After Europe’s CBAM, Germany props up fresh hurdles for firms
Indian firms directly or indirectly in business with European firms face a twin hurdle as Germany tightens its screws on a new law aimed at ensuring fair labour standards and environmental requirements.
For Indian businesses already subject to Europe’s carbon tax, Germany’s supplychain 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 European Union (EU).”
According to the Consulate General of India (Germany), Indian companies operate in Germany across sectors like information technology, automotive, pharmaceuticals, biotech and manufacturing.
Spokespersons for the commerce ministry, and the German embassy didn’t respond to emailed queries.
Germany’s supply chain Act requires firms 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 firms with more than 3,000 employees.
Germany’s new supply chain regulations are closely followed by the EU, 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. It may increase their cost of doing business.”
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 EU’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 reason for India not ratifying the conventions is that these would involve allowing government staff to conduct strikes and openly criticise state policies, which are prohibited under Indian statutory rules.