Indo-Japanese economic relations

“Japan- India relationship is blessed with the largest potential for development of any bilateral relationship anywhere in the world”

Speech by H.E. Shinzo Abe – Prime Minister of Japan at the Parliament of the Republic of India, August 22, 2007

Japan and India have had a long trade and economic relationship starting from the later part of the 19th century. However, post World War II and the establishment of diplomatic relations, the imperatives of the cold war kept the relations between the two countries at a sub-optimal level. In the late 1980s, with the cold war fading, Japan-India relations again looked promising. It is worth noting that even during the cold war period, Japan’s Overseas Development Assistance(ODA) was still active in India. The landmark event which signalled the high point of the relationship in that period was the joint venture between Maruti Udyog and Suzuki Motors in 1984 to produce small cars in India. This article seeks to find ways to rejuvenate the partnership between Indian and Japan to blossom into one of the most functional partnerships among nation states in recent history.

’90s preferences

Despite having been an early investor in India’s industrialisation, Japan in the early 1990s was focused on trade and investment with China. India’s nuclear tests in 1998 again led to severe condemnation and harsh sanctions by Japan and the relations moved to a low keel. However, despite this setback, there was consensus amongst major India political parties in support of robust relations with Japan. The Vajpayee-led NDA government’s “look east policy”, which was furthered by Dr. Manmohan Singh’s government, laid the foundations of a special strategic global partnership with Japan at the turn of the century and in the first few years of the new millennium when the signs of a shift in global power balance in favour of Asia became apparent. The current NDA government’s focused efforts in this regard seem to stem from awareness of the fact that the economic value created by way of trade and investment between the two countries is significantly lower than the potential. As per data from the Japan External Trade Organization (JETRO), Japan’s aggregate outward investment in China during the period 1996-2015 was $116 billion and in India was $24 billion. China has received close to 5 times more investment than India. Chart 1 captures the long-term trend. The stock of Japanese foreign direct investment globally is $1.3 trillion. The annual outward flow of Japanese FDI is about $130 billion and the U.S. gets about $40 billion annually. India should target at least $25 billion annually for the next 10 years.

FDI patterns

From a foreign direct investment (FDI) perspective, based on data from the Department of Industrial Policy and Promotion-India, between April 2000 and September 2016, Japan ranked fourth with an aggregate investment of $24 billion. In comparison, China’s aggregate FDI in the same period was $1.6 billion and that of South Korea was $2.1 billion. The two-way trade (sum of exports and imports) in 1994-1995 between Japan and India was $4067 million, between India and China was $1015 million and between India and South Korea was $961.9 million. By 2015-16, Japan-India two-way trade had increased to $14,512 million (a cumulative annual growth rate of 6.3%), China-India two-way trade had grown to $70,758 million (CAGR of 22.6%) and South Korea-India two-way trade had grown to $16,587 million (CAGR of 14.6%). Chart 2 illustrates this with long-term data.

Challenges to partnership

There are three main challenges which have constrained the Japan-India partnership from achieving its full potential. First, India’s complex regulations, red tape, ad hoc nature of state-level interventions. Second, Japanese companies face considerable logistics challenges and non-availability of uninterrupted power supply constrains their manufacturing plans in India. Third, while India can emerge as a large market for Japanese infrastructure system exports, there have been incredible delays in the commencement of the projects.

In order to facilitate investment from Japan, the union government has set up a Japan Plus committee which comprised four senior bureaucrats from the government and three Japanese officials chosen, one each from Japan’s Ministry of Economy, Trade and Industry (METI), Japan External Trade Organization (JETRO) and the Aichi perfecture to deal with all aspects of investment mainly challenges faced by Japanese companies post investment. Between FY15 and FY16, while FDI from Singapore and the U.S. have more or less doubled, Japan’s FDI into India has increased by only 30%.

Top Start

In fact, Japan International Cooperation Agency (JICA) has funded the Tamil Nadu Investment Promotion Program for strengthening policy framework and urban and industry infrastructure to facilitate foreign investment.

Japan is working on developing 12 Industrial townships called Japan Industrial Townships (JITs) which will operate like Little Japan with all the infrastructure to support the operations of Japanese companies. Still, the JITs face challenges from access to ports, lack of uninterrupted power supply and poor level of benchmarking to global best standards as applicable for industrial parks.

As per the JETRO Survey on Business Conditions of Japanese Companies in Asia and Oceania (2015), more than 70% of Japanese companies operating in India have indicated that they will expand operations over the next one to two years. In comparison only 38.1% of the Japanese companies operating in China have indicated that they will expand operations. The sub-40% figure is a low since 1998. India can be one of the largest markets for Japanese infrastructure systems exports (one of the core components of Abenomics) in transport, water, energy and logistics. While there is the shining example of the Delhi Metro Rail, the delays with Delhi Mumbai Industrial Corridor (DMIC), which was set up in 2007, and the pace of the ongoing feasibility studies of Chennai Mumbai Industrial Corridor (CBIC) are disappointing.

Tokyo Declaration metrics

The Tokyo Declaration of November 2014 sets a target for doubling Japan’s foreign direct investment, the number of Japanese companies operating in India and an ambitious investment target of JPY 3.5 trillion ($33.5 billion) within a five-year period. The doubling of foreign direct investment seems unlikely unless some dramatic revival happens.

The number of Japanese companies in India in October 2014 was 1,156 and by October 2015 it was 1,229, an increase of 6%, much lower than the needed growth to achieve the target. The cumulative Overseas Development Assistance disbursement by Japan (India is the largest recipient of Japanese ODA) in 2014 was JPY4.6 trillion and in FY 15-16 only JPY 185.6 billion was disbursed. Given the under-performance on all the benchmarks set up under the Tokyo Declaration, timely intervention from the highest levels of both governments can still ensure that the ambitious metrics can be achieved.

The Japan-India relationship is at a unique juncture as Asia is emerging as the powerhouse of the world. The Japanese government must play a more active role in building India’s infrastructure, which will serve as a foundation for sustained economic growth. Both Japan and India must aspire for two-way trade of $100 billion, annual investment by Japan in India of $25 billion and at least 100 joint manufacturing/research and development centres on a global scale within the next ten years.