When India became the 5th largest economy surpassing the United Kingdom, it was envisioned to take the 4th spot by 2024-25. This dream is likely to become true early as the 4th largest economy in the world, Germany, slumped into recession. Output in Germany, Europe’s largest economy, dropped by 0.3% during the first quarter of 2023 as household final consumption expenditure declined by 1.2%. This is the second decline in a row. The contraction in the economy can directly be attributed to a sudden rise in energy prices amid the Russia-Ukraine conflict. As per IMF’s World Economic Outlook in April 2023, the German economy is anticipated to contract by 0.1% during 2023 and expand by only 1.1% during 2024. On the other hand, India’s economy is expected to expand by 5.9% and 6.3% in 2023 and 2024 respectively.
The picture looks rosy for India but there are some limitations as well. Germany is India’s largest trading partner in Europe and one of the top trading countries worldwide. The bilateral trade between the countries during 2021-22 was valued at USD 24.8 Bn. On top of that, Germany is the 9th largest investor in India with cumulative FDI equity inflows of USD 13.9 Bn between April 2000 to December 2022, however, it accounted for only 2% of the overall equity inflows.
In terms of EXIM, India’s exports stood at USD 9.88 Bn and imports at USD 14.9 Bn with Germany during FY22. Indian exports to Germany are expected to decline amid a demand slowdown. Additionally, funds of around one billion euros are provided by the German government each year for economic cooperation with India may dry up if the situation remains the same.
Impact on commercial real estate
As per the Indo-German Chamber of Commerce, there are more than 1,700 German companies operating and providing jobs to nearly 4 lakh people in India. These companies operate mainly in sectors of transportation, electrical equipment, metallurgical industries, services sector (particularly insurance), chemicals, construction activity, trading, and automobiles which may witness a decline in German investments due to GDP contraction. However, the positive side of the story is these companies may shift their operations from Germany to India to reap the cost benefits. As per an estimate, the office rentals in Frankfurt are around INR 370/sq ft/month as of Q1 2023. On the other hand, office rentals in Mumbai (which is the costliest city in India for office spaces) are 1/3rd of Frankfurt.
As per Vestian Research, the top 25 German companies operating in India account for 7.6 Mn sq ft of office space. If these companies increase only 20% of their leased space in India to reap the sub-dollar rental benefits and cheaper talent pool, India will register approximately 1.5 Mn sq ft of net absorption in the coming quarters which will be equal to the total absorption in Hyderabad during Q1 2023. Some of the large German companies operating in India are Siemens, BMW, BASF, Deutsche Bank, Daimler, Audi, Bayer, Alliaz, Carl Zeiss, etc.
On the contrary, there are more than 213 Indian companies operating in Germany and are involved in trading, manufacturing, R&D, innovation, and services, as per the Confederation of Indian Industry (CII). These companies are prone to face the risk of a demand slowdown in Germany which may register a decline in their operations in India as well.
The largest economy in Europe entered a recession and it will definitely have an adverse impact on other countries. The US is already struggling with a debt ceiling crisis and if the situation worsens, it can sink the US economy also into recession. Overall, the situation is uncertain right now, and will take time to know the degree of impact on the Indian economy. Interestingly, around 20% of German companies in India are in Pune alone which may have the maximum impact of the German slowdown. However, the Indian commercial real estate sector is all geared up to tussle with the current situation and win.
What do you think – Is Germany’s loss, India’s gain?