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Analysis on India’s Trade Policy and Its Implications for Korea-India Cooperation Trade policy, Foreign direct investment

Author Jeong Gon Kim, Hyoungmin Han, Hyeyoon Keum, Jong Hun Pek, and Sunhyung Lee Series 21-05 Language Korean Date 2021.12.30

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Economic exchanges between Korea and India have been expanding since the signing of the Korea-India CEPA, which took effect in 2010, and the recent promotion of the New Southern Policy (NSP) by Korea, but the level of exchange still remains insufficient considering the potential of the two countries. This study aims to contribute to deepening Korea-India trade cooperation by analyzing India’s trade policy and trade investment relations. Taken overall, Chapter 2 analyzes the trends of commodity & service trade and characteristics of investment policies, centering around India’s economic liberalization since the 1990s. Chapters 3 and 4 examine India’s recent trade and investment structure with major countries including Korea, and Chapter 5 analyzes India’s status on the global production networks. In conclusion, Chapter 6 presents various implications for Korea-India trade cooperation.
Looking at Chapter 2 in more detail, India has achieved great results in lowering tariff rates and easing investment barriers by promoting full-fledged liberalization policies since 1991. In particular, investment barriers have been significantly lowered and automatic approval is now being implemented in most areas, reflecting the remarkable improvements made in the investment environment since the inauguration of the Modi government. But at the same time, India has continued to actively utilize non-tariff barriers such as anti-dumping measures, and has been showing a trend of raising tariff barriers since 2018 with the aim of establishing its economic self-reliance. In short, India has placed its focus on developing its own production base by attracting foreign investments. And in spite of steady liberalization, India’s trade policy continues to lean towards the protection of domestic industries.
According to Chapter 3, as intermediate goods account for an increasing proportion of total trade in goods, India’s status as a global production base is on the rise. In recent years, India’s major import destinations have switched from North America and Europe to China, Korea, and Southeast Asia, and in particular, trade with Korea has significantly expanded since 2000s. Furthermore, since the Korea-India CEPA took effect in 2011, trade between the two countries has been increasing, and Korea’s exports to India have increased even more, widening India’s trade deficit with Korea. However, India is also enjoying the positive effect of diversifying its export items to Korea. The share of intermediate goods in India’s trade with Korea is the highest among India’s major trading partners, and the manufacturing network between the two is growing stronger. Nevertheless, the volume of trade between Korea and India has not grown as much as expected following establishment of the CEPA, thus indicating a new breakthrough is required.
In Chapter 4, we examine India’s growth into a major FDI target country in the global market. In particular, India recorded a significant increase in FDI inflow along with China in 2020, when the global economy shrank significantly due to the COVID-19 pandemic. The major fields of FDI in India are services, software, renewable energy, and infrastructure. Also, FDI investment in India has recently shown a notable increase in brownfield investment over greenfield. Korea’s FDI in India began in earnest during the 1990s with the entry of Korean manufacturing companies into India, and increased further with the Korea-India CEPA. The proportion of investment in manufacturing and green fields is relatively high compared to the United States, the United Kingdom, and Japan, but on a far smaller scale. Korea needs to diversify its investment fields and methods in response to India’s aggressive investment liberalization.
According to Chapter 5, India is reinforcing its global connectivity as a production base. Since the Modi government took office, India has been more actively supporting foreign companies’ production in India, and it has been effective in promoting production activities of foreign companies in India. If we classify the contribution of major countries to India’s exports and production, they have in common that their contribution to production is much greater than that of exports. This means that major countries’ production linkages with India place greater weight on the purpose of meeting India’s domestic demand. Therefore, Korean companies and the government need to closely monitor demand in India and strategically strengthen production linkage with the country.
In Chapter 6, we consolidate the research findings of the study to present implications for Korea-India economic cooperation. As shown in this study, Korea and India are excellent cooperative partners, especially in the manufacturing sector, meeting each other’s needs. Korea has the ability to invest in key manufacturing industries that India seeks to foster, such as electrical/electronics and automobiles. Meanwhile, India continues to conduct active trade in intermediate goods while exhibiting a strong will to foster its manufacturing sector. Moreover, India needs a partner that can alleviate its excessive economic dependence on China, all of which is likely to expand Korea’s opportunities.
