construction permits, enforcing contracts and resolving insolvency.

Table 20: Rank of Ethiopia and India as per the World Bank Doing Business Report 2014

Categories Ethiopia India

2013 2014 2013 2014

Starting a Business 162 166 177 179

Dealing with Construction Permits 55 55 183 182

Getting Electricity 98 91 110 111

Registering Property 107 113 91 92

Getting Credit 105 109 24 28

Protecting Investors 156 157 32 34

Paying Taxes 103 109 159 158

Trading Across Borders 165 166 129 132

Enforcing Contracts 44 44 186 186

Resolving insolvency 77 75 119 121

Ease of Doing Business 124 125 131 134

Source: The World Bank Doing Business Indicators, 2014

Similarly, the global competitiveness report 2013-14 has also highlighted on the other problems

which India and Ethiopia are facing. Among others, inadequate supply of infrastructure,

corruption, tax regulation and policy instability are cited as the most problematic factors in India

while, foreign currency regulation, inefficient bureaucracy, corruption, access to finance, tax

rates and high inflation rate are cited as the major factors hindering business and trade in

Ethiopia (Table 21).

35

Table 21: Most Problematic factors for Doing Business as per GCI 2013-14

Problematic factors for India Problematic factors for Ethiopia

Inadequate supply of infrastructure Foreign currency regulations

Corruption Inefficient government bureaucracy

Tax regulations Corruption

Policy instability Access to financing

Restrictive labor regulations Tax rates

Inflation Inflation

Access to financing Tax regulations

Tax rates Poor work ethic in national labor force

Poor work ethic in national labor force Inadequate supply of infrastructure

Foreign currency regulations Policy instability

Government instability/coups Inadequately educated workforce

Insufficient capacity to innovate Insufficient capacity to innovate

Inadequately educated workforce Government instability/coups

Crime and theft Restrictive labor regulations

Source: The Global Competitiveness Report, 2013-14, World Economic Forum,

Table 22: Doing business rank of Ethiopia visa-vi its Neighbors

Countries 2013 2014

Ethiopia 124 125

Ghana 62 67

Uganda 128 132

Kenya 122 129

Tanzania 136 145

Nigeria 138 147

Burundi 157 140

Eritrea 185 184

Malawi 161 171

Zambia 168 170

Djibouti 172 160

Source:The World Bank Doing Business Indicators, 2014

36

Comparing the doing business rank of Ethiopia in 2014 with its other neighbors, it was found

that except Ghana all other countries are ranked lower in doing business. Only two countries

namely Burundi and Djibouti improved their ranking in 2014 compared to 2013. Overall, most of

the African countries were ranked lower in doing business.

Infrastructure bottleneck in India and Ethiopia

Inadequate Infrastructure is seen as a major obstruction for enhancement of trade between India

and Ethiopia. Both India and Ethiopia scores very poorly in transport, telecom, power

consumption, financial development etc. against high income countries. For example, paved road

constitutes around 56 percent of total road in Ethiopia and 54 percent in India but 84 percent in

high income countries. Other major problems include- electricity power consumption, internet

penetration and quality of port and health sector development. Also the external sector in both

India and Ethiopia are heavily taxed as they contribute 15 percent and 30 percent to total revenue

respectively.

Table 23: Indicators of Infrastructure Development

Indicators India Ethiopia High Income

countries

Road density. K.M(„000‟ Population) 3.84 0.5 NA

Paved road (% of total) 54 56 84

Telecom density (per 100 people) 73 28 163

Electric power consumption (kWh per capita) 684 52 8095

Per capital Health Expenditure (in US$) 61 18 1030

Internet users (per 100 people) 15 1.9 78

Quality of port infrastructure, WEF (1-7) 4.2 3.1 5.25

Domestic credit provided by financial sector

(% of GDP) 76 NA 198

Taxes on international trade (% of revenue) 15 30 0.6

Time to export (days) 16 44 12

Time to import (days) 20 44 11.5

Source: World Bank Development Indicator, World Bank, 2014.

37

In recent years, however, Ethiopia has made significant progress in infrastructure. The country

developed Ethiopia Airlines and associated regional air transport hubs. It has launched

investment program to upgrade its network of trunk roads and is establishing a funding

mechanism for road maintenance. Access to water and sanitation is expanding thanks to

judicious concentration on intermediate options such as traditional latrines, wells, boreholes and

stand posts (World Bank, 2011).

