The trade and economic relations between India and South Korea have gathered momentum in recent years, with bilateral trade reaching US$ 16.83 billion in 2017. India’s relations with South Korea have strengthened following Prime Minister Narendra Modi’s visit to that country in 2015. Since then, the interest among Indian states to improve business ties with South Korea has been growing.
By Baishakhi Dutta
Prime Minister Narendra Modi has rolled out the red carpet for South Korean investors. South Korean firms are already well versed with doing business in India, and are majorly involved in the automobile, consumer electronics and other industries. Business leaders from Korea believe that India’s skill sets and talent pool, combined with Korea’s manufacturing experience and infrastructure, can make the two countries a business force to be reckoned with. This will enable the two nations to jointly tap other key markets that they couldn’t explore individually.
Trade developments: The impact of CEPA
The two nations had been keen on establishing business relations since decades, holding numerous rounds of discussions. In 2009, this culminated in one of the major kickstarters of the relationship—the signing of the Comprehensive Economic Partnership Agreement (CEPA), which simplified trade between India and South Korea. The terms of CEPA included a free trade agreement between India and South Korea. Chosen industries of the two countries could easily set foot on each other’s soil, with little to no financial restrictions. Import of products manufactured in Korea became cheaper due to CEPA, allowing Indian companies to use inexpensive materials for their products. Indian service industries like engineering, finance, IT and so on, enjoyed better access to Korea, while Korean industries like automobiles and electronics saw huge tariff cuts (down to below 1 per cent).
However, the inexpensive imports took a toll on domestic manufacturing, as Indian players started to incorporate more of the cheaper material provided by Korea. Some recent discussions have tried to resolve such issues without hampering trade relations.
India may now push for tweaking the CEPA once again, which may lead to a significant change in the official policy. Last year, India had decided to expand the scope of CEPA, despite domestic manufacturers repeatedly expressing their concerns that the agreement disproportionately favours Korea.
Currently, more than 78 per cent of items from India’s list of goods and 88 per cent of the Korean list have been placed in the zero-duty category. The Indian government has made it clear that the existing trade deal between the two countries hasn’t helped India as much as it should have. Last month, while addressing the large family-owned mega-conglomerates from Korea such as Samsung, Hyundai, and LG, Prime Minister Modi asked Korean firms to further increase their US$ 2.55 billion worth of investments in the country, mostly in the automobile and engineering sectors. However, India may have a tough time adding to the list of 600 Korean companies that already have operations here, owing to investors’ reservations about capital availability and complications regarding the Goods and Services Tax (GST).
Many Korean firms have expressed concerns that their local partners find it difficult to receive loans from Indian banks, and that the new GST structure is too complicated. However, according to Finance Minister Arun Jaitley, “India has been a significantly tax non-compliant society. That has to be improved.” Commenting further on the GST, Jaitley argues that the existing four tax slabs were required because of the earlier vast differences in taxes, for different items. He adds that once the topmost tax bracket of 28 per cent is levied on fewer items, the other tax rate slabs should not pose a challenge to the industry. He further says that Indian banks have become cautious over the last few years, hinting at the issue of non-performing assets.
Commerce secretary, Rita Teaotia is of the opinion that India’s exports to Korea have continued to reduce, while imports from it have risen steadily. “It is not a sustainable relationship,” she says, referring to trade figures from 2016-17 which show US$ 4.24 million worth of Indian exports being dwarfed by US$ 12.58 billion worth of imports from Korea.
Deepak Bagla, MD and CEO, Invest India, states that the CEPA signed between the two countries provides an excellent platform for expanding bilateral trade, which is currently below its potential, and also provides a platform for the flow of investments, both ways. He adds that the two-way trade between India and South Korea currently stands at US$ 16.8 billion and holds tremendous promise for further growth.
New opportunities for Korean investors
India’s electronics manufacturing sector has been growing at a CAGR of 17 per cent, and is expected to reach a turnover of US$ 228 billion by 2020, according to a recent report released at the Vision Summit 2017, which was jointly conducted by IESA and EY. The report states that the electronics manufacturing services (EMS) segment has seen huge growth over the past few years, from US$ 500 million in 2013 to US$ 1 billion in 2015.
