One Yen for India: To Advance Bilateral Relations, Japan and India Must Harness Complementarities

Japan’s youngest prime minister wrote in his book Towards a Beautiful Society that he would not be surprised if in ten years Japan-India relations surpassed Japan-US and Japan-China relations.

At the 14th Annual India-Japan Summit, Prime Ministers Kishida Fumio and Narendra Modi resolved to further advance the special India-Japan strategic and global partnership. They shared a common vision that the economies of both countries would be fueled by “strong bilateral investment and trade flows through diversified, resilient, transparent, open, secure and predictable global supply chains,” according to the joint statement. There is no doubt that the climax of the bilateral relationship occurred under Abe Shinzo’s premiership, when Indo-Japanese relations entered a qualitatively new phase.

Japan’s youngest prime minister wrote in his book Towards a Beautiful Society that he would not be surprised if in ten years Japan-India relations surpassed Japan-US and Japan-China relations. The challenge for both nations is to translate this ambitious vision into reality. The pattern of economic cooperation in 2014 is also broadly similar to what was announced at the summit. Under Abe, 3.5 trillion yen ($33.8 billion) has been pledged by Japan for high-speed trains, smart cities, the rejuvenation of rivers like the Ganges and clean energy projects. This amount has now been increased to 5 trillion yen ($42 billion) in public and private investment and ODA over the next five years.

Despite progress in bilateral economic cooperation, the flagship high-speed rail project between Ahmedabad and Mumbai is still ongoing and land acquisition is still not completed. The same goes for freight and industrial corridors and smart cities. The two leaders affirmed that this high-speed train project is an important symbol of Indo-Japanese collaboration; that they would work together for the start of operations at the earliest. Currently, there are 1,455 Japanese companies in India. Japan is the only country in the world with 12 industrial townships dedicated to each country in nine states of India.

There is a Japan Plus Desk, created in 2014 by an agreement between Abe and Modi, to facilitate and support investors in India. This has improved comfort levels for Japan to become India’s fifth largest investor. However, this is not reflected in robust trade – bilateral flows are only $17.2 billion despite a Comprehensive Economic Partnership Agreement (CEPA) since 2011 which aimed to remove tariffs on most products; increase the access of Indian professionals and contractual service providers to the Japanese market. Japan posted a trade surplus of $6.8 billion for this fiscal year (April-January). At the summit, the two leaders recognized the need to strengthen bilateral trade and encouraged further consideration of CEPA implementation through existing mechanisms.

Although India has taken steps to improve the business environment for Japanese investors, this is an area where further steps are needed to attract significant investment. Despite all the bullish surveys by the Japan External Trade Organization that a majority of Japanese companies that have invested in India are positive about expanding their business, they are not making the decision to invest in haste. . Their exposure to ASEAN is 11 times higher than in India. Japan’s net FDI inflows to India fell sharply to $2.7 billion in 2021 from record highs of $4.2 billion in 2016 according to JETRO, as Japan seeks a alternative to investing in China.

Large Japanese investments are hampered by concerns about the complicated legal and tax system, difficult labor issues, inadequate infrastructure, poor contract enforcement, and more. To exploit the unfulfilled promise of the relationship, Japan and India must exploit their natural complementarities. Japan is a “hard” power with manufacturing prowess. India is a “soft” power in IT and services. Japan is running out of natural resources that India has. Japan has capital. India has a skilled workforce. Japan is looking for markets. India has a huge thriving domestic market.

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