Corruption: Corruption is one of the major problems for business and trade in both the

countries. The Corruption Perceptions Index 2013 ranks India and Ethiopia at 94 and 111 out of

177 countries respectively. There are several sectors in Ethiopia where businesses are

particularly vulnerable to corruption. Land distribution and administration is a sector where

corruption is institutionalized, and facilitation payments as well as bribes are often demanded

from businesses when they deal with land-related issues. Corruption also occurs when businesses

obtain permits and licenses due to complicated bureaucracy. The customs administration lacks

qualified staff, and customs laws are usually enforced arbitrarily17

.

A study by Wei (1999) finds that corruption is a major obstacle to economic development. It

reduces domestic investment, discourages foreign direct investment, inflates government

spending, and shifts government spending away from education, health, and infrastructure

maintenance toward less efficient public projects. Therefore, reducing corruption will increase

trade and investment in both the countries. As per the S&P the credit ratings18

of India is BBB-

with negative outlook due to higher inflation rate and fiscal deficit. On the other hand Ethiopia

has received its first local currency credit rating „B‟ with stable due to strong growth. This will

help Ethiopia for a potential debut for capital floating on international markets and a marketing

tool to attract higher FDI into Ethiopia.

Lower Human Capital Development: Studies have shown that human capital development is

vital for trade development and in attracting foreign investment. (Borensztein et al, 1998 and

17

http://www.business-anti-corruption.com/country-profiles/sub-saharan-africa/ethiopia/business-corruption-in-

ethiopia.aspx. 18

For S&P, a bond is considered investment grade if its credit rating is BBB- or higher. Bonds rated BB+ and below

are considered to be speculative grade, sometimes also referred to as "junk" bonds.

38

UNCTAD 2009). Human development index 2013 ranks India and Ethiopia at 136th and 173rd

out of 187 countries respectively, indicating poor human capital in both the countries. Similarly,

Human Capital Index, 2013 ranks India and Ethiopia poorly out of 122 countries. Among sub

indicators, although India scored well in workforce and employment, education and enabling

environment except heal and wellness, Ethiopia scored very poorly in all the sub indicators

(Table 24).

Table 24: Ranks of India and Ethiopia on the basis of Human capital Index (HCI), 2013

Indicators India Ethiopia

HCI 78 116

Education 63 115

Health and wellness 112 108

Workforce and employment 49 111

Enabling environment 67 111

Source: Human capital Index, 2013, World Economic Forum. Total 122 countries covered..

Barriers to trade and Investment: Evidence from Primary Survey

In order to identify the barriers to trade and investment between India and Ethiopia, CII

conducted telephonic survey of both Indian and Ethiopian companies. The results of this survey

are given in Table 25. It is evident that from India‟s viewpoint transportation and logistics costs

are major problem for trade and investment in Ethiopia. Ethiopia is a landlocked country and

relies majorly on Djibouti for access to shipping lines. The existing rail link is old and is in dire

need of upgradation. Coupled with this is the issue of high inland transportation cost which is

estimated to account for as much as 40 per cent of the total cost of the product. Access to finance

is the second major barrier which India faces. The banking sector in Ethiopia is mainly state run

and is not geared to cater to the needs of trade. Indian exporters therefore find it extremely

difficult to obtain foreign exchange as well as funds for project financing. The volatility in the

exchange rate was a major deterrent for Indian companies trading with Ethiopia. The financial

sector is highly regulated and foreign investment is not allowed. In addition to this other

problems highlighted by Indian companies are repatriation of profits, confusion about VAT,

difficulties in accessing Ethiopian buyers, delays in costumes and procedural issues.

39

Table 25: Barriers to Trade and Investment between India and Ethiopia

Indian Perspective Ethiopian Perspective

Transportation and logistics costs Access to trade finance

Access to finance Access to Indian buyers

Repatriation of profits Poor business environment

Value Added Tax import tariffs

Difficulty in accessing Ethiopian buyers

Lack of Government support for participation in

trade fairs

Delays in customs Lack of export capacity

Procedural issues

Skill Development

Promoting English language

Source: CII Survey

From an Ethiopian perspective, there are number of issues hindering trade and investment

development between India and Ethiopia. Access to trade finance is ranked number one problem.

