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Japan – India Economic ties: emerging developments and future prospects

Japan and India are the two main democracies in Asia. They are natural allies, with theoretically very high levels of economic complementarity. With a developed economy, an ageing population and a low birth rate, Japan wants a development scenario. In creating such a scenario, it will be necessary for Japan to extend its relationship with India, which continues to rise rapidly.

However as illustrated by slow bilateral trade and foreign direct investment in India, guided by aspirations, this economic partnership falls well short of its promise. What is most notable at this time is Japan’s investment in Indian infrastructure through official development assistance. India has strong hopes for Japan as a growth partner.

This essay addresses the current developments in the multifaceted economic relationship between Japan and India and explores its future opportunities and problems.

Sluggish Japan – Trade in India

Japan had a chronic trade surplus with India. Leading products imported from India are petroleum products (naphtha), agricultural chemicals, gemstones, fish and shellfish. Horizontal trade between Japan and India has not grown as seen in the trade in agricultural goods and pieces between Japan and the East Asian nations.

Though India has a competitive edge in generic drugs, exports of pharmaceuticals to Japan remain sluggish, even as the Japan-India EPA has given India national treatment for the registration of generics and related applications. Though India exported $5.4 billion in pharmaceuticals to the United States in fiscal 2018, equivalent exports to Japan amounted to just $58.2 million.

Japan’s Active Direct Investment

Japanese automakers’ business advance has made a major contribution to improving the standards of the Indian automotive sector. These reforms had the effect of attracting Japanese firms to migrate to India in fields such as steel, machinery, power generation equipment and logistics. Daikin has retained its status as the top brand in the air conditioning market.

A survey of Japanese manufacturers with foreign branches conducted by Japan Bank for International Cooperation (JBIC) in 2019 reported that India ranked first as an attractive place to do business in the long term (in the next 10 years) and in the medium term (the next 3 years). The most widely cited explanation for India’s attractiveness was the potential opportunities of the domestic industry.

Expectations for India have stood out relative to other regional regions. On the other hand, India ranked lower than many regional regions in terms of the degree of satisfaction with revenue and profits, the indicator of economic success, the metric in which it ranked at the same level as Brazil and Russia. Some of the reasons given as problems that obstruct investment in India were lack of infrastructure, intense rivalry with other firms, and lack of accountability in law enforcement.

Creation of infrastructure by Japanese ODA

The active role played by Japan in the growth of India’s infrastructure is noteworthy in the Japan-India economic partnership. India was the first beneficiary of foreign yen loans that Japan started offering in 1958. Over the years since the 2004 fiscal year, India has been the largest beneficiary of Japan’s ODA.

A substantial proportion of yen loans went to the building of subway networks. The Delhi Metro, which started running in 2002, is a good example of the transition of Japan’s operating systems, building culture and safety technologies to India. Japan’s funding for subway systems has extended from New Delhi to Ahmedabad, Mumbai, Kolkata, and Chennai.

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Delhi Commercial Corridor Mumbai

India is working on proposals for five commercial corridors. Of these ventures, the Delhi Mumbai Industrial Corridor (DMIC), a joint Japan-India initiative with an expected investment of between $90 billion and $100 billion, is a flagship project. With the Western Dedicated Freight Corridor (DFC), a dedicated freight rail network that acts as the backbone, the construction of eight Investment Nodes is expected in a belt region covering six states.

Currently there are 18 initiatives ongoing as part of the DMIC. Japan has gained a 26 per cent equity stake in the Delhi Mumbai Industrial Corridor Development Corp., whose board comprises two officers from the JBIC. Japan originally suggested 19 $4.5 billion nominee schemes. The Logistics Data Bank, an IT-driven logistics visualization services project, is one of the popular initiatives funded by NEC.

West Dedicated Freight Corridor

At the 2008 Japan-India summit, Prime Minister Asō Tarō pledged ODA loans for the building of the Western DFC. The Western DFC will fly 1,504 km from Dadri to the Jawaharlal Nehru Port (JNPT) on the opposite side of the Mumbai Port. Electric locomotives transport double-stack containers on a double-track railroad. Freight that took between three and four days to travel from Delhi to Mumbai by conventional rail would be able to complete the journey in a single day and freight capacity will increase by 3.6 times per train. The Western DFC project obtained a loan of 731,5 billion yen through the Japan Foreign Cooperation Organization.

On the basis of the Special Terms for Economic Partnership (STEP) loan, more than 30% of the materials used are to be supplied from Japan and Japanese companies are expected to be the main contractors for each railway construction kit. However the Indian Ministry of Railways would be managing the electrical locomotive project because the cost factors made Japanese firms hesitant to join. As of October 2019, the construction phase 1 portion is 63% complete and the phase 2 section is 31% complete (Dadri to Rewari and Vadodara to JNPT). While the rail service is expected to start by the end of 2021, there is a risk that it will be postponed.

Mumbai-Ahmedabad High Speed Railway

The construction of the Mumbai-Ahmedabad High-Speed Railway is gaining tremendous interest as a new sign of joint ventures between Japan and India. The final decision to incorporate Shinkansen technology for the above mentioned project was taken at the Japan-India Summit in December 2015.

Japan agreed to fund 80.9 per cent of gross building costs (1.8 trillion yen) by ODA with the very concessional terms of the 50-year repayment cycle (including the 15-year grace period) and the 0.1 percent interest rate.

The high-speed rail line will be lifted for a total distance of 508 kilometers, as is the case in Japan, and travel time will be shortened from eight to two hours. The East Japan Railway will be responsible for the transition of Shinkansen technologies in fields such as rolling stock, operations and recruitment of Indian workers.

The proposed production of 240 units of Shinkansen rolling stock would essentially take place in Japan, except in the case of such rolling stock being commonly used on other railway lines. Although building is to take place from 2018 to the end of 2023, there is still a great deal of speculation over costs and land expropriation.

Indian Railways had already secured 47% of the land required for the development of high-speed rail by February 2020. However in the election of the Maharashtra Legislative Assembly in October 2019, the ruling Bharatiya Janata Party (BJP) did not gain a majority, and the coalition government headed by the Shiv Sena regional party—which is dubious about the high-speed rail project—took control.

Given that regional governments have broad control over land expropriation, there would be a need to track potential changes.

Expansion of the trade of individuals

The institutional mechanism in the form of annual summit meetings between Japan and India on the basis of a strategic and global partnership has allowed the launch of the major infrastructure projects mentioned above.

If these projects will be completed would measure the importance of this bilateral relationship. Finally, the growth of mutual understanding by successful human exchanges would be highly necessary for the creation of a framework for the expansion of bilateral relations. This would be indispensable for growing Japan’s investment in India and for cooperation in the area of information technology.