India-Japan relations have immensely improved in recent times becoming much more stable and multi-dimensional in nature. Both sides now accord utmost importance to the relationship and have mutually agreed to augment the political, economic and strategic aspects of the partnership. The changing geopolitics and geo-economics of Asia-Pacific affected by China's rise has invariably brought India and Japan together. And hence, keeping the strategic dimension in mind as well the attractiveness of India as an economic player in the region, Japan has shown more keenness than ever before for deeper India-Japan economic engagement.
Hence, it is imperative to examine India-Japan economic relations in a rapidly globalizing where economies are more interdependent and intertwined than ever before. Besides, identifying the major parameters of the emerging economic relationship like the Comprehensive Economic Partnership Agreement (CEPA), Japanese Foreign Direct Investment (FDI), and Japanese Official Development Assistance (ODA), there is a need to note as to what impedes the relationship from achieving its potential.
For instance, when compared to India’s trade with China or Japan's trade with China, India-Japan trade is still very low. There has definitely been an increase in India-Japan trade since 2003, and export from Japan to India in products like steel, automobile parts, and processing of machinery has increased. There was a decline in bilateral trade in 2009 due to the global economic crisis and currency fluctuation of these countries. However, in 2010 after long negotiations, both countries agreed to sign the Comprehensive Economic Partnership agreement (CEPA) to speed up bilateral trade. In 2011 when CEPA came into force, India-Japan trade amounted to $ 10 billion with the aspiration to achieve the target of $ 25billion by the end of year 2015.
During the fiscal year of 2012-13, India-Japan trade reached $ 18.61 billion as compared to $18.43 billion in the fiscal year of 2011-12. During fiscal year 2012-13, India's exports to Japan were $ 6.1 billion and imports from Japan were US$ 12.51 billion. India's primary exports to Japan have been petroleum products, iron ore, gems and jewellery, marine products, oil meals, ferroalloys, inorganic or organic chemicals, etc. India's primary imports from Japan have been machinery, transport equipment, iron and steel, electronic goods, organic chemicals, machine tools and so on.
Foreign Direct Investment (FDI) is another important dimension of India-Japan economic ties. In the past decade, India has emerged as an ideal destination for Japanese FDI. During the period of 2000 to 2012 Japanese firms have made an actual investment of $12.66 billion in India. This accounted for seven percent of total FDI inflow into India and making Japan the fourth largest investor in India after Mauritius, Singapore, and the United States. The number of Japanese firms in India have grown significantly over the past several years and approximately 1000 Japanese firms are working on Indian soil which is still very less as compared to China where nearly 8000 Japanese companies are working.
Japanese FDI into India has primarily been in automobile industry, electrical equipment, pharmaceuticals, trading and telecommunications sector. India's rising economy and stable investment environment offer huge opportunities for Japanese investors. Areas which provide huge opportunity for Japanese investors include infrastructure, manufacturing, automobiles, power, metals, renewable energy, food processing and electronic hardware, etc.
Japanese Official Development Assistance (ODA) is another important aspect of India-Japan economic ties. Started in 1954, the goal of ODA is to help developing nations. India was the first country in the world to receive the ODA in 1958. In 2003-04 India replaced China to become the largest recipient of Japanese ODA. Japanese ODA to India has served several aims. Firstly, the Japanese ODA for India is one of the important gears to make stronger India-Japan relations as put forth by "Japan-India Strategic and Global Partnership". Second, sustainable economic growth of India is vital in ensuring a more stable Asia. Hence, improving investment environment in India is one of the major objectives of Japanese ODA. Third, reducing poverty being one of the major challenges for growing India, Japanese ODA also aims to help India fight this challenge, particularly regarding access to education and healthcare in commensurate with achieving the United Nations Millennium Development Goals. Environment protection is another important area of concern, as that will help India move towards sustainable economic growth. Moreover, Japanese ODA also aims to help enhance the people to people exchange between India and Japan providing a basis for building strong bilateral relations between these two nations.
There are various projects in India for which Japan is providing ODA. According to the Ministry of Foreign Affairs of Japan (MOFA), 66 projects in India have received Japanese ODA. For instance, the Delhi Mumbai Industrial Corridor (DMIC) and Dedicated Freight Corridor (DFC) to which Japan is providing financial as well as technical assistance. For the second phase of DFC, Japan has sanctioned 1,616 million yen loan to provide necessary funds for engineering services, which precedes the main construction portion, for the 552 km long segment forming part of the western corridor of 1,500 km of the entire rail road of 2800km. This DFC project was launched in 2005 with the aim to improve India's infrastructure. Japan has approved eleven ODA loan projects for India, including the ones India and Japan signed for Exchange of Notes in 2011, in response to India's proposal presented in fiscal year 2010. Total amount of pledge is roughly 203 billion yen.
There are also other important projects such as the 'Yamuna Action Plan'. Japan has sanctioned 32,571 million yen for the third phase with the aim to rehabilitate and improve existing sewerage systems and carry out activities to raise public awareness among people in the National Capital Region. Japan has approved 18,590 million yen for the 'Andhra Pradesh Rural High Voltage Distribution System Project'. This intends to create a high voltage power distribution system in rural areas of Andhra Pradesh. Then, there is the 'Rajasthan Forestry and Biodiversity Project -2' for which Japan has granted 15,749 million yen to accomplish forestry and biodiversity conservation programmes in the state of Rajasthan. For 'Bihar National Highway Improvement Project', an amount of 22,903 Million yen has been granted with the aim to expand or widen the roads and rehabilitate bypass of National Highway 83 (NH 83) in Bihar. 19,832 million yen has been sanctioned for the third phase of 'Bangalore Metro Rail project' to set up a mass rapid transit system in Bangalore city by building subways and elevated railroads.
India-Japan relation has been growing significantly in past several years, particularly so after the signing of the CEPA in 2010. However, China is the largest trading partner for Japan and India whereas India is the 25th largest export destination for Japan and Japan is the 10thlargest export destination for India. Japan's trade with China is more than 20 times with that of India making both countries overly dependent on China. Domestic economic issues have been a major impediment in the growth of bilateral economic relations between India and Japan. Japan's major concern is India's poor infrastructure, labour lows, bureaucracy, lack of political will to implement the process of liberalization and high tariff making.
Today there is a need to sustain the bilateral relationship and take it to a higher level for mutual benefits. It is high time for both India and Japan to intensify and diversify their economic ties with a view towards long term, sustainable ties. India can benefit a great deal from Japan's proven industrial might and high technology. On the other hand India can be a great asset for Japanese industrial manufacture. In the final analysis, the undoubted convergence between the two countries in the economic sphere is crucial not only for India and Japan but also for the growth and stability of Asia at large.
Disclaimer: The views expressed in this article are personal.
Santosh Kumar, Research Scholar, Center for East Asian Studies, School of International Studies, Jawaharlal Nehru University.
