German Chancellor Olaf Scholz is leading 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'.
Scholz's visit to India this week comes at a delicate time for Germany, whose export-oriented economy faces a second year of contraction and concerns over a trade dispute between the European Union and China that could rebound on German companies.
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 seven percent.
However – 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.
Speaking on Wednesday, Germany's Finance Minister Robert Habeck said: "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."
"We must reduce critical dependencies and strengthen the resilience of German companies and their supply chains to and from Asia," he added.
German presence
According to Volker Treier, head of foreign trade at the German Chamber of Commerce DIHK, German direct investments in India have been valued at around 25 billion euros for 2022 – about 20 percent of the volume invested in China.
He believes that share could rise to 40 percent 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 ... because of the size of the market and the economic dynamism in the country," he added.
Scholz, will be travelling to India with most of his cabinet including the foreign and defence ministers, and is scheduled to 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.
Expansion into India
German firms cite bureaucracy, corruption and India's tax system as hurdles to investment, according to a study by consultancy KPMG and the German Chambers of Commerce Abroad.
Nonetheless, they see a bright future in India, with 82 percent expecting their revenues to grow over the next five years.
Some 59 percent are planning to expand their investments, compared to just 36 percent 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.
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 already has two factories in the country and signed a supply deal with local partner Mahindra in February.
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.
In 2023, trade between Berlin and New Delhi hit a new record, with India expected to overtake both Germany and Japan to become the world's third-largest economy by the end of the decade.
However, negotiations for an EU-India free trade deal, years in the making, still have no end in sight.
