For Indian businesses already subject to Europe’s carbon tax, Germany’s supply chain rules would mean additional compliance and reporting costs, apart from fines and loss of business opportunities for any violations, industry experts told Mint.
Germany’s Supply Chain Due Diligence Act (SCDDA) is aimed at ensuring that labour and contractual requirements are maintained across supply chains for businesses operating in the country.
The Act, which was tightened in early 2024 after it was enforced last year, requires companies to identify, assess, prevent, and remedy any potential human rights and environmental violations, even if indirectly, across their operations and supply chains.
Companies must also provide ways for workers to file complaints about labour or environmental violations, even if these workers are employed with suppliers with whom the businesses don’t have a direct commercial relationship.
All exporting nations including India, China and Vietnam will have to comply with Germany’s new regulation as well as with the European Union’s Carbon Border Adjustment Mechanism (CBAM) to do business in the continent, said Biswajit Dhar, a professor at the Centre for Economic Studies and Planning at Delhi’s Jawaharlal Nehru University.
“Market access for Indian companies can be impacted if they don’t follow strict labour standards laid out by Germany, which is likely to become a model for supply chains across the EU,” he added.
According to the Consulate General of India (Germany), Indian companies operate in Germany across sectors like information technology, automotive, pharmaceuticals, biotech and manufacturing.
Spokespersons of India’s commerce ministry, and the German embassy in New Delhi didn’t respond to emailed queries.
Hefty consequences for violations
Germany’s supply chain Act requires companies to obtain contractual assurances from direct suppliers that they will comply with the standards defined under the law, including control mechanisms for their enforcement, said P.S. Easwaran, partner and supply chain leader at Deloitte South Asia.
“Hence, even if an existing supplier from India may already be compliant, the cost to formalise the deployment of SCDDA-specific standards and reporting will increase,” he said.
“It will also impact the viability of the Indian supply chain to Germany because of the need (for a German company) to ensure that it has conducted a risk analysis and implemented preventive and remedial measures for its indirect suppliers,” Easwaran added.
Possible consequences for violations include fines of up to €800,000 (about ₹7 crore) or up to 2% of a company’s average annual global turnover, as well as exclusion from public contracts in Germany for up to three years.
German companies with more than 1,000 employees, or German-registered branches of foreign companies with more than 1,000 employees, have to comply with the SCDDA. Last year, this regulation applied only to companies with more than 3,000 employees.
Germany’s new supply chain regulations are closely followed by the European Union, which is negotiating a free trade agreement (FTA) with India.
“The EU wants its trade partners to make commitments in labour standards. It is coming up with a new regulation, as some countries (like Germany) are coming up with their regulations,” said Arpita Mukherjee, professor at the Indian Council for Research on International Economic Relations.
“The third-party assessment is difficult, especially for Indian MSMEs (micro, small and medium enterprises). It may increase their cost of doing business,” Mukherjee added.
Twin impact
European countries are increasingly looking at labour and environmental standards across their supply chain, which is evident from measures such as Germany’s SCDDA and the European Union’s CBAM.
As things stand, India is yet to ratify two fundamental International Labour Organisation (ILO) conventions—the Right to Organise Convention, 1948, and the Right to Organisation and Collective Bargaining Convention, 1949.
The main reason for India not ratifying these conventions is because these would involve allowing Government employees to conduct strikes and openly criticise state policies, which are prohibited under Indian statutory rules.
CBAM, the first-of-its-kind tax imposed by the European Union, is applicable on the import of carbon-intensive goods to the continent as the EU aims to become a climate-neutral or net-zero carbon economy by 2050.
During the transitional phase of the CBAM, between October 2023 to December 2025, Indian firms are required to provide extensive production and emissions data on products exported to the EU.
The CBAM will initially apply for carbon-intensive industries such as cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen. Their exports to the EU will be taxed from 1 January 2026. By 2034, all goods imported into the EU will be included under the CBAM regime.
Rising exports to Europe
Indian companies with a strong presence in Germany include HCL Technologies Ltd, Tata Consultancy Services Ltd, Infosys Ltd, Wipro Ltd, Bharat Forge Ltd, Mahindra & Mahindra Ltd, Hinduja Group, Tata Steel Ltd, Ranbaxy Ltd, Biocon Ltd, and Dr Reddy’s Laboratories Ltd, as mentioned on the Consulate General of India (Germany) website.
In financial year 2023-24, India’s merchandise exports to Europe increased 1.47% to $98.88 billion. The staples of Indian exports to Europe—gems and jewellery, ready-made garments, chemicals, cotton yarn, and handloom products—declined FY24, but engineering goods, petroleum products, drugs and pharmaceuticals, and electronic goods exports increased during the year.
India’s exports to Europe have been steadily rising since FY21, in tandem with the global economy emerging from the pandemic.
Exports to Europe in value terms stood at $55.32 billion in FY21, gradually improving to $85.20 billion in FY22, $97.45 billion in FY23, and $98.88 billion in FY24.