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With India opening doors to Korea and vice-versa, it has to be seen how this development will add to India’s growth story. But on the face of it, Korea seems to be benefitting more than India through this agreement.

by Susenjit Guha

If the Indo-ASEAN FTA has come as big blow to the state of Kerala, the FTA or rather the more carefully drafted Comprehensive Economic Partnership Agreement (CEPA) signed earlier with Korea, the most developed nation in ASEAN, was cheered by most leaders across industrial sectors in both the countries. The deal was inked after the lengthy talks that continued for nearly three and half years between the two countries.

Unlike FTA, CEPA is aimed at lowering trade barriers in a phased manner instead of complete elimination. It can be mutually beneficial for the industries in both the nations. Unlike FTA signed between the US and EU which stipulates the elimination of trade barriers within next five years, CEPA aims to scale down import duties from the existing 12.5 per cent to 1 per cent over eight years.

Industry leaders in India are of the opinion that Indian businesses will get larger market access in Korean markets and trade would be more balanced between the two nations. According to Commerce and Industry Minister, Anand Sharma, "this is just the beginning… hope that this will help use the opportunities that exist in both Korea and elsewhere."

FICCI Secretary General, Dr Amit Mitra felt, "FICCI projects a doubling of trade between India and South Korea within the next five years, facilitated by the CEPA agreement."
President of the FIEO, Sakthivel felt, “It is a welcome policy…  given the US dollar credit, extended the interest subvention scheme and enhanced focus market scheme. All this will help exporters.”

While both the Confederation of Indian Textile Industry (CITI) and the Apparel Export Promotion Council (AEPC) felt much more could have been done or extracted in light of the global meltdown, the Synthetics and Rayon Textiles Export Promotion Council (SRTEPC) welcomed CEPA.

Indian trade imbalances with a particular country can only be corrected if exports can access more markets out there. Even though India’s trade deficit stands at US$ 4.6 billion with Indo-Korean trade amounting to US$ 10.2 billion – from last year April to February this year – the CEPA can help bring it down. Korea has nearly US$ 1.46 billion invested in India while Indian investments already there are expected to increase after the agreement.

Primarily, the services sector that has a large pool of trained professionals raring to have a go at new markets would be immensely benefited. There is a huge potential for Indian IT and IT-enabled service professionals and businesses in areas of engineering, legal, English teaching and financial services. Director General, Confederation of Indian Industry (CII), Chandrajit Banerjee has welcomed the move and said, "The free trade pact between India, Asia's third-largest economy, and the fourth largest, South Korea, would go a long way in fostering closer economic partnership at all levels… Indo-Korea CEPA would lead to a mutually beneficial economic relationship between the two countries, which is far below its true potential."

But why is CEPA with Korea laden with added attractions when India had already signed similar agreements with Singapore and an FTA with ASEAN? The latter deal is drawing a lot of flak in the state of Kerala. But what are the benefits that Korea can gain from this agreement?

Unlike most of the western nations that formed the core market for Indian products, Korea was unaffected by the global economic meltdown. While the need for India is to lessen the dependence on US and European markets, the FTA or rather a CEPA with Korea is a welcome move in tandem with India’s need to go down the ‘Look East’ policy track. Most of the country’s young are engaged in the IT and IT-enabled services sector and they form nearly 17 per cent of the population. While India can benefit from the agreement, Korea would also find opportunities to cater to the rising demand for consumer goods from this population segment. With duty cuts, white goods and parts would be cheaper and sales would witness a quantum leap as the majority of the buyers fall in this population segment.

South Korea’s trade minister Kim Jong-hoon felt it was his country’s first step towards forging trade agreements with BRIC – Brazil, Russia, India and China.
Among the major features of CEPA was lowering of duties for importing Korean auto parts. Many infrastructure projects are being done by South Korean companies including expansion of the metro railway in many Indian metropolitan cities. The agreement may further strengthen the trade relations between the two countries in their respective areas of dominance, e.g. South Korea in electronics and India in agricultural products.

As agreed under CEPA, South Korea would waive duties altogether for 93 per cent of its agricultural and industrial products while India would reciprocate with 85 per cent of its products. Farm products, automobiles and textiles have been kept outside the ambit of tariff elimination while some of them would be scaled down gradually in future.
It is up to the export-import community to make the most of the openings as the small and medium enterprises can forge alliances with Korean companies. And, the tapping potential can be done in a wide array of sectors like printing and publishing, consultancy services, telecommunications, education and tourism.
But, behind the apparent shine of the deal, there are some features worth noting. While manpower exchanges between the two countries are expected to grow with the Indian services sector benefiting, Korea has kept the authority of checking the influx of Indian workers and professionals. While other FTAs by Korea do not allow free labour movement, there is enough potential for Indian professionals to access high paying jobs markets with living conditions comparable to any advanced western country.

But Korea would determine the number of Indian job seekers, keep tabs and even prevent them from overstaying while the lucrative medical sector will not be accessible to Indians. India, on the other hand, has agreed to exclude tariff exemption on some agricultural products and fisheries while opening up medical, banking, advertising, accounting and telecommunication sectors to Korean businessmen.
Although the share of foreign investments in a company is limited to 65 per cent in India, Indian electronics, auto manufacturers and machinery sectors do provide good investment opportunities for South Korean companies.

According to Korean minister Kim, the deal would send a signal that free trade is up and running while protectionism is history. Industrial, agricultural goods and raw materials have received wide exposure, but the Koreans are upbeat over getting access to the huge Indian market. CEPA will come into effect from January next year after being ratified by Korea’s national assembly.  According to Korea Institute for International Economic Policy (KIEP) estimates, bilateral trade is expected to soar to US$ 3.3 billion annually.

The deal is among a series of FTAs signed by Korea with different countries, India being the sixth country to sign an agreement with it.  South Korea, with its right kind of approach, stands to benefit immensely and will be more than what India is going to benefit in absolute figures.

But will India be able to narrow the trade deficit with South Korea?
Indian imported goods worth US$ 3.6 billion and exported US$ 1.6 billion in the first half of this year. Korea is better positioned with a surplus of US$ 2.30 billion from US$ 15.56 bilateral trade last year, an increase of 39 per cent. Korean exports to India in June 2009 accounted for just 2 per cent of the total compared that to China with 20 per cent, higher than US and Europe. But the prospects are bright as the fallout of the global recession will make the West consume less and trade more, while India will continue to grow very fast. With its export-driven approach, South Korea seems to be moving faster than India and China, which are yet to realise their full potential.