India and South Korea have a wide-ranging and currently burgeoning partnership that covers everything from security alliances and economic ties, to shared interests in food, pop culture (including beauty, entertainment, fashion, etc.) and literature. Being an export-oriented economy, South Korea consistently ranks among the top 10 exporters to India with its exports accounting for over 70% of the total trade between the two countries.1
In the past decade, however, given India's relative dependence on imports for its energy and industrial needs, the Indian government has taken a policy stance to reduce imports and substitute them with local manufacturing – through the ‘Make in India' policy approach. This policy shift, however, is a unique opportunity for South Korean chaebol such as Samsung, LG, Hyundai, and Lotte. These companies could potentially expand their manufacturing operations in India to serve both the Indian domestic market and the export market.
Ease of manufacturing in India
Since 1991, India has made numerous strides in making Indian business easier for foreign investors. This includes doing away with more than 20000 compliances, decriminalisation of multiple laws and repeal of redundant provisions.2 For instance, non-compliance matters under the Indian Companies Act, metrology, and drugs and cosmetics have been decriminalized; the Foreign Investment Promotion Board which was responsible for vetting FDI applications has been abolished and replaced by a Foreign Investment Facilitation Portal which provides a single window clearance; there is also an ongoing process to bring multiple labour laws under four key codes. Through business process re-engineering and single window clearances, both Indian states and the union government have reduced time for granting approvals, eliminated physical touchpoints and brought transparency in inspections. In fact, immediately after the launch of the Make in India scheme in 2014, India became the top destination globally in terms of FDI inflows with over $60.1 billion FDI in 2015.3 Today, foreign companies can freely invest in Indian sectors such as manufacturing, automobiles, chemicals, electronics, etc., which previously had several conditionalities attached.
Apart from attacking the curse of red-tapism, the Indian government has been attempting to specifically promote manufacturing through inter alia incentive schemes, grants in aid, capital subsidies and reduced utility rates. Specifically, for industries including automobiles and components, chemicals, large scale electronics manufacturing and specialty steel, the Indian government has rolled out certain ‘production-linked incentives' (PLI) schemes to promote domestic manufacturing. For example, under the PLI scheme for specialty steel, eligible manufacturers receive incentives based on assessment of incremental sales of manufactured steel grades. Several global companies have participated in such schemes, committing investments of over $12 billion so far.4
Motivated by these schemes, several South Korean business expansions have already been undertaken in India. Some examples include Samsung's world's largest mobile phone factory in 2018, POSCO's plans to construct a steel mill in 2022, and LG's investment into new manufacturing lines in 2023.
Special opportunity for South Korean biz
South Korean companies are particularly well-positioned to benefit from these manufacturing-centric schemes, owing to the Comprehensive Economic Partnership Agreement (CEPA) signed in 2011 between India and South Korea. CEPA permits for duty-free or lower duty on import for several items necessary for manufacturing. For example, printed circuit boards, loudspeakers, motors, etc. necessary for electronics manufacturing enjoy reduced import tariffs under CEPA. Thus, for components for which local supply in India is insufficient or uncompetitively priced, companies may choose to substitute these for imports from South Korea.
Lower import duties are also present for fully manufactured items, such as cosmetics, electric vehicles, iron, steel as well as certain electronics, providing South Korean businesses with an opportunity to test their products in the Indian market prior to investing in local manufacturing.
Transient window of dual-benefits
As a result of the CEPA, trade between India and South Korea has seen substantial growth from ~$500 million during the mid-1990s5 to over ~$20 billion today.6 However, it is to be noted that CEPA is now being considered for renegotiation due to a widening trade balance in favour of South Korea. As the renegotiation process continues, South Korean businesses may continue to enjoy the dual benefits of the PLI schemes and the CEPA. However, these benefits may only be available for a limited time, depending on the outcome of the renegotiation process. Therefore, it is crucial for South Korean businesses to act promptly and strategically to make the most of this window of opportunity.
South Korean investors looking forward to investing in India may note that they are favoured by the Indian government and supported through catered handholding, via a specialised desk called Korea Plus that advisory regarding facility location, expansion, compliances, incentives, entry strategies, etc. to facilitate investments in India.
India's attractive market, alongside PLI schemes, special benefits for South Korean investors, and catered handholding make India one of the foremost destinations for South Korean investment.
Footnotes
2. https://pib.gov.in/PressReleasePage.aspx?PRID=1758949
5. Sahoo P and others, ‘India–Korea Trade and Investment Relations: An Appraisal of Past Progress and Future Prospects' (2023) 04 The Journal of Indian and Asian Studies < https://www.worldscientific.com/doi/pdf/10.1142/S271754132340003X>.
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