As per Doing Business, Ethiopia stands at 104 in the ranking of 185 economies on the ease of

getting credit. Similarly, the Global Competitiveness Report 2013-14 highlighted that access to

finance remained the major problem in Ethiopia. Ethiopia is mainly bank based economy with

very low banking density and consequently one of the lowest financial inclusion ratios of Sub-

Saharan Africa, with only 14 percent of adults having access to credit19

. According to a recent

World Bank study20

, the cost of finance in Ethiopia has decreased in recent years. But the

average value of collateral taken relative to loan size has increased dramatically, indicating that

only firms having higher collateral can access loans. Often credit is rationed in favour of larger

and more established businesses even under the most advance financial systems because of the

information asymmetry inherent in lending transactions. As a result, most of the SMEs find it

difficult to finance the gap between shipment and payment when accessing newer markets like

India.

19

https://www.agrifinfacility.org/enabling-environment-access-financial-services-ethiopia 20

“Ethiopia Toward the Competitive Frontier - Strategies for Improving Ethiopia‟s Investment Climate” – World

Bank, June 2009

40

In addition, exposure of Indian buyers to African exporters and poor business environment was

highlighted as one of the major bottlenecks by the Ethiopian respondents. Comparing the cost of

doing business, Ethiopia stands at 111th

position out of 185 countries, additionally, the time to

clear exports in Ethiopia remains one of the highest in the region. Globally, Ethiopia stands at

163 in the ranking of 185 economies on the ease of starting a business. More importantly,

Ethiopia exports mainly agricultural products and therefore is prone to price volatility and

adverse climate which affects their capacity to export.

VII. Conclusion and Policy Recommendations

Given the importance of trade and FDI in economic development, this study examines the trade

and investment relationship between India and Ethiopia. It is evident that both India and Ethiopia

are fast growing countries in the world with surplus labour force. Similarly, trade between the

two countries also increased rapidly, particularly after the Bilateral Investment Promotion and

Protection Agreement 2007. However, trade balance consistently remained in favour of India.

While India‟s export to Ethiopia consists of manufacturing goods, agricultural goods contribute

bulk of Ethiopian exports to India.

Similarly, foreign investment in Ethiopia increased significantly after the 2000. China, Turkey,

India, and Saudi Arabia are major investors in Ethiopia. Between 1993 and 2014, roughly 632

Indian firms invested over USD 5 billion. Indian firms have been active in sectors such as

agriculture, floriculture, ICT, mining, cotton and textiles, plastics, and health care. In addition,

Indian investment in Ethiopia has resulted in 3, 04, 330 jobs (temporary and permanent) in

Ethiopia. In addition, Indian investment also boosts export and industrialization in Ethiopia.

Notwithstanding the growing trade and investment relationship between India and Ethiopia,

several barriers to trade and investment exist. Both countries would need to take concrete

measures to take trade and investment to new level. A few measures that could enhance trade

and investment relations between the two countries are as follows:

41

Enhancing India's Exports and Investment to Ethiopia

Improving Business climate: Business climate remained unfavorable for investment in

Ethiopia as shown by Ethiopian ranking in World Bank Doing Business Report. Bureaucratic

hurdles, complex and number of procedure, inadequate infrastructure and taxation issues are

major hindrances for trade and investment. These issues require quick, concrete and sustained

action by Ethiopian govt. However, there is macro and political stability in Ethiopia with low

fiscal deficit. Further, industrial development strategy (IDS) recognizes investment as one of the

pillars of sustainable development and the private sector as the engine to realize the IDS. Under

this strategy private investment is encouraged with various incentives. Recently, Ethiopian

government approves private investment under one stop services.

Reducing Trade Cost

For Indian exporters, transport and logistics costs and access to African buyers are cited as major

difficulties in exporting products. As highlighted in the previous section, there is a need to

improve the ecosystem for businesses to operate in Ethiopia. Ethiopia could slash its trade costs

in a number of ways, including in the first instance by reducing the administrative burden of

export and import procedures. France, for instance, uses only two documents to import or export;

Ethiopia requires eight. Streamlining these procedures both in terms of reducing the number but

also sharply reducing the time it takes to complete them would represent a major reduction in

trade costs, enabling a significant expansion of the role of trade in the economy.

Infrastructure Development

Infrastructure facilitates, particularly, transport and power remained major problems in Ethiopia.

In India, many infrastructure projects are built under public-Private partnership (PPP). Ethiopian

government needs to learn and follow this strategy for infrastructure development in Ethiopia.

The transport sector faces the challenges of low levels of rural accessibility and inadequate road

maintenance. Ethiopian government has undertaken a massive Road Sector Development

Program (RSDP) since 1997 with fund of $7 billion. This has positive impact on road transport.