The Indian government is encouraging electric vehicles in a big way in order to promote green mobility. IT Minister Ravi Shankar Prasad has urged Korean companies to expand their manufacturing activities in defence electronics, medical electronics and lithium batteries for electric vehicles. At a recent meet, the minister said, “We are going to set up seven new
centres of excellence—Fintech at Chennai, the Centres for IoT at Guwahati and Patna, the Centre for Virtual Reality in Bhubaneshwar, the Centre for Blockchain Technology at Gurgaon, the Centre for Medical Technology at Lucknow and the Centre of Electronic Products in Bengaluru.” He added, “The EV revolution in India has given rise to the need for lithium ion batteries and South Koreans are a master in this. Therefore, it is time for Koreans to set up shop in India producing lithium ion batteries in a big way, since a huge market awaits them.”
The Centre and the states in India are investing heavily in the ESDM sector. States like Karnataka, Andhra Pradesh, Tamil Nadu, Telangana, Uttar Pradesh and Gujarat have already made pitches to various major investors. While these states have are already in the limelight, a few others also have the potential to become a foreign investor’s goldmine in the ESDM domain. One example is the state of Assam.
Assam’s geographical location allows companies to have access to various neighbouring countries like Bhutan, Bangladesh, Myanmar, Vietnam, Laos, etc. A large base of skilled manpower with fluency in English, the presence of various technical institutions in the state and considerably lower manpower costs have made Assam the new favoured destination for many investors. Nitin Khare, secretary, Department of IT, Government of Assam, reports that the state has a fully functional software technology park (set up by STPI) and is also developing a state-of-art information technology park at Guwahati, over 100 acres. Two more IT parks are being planned at Dibrugarh and Silchar. While pitching to investors, Khare stated that the Assam government is giving rebates on the cost of land and registration, and also offering a stamp duty concession, lower power tariff, SGST reimbursement, incentives for patent assistance, e-waste management and production incentives for AVGC (animation, visual effects, gaming and comics). “Ease of doing business and the single window clearance mechanism adds to the huge investment potential of the state,” Khare says.
The National Automotive Policy 2018
The automobile industry is a big part of the Indian economic landscape, particularly in the manufacturing sector. It accounts for almost 40 per cent of India’s manufacturing output and, directly and indirectly, employs about 33 million people.
The National Auto Policy (NAP) 2018 aims to strengthen India’s position as an automotive leader in the globe. The policy envisages India as a clean, green and profitable destination to invest in, for those in the automobile domain. Its primary focus is to standardise emission levels and also strengthen the security, safety and eco-friendliness of the vehicles driven on Indian streets. The government aims to equate India with global benchmarks by 2028 in these aspects. The promotion of green mobility will also be aided by improved R&D and higher domestic manufacturing in the automotive front.
Dr Asha Ram Sihag, secretary, Department of Heavy Industry (DHI), underlines the Indian auto industry’s aim to have greater participation from Korean players. NAP 2018 will help in opening the doors to investments in this sector. The draft of the new automotive policy is ready and has been circulated among various industry shareholders. Sihag says, “One of the key elements of the new automotive policy is that we are putting out a long term roadmap for the industry, in terms of the regulatory requirements. The new auto policy also lays stress on things like promoting R&D. So we would like to move from only manufacturing to be able to design and engineer cars in India, and that would be a necessary part of our vision—to have the Indian industry among the world’s top three players by 2026.”
The new automotive policy is expected to create additional investments worth ₹ 25-30 billion in the components sector alone. The Indian auto components industry is also witnessing tremendous innovation, and those from this segment are very keen to expand their relationships with their Korean counterparts. Extending an open invitation to various Korean companies, Nirmal K. Minda, president, ACMA (Automotive Components Manufacturing Association of India) says, “I request Korean suppliers to join hands with Indian manufacturers to supply the OEMs in India… This could bridge the significant trade gap between the two countries. India imported components worth US$ 1.5 billion from South Korea in 2017, while we exported components worth only US$ 140 million.” He pledges to create a roadmap together to bridge the existing trade gap. “ACMA will be glad to connect with small and medium enterprises from Korea who are keen to be in India but have not yet tried their luck. This is a very good opportunity for the Koreans and I request them for a speedy decision in this matter; otherwise, we will lose this chance,” Minda says.
