The Hindu Business Line : Seoul searching

While the South Koreans are waiting to sharpen their edge in the Indian market with the trade deal, India has the tall task of wiping out the huge trade deficit.

There is little doubt that the signing of the Comprehensive Economic Partnership Agreement between India and South Korea represents a significant advance in bilateral relations between the two countries. While the accord is the first Seoul has signed with a BRIC (Brazil, Russia, India and China) member, it is also the first such signed by New Delhi with an OECD country. While the symbolism of the accord is not unimportant, the usefulness of the CEPA must be judged ultimate ly by the advantages it brings for the two countries involved, and it is here that India seems to be on a stickier wicket than its partner.

The Joint Study Group on the future of India-South Korea economies ties had said in its 2006 report that the prospects for the CEPA are bright, chiefly because the two economies “are highly complementary in terms of factor endowment, capabilities and specialisations”. This may be true in theory but the ground realities are very different, as is suggested by, for example, the bilateral trade performance. India is mired in a huge trade deficit, and the trend is quite distressing: between 2003-2004 and 2007-2008 the trade deficit shot up by as much as six times. On the other hand, the Koreans are much better placed, which is probably why they have agreed that the tariffs can be reduced slowly over a decade. Consider the volume of automotive-part exports, which form the biggest chunk of what India buys from South Korea. According to one estimate, these exports, worth $1.3 billion in 2008, are expected to rise sharply in the decade ahead, even without any fresh infusion of Korean investment in the Indian automobile sector. The post-CEPA reduction in India’s tariff on automotive-part imports (currently 12 per cent) is significant in the background of the reported decision of Hyundai to move out the manufacture of the i20 car from the country to avoid the 6.5 per cent EU import duty on India-made cars.

Apart from car manufacturers, companies such as Samsung, LG and Daewoo, not to mention the steel giant Posco, which has mammoth investment plans for India, also stand to gain by way of cheaper input costs. The point is that while the South Koreans are waiting to sharpen their edge in the Indian market, where does India stand in making the CEPA work to its advantage? It is only in the IT-enabled sectors and educational services that the country can score provided the post-CEPA export strategy is well thoughtout and implemented which, as the Joint Study Group report emphasises, is a tall task. The problem is that before it enters “positive” territory, India will first have to wipe out the trade deficit which, according to Ficci, was around $4.5 billion between April 2008 and February this year, when total bilateral trade was worth $10.2 billion.

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