Ethiopia's ICT sector currently suffers from a poor institutional and regulatory framework.

According to World Bank (2011) addressing Ethiopia's infrastructure deficit will require a

42

sustained annual expenditure of $5.1 billion over the next decade. The power sector alone

requires $3.3 billion annually, with $1 billion needed to facilitate regional power trading.

Export Diversification: Trade analysis indicates that Ethiopian export basket mainly consists of

primary goods. As it is known primary commodities are price inelastic and highly volatile in

nature. Ethiopian exports suffer heavily due to unfavorable characteristics of world demand and

negative supply side features of these primary products. Empirical literature also indicates that

export diversification not only improves exports but also terms of trade (Agosin, 2007). Also in a

cross-sectional regression, Agosin (2007) finds that export diversification has a stronger effect

on per capita income growth.

Removing Exchange Controls

Ethiopia‟s central bank administers a strict foreign currency control regime and the local

currency (Birr) is not freely convertible. While larger firms and state –owned enterprises do not

typically face major problems obtaining foreign exchange, less well connected importers,

particularly smaller, new to market firms, face delays in arranging trade related payments. These

measures adversely affect trade and investment. Ethiopia is developing country with limited

foreign exchange and making sincere efforts to develop financial system. Liberalization of the

exchange regime and deepening financial system would benefit the economy through improved

access and confidence in the foreign exchange market.

Removing Non-tariff barriers

There are a number of non-tariff barriers in Ethiopia which hinders trade and investment growth.

These are highlighted by RTPF report21

(2007). These include: Government procurement

procedures, anti-competitive practices, overestimation of prices, numerous customs formalities,

inconsistent and varying classification, pre-shipment inspection procedures, severe shortage of

accredited laboratories and of competent testing and certification institutes; a tax certification

requirement for repatriation of dividend and other investment income; absence of information &

21

Regional Trade Facilitation program (2007) „ Non-Tariff Barriers in Ethiopia‟, available at

www.tradebarriers.org/octo_upload/attachments/.../ethiopia_ntb.pd

43

lack of transparency, testing and certification arrangements, requirements concerning marking,

labeling and packaging, and banking sector constraints.

Financial Development: Financial sector remained under the control of government and foreign

investment is not allowed. Ethiopian banks are also not allowed to invest in foreign securities. As

a result, financial sector has remained under developed and access to financial instruments also

remains at a low level. To help improve the access to trade finance, it was suggested that the

bank network in Ethiopia be expanded. It is proposed that both foreign and private banks may be

allowed in the country. This will help India in expanding the scope of the Lines of Credit

currently being offered by the Exim Bank of India to Ethiopia. India‟s financial sector is quite

modern and vibrant and Ethiopia could learn financial development policy from India.

According to data from the National Bank of Ethiopia, the country‟s central bank, there are 18

private banks and three state-owned banks. The banking system is dominated by government-

owned banks, which include the Commercial Bank of Ethiopia and Development Bank of

Ethiopia. Ethiopia‟s banking system has been open to private banks since 1997, with an

increasing number operating today. The private share of the market has risen to nearly 50% in

recent times from low share of below 10 per cent in early 2000 (BTI, 2012) .

Human Development and Capacity Building: Ethiopian government need to take measures for

rapid development of human resources and capacity building in Ethiopia which is vital for

sustained economic growth and poverty reduction. In recent year, Ethiopian government has

been following education reform under Education Sector Development Programme (ESDP).

Curently, ESDP IV covers 2010/11 –2014/15 and endorsed as part of the Growth and

Transformation Plan (GTP). The Ministry of Education has launched the General Education

Quality Improvement Program (GEQIP). Since 2000 Ethiopia‟s higher education sector has

grown from two public universities to 33 today with another 10 Institutes of Technology due to

open soon. In addition, there are now approximately 66 private institutions offering

undergraduate degree programs in Ethiopia and the private sector accounts for approximately 25

percent of the country‟s undergraduate enrolments.

44

Further liberalization of FDI Policy: Although, Ethiopia is following liberal foreign

investment policy since 1992, foreign direct investment remains regulated and many sectors such

as finance, telecom, and power, exports of certain goods, wholesale trade (excluding supply of

petroleum) and its by-products and import trade (excluding LPG and bitumen) are still closed

for foreign investors. However, in order to reduce bureaucratic hurdles, The EIC has introduced

„one-stop-shop‟ services to cut time and cost of acquiring investment and business licenses.