Commenting on NAP 2018, Anant Gangaram Geete, the Union minister for heavy industries and public enterprises, says, “We are trying to make NAP 2018 more industry and consumer friendly.” He expresses his optimism regarding ‘Make in India’, which is triggering competition between Indian states and helping in the growth of the Indian automotive industry. He believes that it is important to have a business-friendly environment. “We encourage Korean investors as well as Indian investors to set up industries and businesses in India. We are glad that the Korean technological sector is flourishing at a remarkable pace and we are quite sure that in the coming years, the country will be able to overtake Japan. We need to adopt the technological advancements happening in the Korean auto sector to keep ourselves up to date. I assure you that the government of India is always ready to provide full-fledged support to Korean investors,” says Geete.
In June 2016, India’s former minister for commerce and industry, Nirmala Sitharaman and Joo Hyung Hwan, ‘the S. Korean minister for trade, industry and energy at that time, launched Korea Plus, a special initiative to promote and facilitate Korean investments in India.
The mandate of Korea Plus covers the entire investment spectrum, including supporting Korean enterprises entering the Indian market for the first time, looking into issues faced by Korean companies doing business in India, and policy advocacy to the Indian government on their behalf. The Korea Plus team acted as the mediator in arranging meetings, assisting in public relations, in research/evaluation of potential markets/projects, and provided information and counseling to Korean companies investing in India. According to PM Narendra Modi, Korea Plus has facilitated more than 100 Korean investors in just two years, which shows India’s commitment towards welcoming Korean people, companies, ideas and investments.
India and Korea have deepened their cooperation through technology transfer, joint ventures, business alliances and the facilitation of mutual market access. The Korea Trade-Investment Promotion Agency (KOTRA), formed in 1962, has been sending trade missions to India and is also supporting business delegations from India to South Korea. Along with the Korean Chamber of Commerce & Industry (KCCI), KOTRA has established institutional linkages with Indian business associations.
South Korea has shown a keen interest in the state of West Bengal. Tai Sik Lee, senior executive VP, KOTRA, recently visited Kolkata to inaugurate KOTRA’s office in the city. He states that this is a strategic choice of the Korean government. He is optimistic that KOTRA, along with the local governments in eastern and north eastern India, will strengthen the India-Korea Special Strategic Partnership. Korean companies are looking to invest in the areas of electronics, food processing, mining and machinery in West Bengal. Kyun Han Kim, minister-counsellor, embassy of the Republic of Korea, believescthat in India, KOTRA plays a crucial role in supporting trade and investment activities between India and Korea.
Can startups be far behind?
At present, India’s startup ecosystem is quite impressive. It has one of the world’s most dense startup population. The initiative by the Indian government, called Startup India, has provided these innovators the infrastructure and the opportunities they need to launch their products in the market. There are over 50 schemes and policies offered by the government to various kinds of startups, while nationalised banks have also come forward to give them a hand.
While expressing his views on Indian startups, PM Modi affirms that India has one of the largest startup ecosystems. He is optimistic about India and Korea working towards creating a stable business environment, removing arbitrariness in decision-making, and promoting the startup ecosystem further in India. “We are widening areas of trust, rather than digging into doubts. This represents a complete change of the Indian government’s mindset,” states Modi.
The dawn of a new era
The relationship between India and South Korea has been growing steadily in the last few years. Although approximately 600 Korean companies operate in India – including global corporations like Samsung, Hyundai and LG – going ahead, India could attract a significantly higher number of Korean companies. The paucity of core infrastructure discourages a lot of foreign operations in India. Many companies are aware of the golden opportunities, yet India has been slow in responding to investors’ real estate needs and their requirement for other forms of support to create an enabling business environment —especially in terms of the development of ports, roads, railways and more. Here, South Korea can assist India in modernising, upgrading and co-shaping its alliance for a mutually-beneficial partnership in South East Asia.