[Post-China India]③Rich in Potential but Also High Risk

"A country with abundant growth potential but also significant risks."

Amid the US-China conflict, India is emerging as a production base replacing China, but domestic companies operating in India cite poor business conditions compared to competing countries?such as environmental pollution, lack of infrastructure, and high regulatory costs?as their biggest challenges. Religious and cultural differences also act as obstacles to entry, creating psychological distances as vast as the physical ones.

In particular, India's poor production infrastructure and transportation system compared to China are major factors causing companies to hesitate in entering the market. According to the International Finance Center on the 15th, India's power transmission and distribution loss rate reached 17%, three times higher than major countries due to poor systems. There is also a significant gap in power infrastructure between regions, making standardized production difficult in many areas. Professor Choi Won-ki of the Asia-Pacific Research Department at the Korea National Diplomatic Academy pointed out, "Infrastructure is crucial for the semiconductor industry, which India strongly hopes to attract. Semiconductor factories operate 24/7, and if power supply is interrupted, losses are significant. Even if companies have their own contingency plans, risks such as power outages cannot be ignored."

Poor Infrastructure and Protectionism as 'Obstacles'

Although India is working to expand transportation infrastructure such as roads, railways, and ports, it remains inadequate, which is also a limiting factor. Among the world's top 50 ports by cargo volume, China owns 14, while India has none. Indian ports are too shallow for large vessels to enter smoothly, and most cargo inspections rely on manual labor. Only 5% of roads are highways, and 40% are unpaved. In response, the Indian government announced the National Infrastructure Pipeline (NIP), a plan to select and implement infrastructure projects worth over 1 billion rupees with high importance and feasibility between 2020 and 2025, with a total expected investment of 111 trillion rupees (approximately 1,726 trillion KRW).

India's protectionism aimed at fostering domestic manufacturing also makes it difficult for foreign companies to enter. India's tariff rate (most-favored-nation basis) was 18% in 2021, the highest among Asian countries. The tariff system includes many detailed items such as social security tax and education tax, and the calculation applies compound interest rather than simple addition, complicating matters and increasing difficulties for companies.

Despite low labor costs, only about 20% of China's level, high costs related to permits and legal matters also hinder companies. India, with its diverse religions and ethnicities, has strong local government authority, and complex taxation and legal systems act as non-tariff barriers to foreign companies establishing production bases. For example, the US logistics company Amazon withdrew from the Indian distribution business last year due to excessive regulations that do not allow foreign companies to hold inventory or maintain a certain market share. According to a 2019 World Bank survey, India's ease of doing business ranked 63rd globally, behind major emerging countries such as Taiwan (15th), China (31st), and Mexico (60th). Rapidly increasing greenhouse gas emissions and high mortality rates due to environmental pollution such as fine dust are also risk factors. The International Monetary Fund (IMF) warned that India's warming could threaten the agricultural sector and reduce productivity.

India: Widening Current Account Deficit and Rapid Increase in National Debt

The macroeconomic situation is also challenging. Although India showed relatively favorable growth after COVID-19, the current account deficit has widened and national debt has surged during this period. India's current account deficit reached $80.4 billion last year due to rising raw material prices, expanding from a $33.4 billion deficit in 2021. The national debt ratio in 2021 was 84.2%, significantly higher than the emerging market average of 63.7%.

Experts positively evaluate India's economic growth potential despite various risk factors and advise that South Korea should actively seek entry. Despite the spread of COVID-19, foreign direct investment (FDI) inflows into India increased by 13% in 2020 compared to the previous year. India attracted a record-high total FDI of $81.973 billion from 2021 to 2022.

Another important reason India matters to Korean companies is that it can serve as a hub region and a foothold for expansion into the Middle East and Africa. Professor Choi said, "Although the Korea-India 'Special Strategic Partnership' was elevated in 2015 and India was designated as a key partner in the previous government's 'New Southern Policy,' diplomatic and security cooperation between Korea and India has not made significant progress so far. Both countries are liberal democracies sharing political values, strategic interests in the US-China strategic competition, economic complementarity in industrial structures, and potential for cooperation in manufacturing supply chains, so strategic cooperation should be strengthened."

Kim Kyung-hoon, a senior researcher of the India-South Asia team at the Korea Institute for International Economic Policy (KIEP), emphasized, "India has started to check China diplomatically and economically and is strengthening economic relations with advanced countries seeking to diversify risks from China, so it is highly likely to benefit from 'friend-shoring.' Since India has been the G20 chair since December last year and plays a key role in setting the global agenda, the Korean government should build a denser cooperative relationship with India, like other major countries pursuing India engagement strategies." Park Dong-hoon, head of the Asia-Pacific Economic Team at the Bank of Korea's Research Department, added, "South Korea needs to strengthen its approach to intermediate and capital goods markets expected to grow with India's expanding role as a production base. It should also diversify export items to target the Indian domestic market in response to the rapid growth of India's consumer market."