However, Ethiopia provides many incentives like costume duty, income tax exemptions, non-

fiscal, export incentives and remittance of capital. In addition, the privatization program offers

enormous opportunities to both private foreign and domestic investors particularly in the

agriculture, manufacturing and hotel and tourism sectors (EIC, 2013).

Measures to Develop Light Manufacturing: Although Ethiopia is growing rapidly in recent

times, structural transformation and creation of productive jobs is very slow. In order to sustain

structural transformation and job creation, development of labour-intensive light manufacturing

such as apparel, leather goods, metal products, agribusiness, and wood products is required. The

World Bank22

(2009) study indicates that measures like removal of import tariff, harmonizing

and improving customs procedures, development of collateral markets, development of hard

infrastructure, and partnership with the private sector, to design technical skills development

would help develop the light manufacturing sector in Ethiopia.

Annual Trade Fair between India and Ethiopia: The annual India-Africa Conclave is an

important forum to bring buyers and sellers together. In addition, dedicated trade meets

connected with a particular country or sector will help address information asymmetries as well

as bring the growth markets of Africa closer to Indian producers. In a similar way, India and

Ethiopia can conduct annual trade events to improve knowledge about both countries to their

respective trades.

Enhancing Ethiopia’s Exports to India

22 See Dinh et al., (2009) Light Manufacturing in Africa: Targeted Policies to Enhance Private investment and

Create Jobs, Vol. I, World Bank, for sector specific policy measures.

45

Improving Business climate: Like Ethiopia, India also needs long-term plans to improve

business climate to increase trade, investment and growth. Major areas of concern include higher

level of corruption, complex and lengthy investment and business approval processes, obsolete

land acquisition laws, rigid labor laws, and poor contract enforcement.

Enhancing the Scope of DFTP Scheme

The analysis also suggests that the current architecture of the DFTP is not favourable for

Ethiopia. In fact, various products of export interest such as coffee, sesame seeds, oil seeds, other

agricultural products and certain types of meat are not granted preferential market access,

whereas other products enjoy small MOP. Therefore, further liberalization of tariffs on products

with low margins of preference as well as reduction or elimination of tariffs of products in the

exclusion list would be beneficial to boost exports to India.

Relaxation of Rules of Origin in DFTP Scheme: To enjoy the tariff preference under the

Scheme, a product should be wholly produced or obtained in the Beneficiary Country. If the

product is not wholly produced or obtained in the Beneficiary Country, it should meet the

requirement of change in tariff heading (CTH) and 30% value addition. Preferential concessions

shall be granted if the consignments are supported by a DFTP Certificate of Origin prescribed

there under. Relaxation of rules of origin might help Ethiopia to increase exports under DFTP

scheme. Studies by Laird (2012) suggest that LDC‟s will significantly gain by relaxing the rules

of origin or using aid for trade to help LDCs to meet the standards in major export markets.

Larger participation of India in Human Capital development in Ethiopia

There is a need to create an ecosystem to facilitate growth. These include setting up of

educational institutions and skill development facilities to cater to the manpower requirements of

the target industries. Indian companies need to develop in house training programme to develop

skilled labour force in Ethiopia.

Institutional development is extremely important for Ethiopia as it severely lacks on this front.

This includes a host of issues such as development of human capital, private sector development,

setting up of regulatory bodies, technical institutions, standard setting bodies etc. These issues

together create a more congenial environment for trade and investment. India has adequate

46

knowledge and technical capacity to develop institutions that are helpful for trade and

investment.

As evidence of growing relationship between India and Ethiopia in education, India offers

fellowship to students from Ethiopia under the Indian Technical and Economic cooperation

(ITEC). As a part of capacity building, about 500 Ethiopian students travel every year for higher

education and out of these 40 travel with scholarship offered by Indian government. In addition,

the Ethiopian Government offers some 350 scholarships to their nationals for University studies

in India every year. Some 300 Indian faculty members are teaching in various colleges and

universities throughout Ethiopia. India also offers 50 Indian Council of Cultural Relations

(ICCR) scholarships to Ethiopian students for University studies in India. The pan African e-

Network project was launched in Ethiopia in July 2007. The Tele-Education Centre at Addis

Ababa University and the Tele-Medicine Centre at the Black Lion Hospital in Addis Ababa are

working well and are considered very useful by the Ethiopian side.

47

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