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German cabinet heads to India for government consultations

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Trip comes as Germany tries to reduce reliance on China

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Major forum aims to foster more German-Indian business

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Trade with India hit record high despite elusive trade

deal

(Adds economy minister quotes, paragraphs 5-6)

By Christian Kraemer

BERLIN, Oct 23 (Reuters) - Chancellor Olaf Scholz leads

a high-level delegation to New Delhi this week, betting that

greater access to the vast Indian market can reduce Germany's

reliance on Beijing even if India does not turn out to be the

"new China".

From cars to logistics, German companies are largely

optimistic about India's growth potential, tapping into a wealth

of skilled young workers, a cheaper cost base and economic

growth motoring at around 7%.

The visit comes at a delicate time for Germany, whose

export-oriented economy faces a second year of contraction and

worries over a trade dispute between the European Union and

China that could rebound on German companies.

Stung by its problematic reliance on cheap Russian gas

before the Ukraine war in 2022, Germany has pursued a strategy

of reducing its exposure to Beijing.

"India, the most populous country in the world, is a key

partner of the German economy in the Indo-Pacific and plays a

key role in the diversification of the German economy," Economy

Minister Robert Habeck said on Wednesday.

"We must reduce critical dependencies and strengthen the

resilience of German companies and their supply chains to and

from Asia."

But China is still the biggest show in town.

German direct investments in India were around 25 billion

euros ($27 billion) in 2022, about 20% of the volume invested in

China, said Volker Treier, head of foreign trade at the German

Chamber of Commerce DIHK. He thinks that share could rise to 40%

by the end of the decade.

"China will not disappear, but India will become more

important for German companies,' said Treier.

"India is the litmus test, so to speak. If de-risking China

is to work, India is the key to it, because of the size of the

market and the economic dynamism in the country."

Scholz, who will take with him most of his cabinet including

the foreign and defence ministers, will meet Indian Prime

Minister Narendra Modi on Friday before presiding over the

seventh round of Indian-German government consultations.

Habeck will arrive a day earlier to open the biennial

Asia-Pacific Conference of German Business.

CHINA + 1

German firms cite bureaucracy, corruption and India's tax

system as investment hurdles, according to a study by

consultancy KPMG and the German Chambers of Commerce Abroad

(AHK).

They nonetheless see a bright future in India, with 82%

expecting their revenues to grow in the next five years. Some

59% are planning to expand their investments, compared to just

36% in 2021.

For example, German logistics giant DHL plans to invest half

a billion euros in India by 2026, tapping into a fast-growing

e-commerce market.

"We see enormous growth potential in the Asia-Pacific

region, of which India has a significant share," said division

head Oscar de Bok.

Volkswagen, which has been hit by falling sales

in China and high production costs at home, is considering new

tie-ups in India for joint production. It has two factories

already and signed a supply deal with local partner Mahindra in

February.

"I think we shouldn't underestimate the potential in India

in terms of a market ... and in terms of regulatory uncertainty

between the U.S. and China," said the group's finance chief Arno

Antlitz in May.

Similarly, Cologne-based engine maker Deutz

announced a deal this year with India's TAFE, the world's

third-largest tractor maker, for subsidiary TAFE Motors to

produce 30,000 Deutz engines under licence.

"The main arguments for India are political stability and

low labour costs," said Jonathan Brown, a managing director at

BCG. "So you should have a 'China + 1' strategy in which India

plays an important role."

Trade hit a new record in 2023 between Germany and India,

which is expected to overtake Germany and Japan to become the

world's third-largest economy by the end of the decade.

Negotiations for an EU-India free trade deal, years in the

making, still have no end in sight.

"The hurdles to gaining a foothold in the market are high,"

said BCG's Brown. "But once you're there, you have great

potential. What doesn't work is just selling German products

locally."

($1 = 0.9246 euros)

(Writing by Matthias Williams, Editing by Louise Heavens and

Ros Russell)