In the process of bolstering its production network with India, Korea should keep in mind its connection with Southeast Asia. From a strategic point of view, Korea needs to minimize the risks associated with US-China conflict by streamlining investment deployment, making it is necessary to expand the existing Korea-ASEAN production network to India. As found in this study, India has recently been trying to reinforce production connections with Southeast Asia. This could offer opportunities for Korea to establish a three-nation production network by expanding production and exports of final goods in India using Vietnamese intermediate goods. Developing these links in the mid to long term can further boost Korean companies’ trade and investment in the New Southern Region, which could also lead to expansion of India’s participation in the global production network.
Considering this potential, Korea and India should break away from the trade imbalance issue and take the view of expanding and strengthening the bilateral economic cooperation relationship. According to the findings of this study, the Korea-India CEPA is not a direct cause of the trade imbalance between the two countries, but could instead be a result of failure to fully reflect the characteristics and potential of the bilateral trade structure. Given this fact, the two countries should shift to a forward-looking perspective to further expand liberalization through further negotiations to improve the CEPA.
Meanwhile, Korea should actively consider diversifying its investment in India in addition to manufacturing. This study shows that Korea’s investment in India is biased toward manufacturing compared to major countries, and competition with Germany, Japan, and China is likely to intensify. It is worth noting that investment in India from major countries has been increasing recently, mainly in services, computer software /hardware, renewable energy, communication, and infrastructure. And in terms of investment methods, it is recommended to actively consider brownfield investment. According to this study, while Korea’s investment in India has been concentrated in greenfield investment, most of the major countries have a very high proportion of brownfield investment. These investment fields are where India’s demand is increasing, and companies in major countries are enjoying a rapid first-mover effect through brownfield investment.
Korea is currently in dialogue with India’s trade authorities, focusing on improvements of the Korea-India CEPA and India’s trade relief measures with Korea, but these efforts seem insufficient to broaden its understanding of the potential for cooperation. Therefore, the country should establish regular trade policy dialogue channels with India to broadly understand each other’s core policies, raise immediate issues, and continuously discover possibilities for cooperation. In addition, the Korea-India CEPA must be upgraded into a comprehensive platform for economic cooperation by including areas such as infrastructure, energy, and digital industries, which India is currently focusing its efforts on.
As well as the intergovernmental trade policy dialogue channel, a joint initiative should be pursued between Korea and India as a trade and investment support channel in which various economic actors, including Korean and Indian companies, governments and institutions, can participate. The Korea-India joint initiative would serve as a comprehensive platform for bilateral cooperation, which can be used as a window to specifically identify the immediate needs of the two countries, match companies, and directly communicate difficulties in business activities with the Indian government. It is also necessary to create a Korea-India cooperation fund in connection with this joint initiative. This should be utilized to further encourage projects and research across almost all fields related to bilateral cooperation. More specifically, this fund can support business matching projects between companies in both countries, and could help companies related to the CEPA and support joint research to revitalize trade investment.
When cooperating with India, it is critical for Korea to prioritize investment that meets India’s needs. This is because India prefers partners that solve its needs through investment rather than unilateral expansion of exports. In other words, it would be feasible for the Korean government to preemptively present the investment projects that India needs in terms of economic policy and receive support from the Indian government. One such example is the India-Japan Investment and Trade Promotion and Asia-Pacific Economic Integration Action Plan agreed upon by Japan and India in 2015. At the time, Japan suggested expanding investment in India and inviting Japanese companies into the market, focusing on major projects, based on which India provided Japanese companies with trade investment benefits. In order to proceed with such large-scale projects, not only corporate investment but also government support in the form of ODA, etc., must play an important role.

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