Japan turns to India

After years of dilly dallying, Japan is starting to show real interest in India as an investment destination. Ironically, despite its economy having slipped into recession, the Japanese government has committed itself to its largest ever loan for an overseas infrastructure project, signalling a new strategic relationship with India. The loan will be of long tenure and at low interest and will pave the way for other Japanese investment to flow in.

Japanese companies have been notoriously finicky and indecisive about investing in India, often seeming to be on the threshold and then holding back. A major deterrent for them has been India's poor infrastructure.

The project being funded by the Japanese government is an 'infrastructure' mega project, a 1,483km 'dedicated freight corridor' between Delhi and Mumbai providing high speed connectivity for high-axle-load wagons and an industrial corridor either side of the freight corridor.

The industrial corridor will ultimately have nine investment regions dedicated to industries like chemicals and engineering, as well as three ports and six airports. The industrial products will typically travel on the freight corridor to the ports, satisfying Japan's desire for better infrastructure to do business in India.

While the first phase of the project was cleared at the time of Prime Minister Manmohan Singh's visit to Tokyo last month, the total commitment from Japan is now a weighty $US4.7 billion.

Indeed, as Beijing's influence in Asia and around the world has grown, Tokyo and New Delhi have realised the importance of strong economic and strategic ties. Last month, Japan forged a maritime cooperation agreement with India along the lines of the one signed earlier with Australia and the buzz was that it was designed to thwart any Chinese domination over the waterways in Asia.

Indian economists estimate that total Japanese investment in India will reach $US5.5 billion by 2011, compared with just $515 million in the 2006 fiscal year.

Despite this bounty from the normally over-cautious Japanese, Prime Minister Singh, who is rated highly in Tokyo's corridors of power due to his stature as an economist-politician, could not resist observing in a meeting with representatives of industry that while Japan was wringing its hands, others were making hay. He pointed out that the increase in India's bilateral trade with China in the past one year alone was more than the whole of India's total trade with Japan.

On a Japan-India Free Trade Agreement, which has been on hold for too long and is finally likely to be signed this year, the real stumbling block has been India's reluctance to give tariff concessions on a blanket basis. This is based on principles of protecting domestic manufacturers. For instance, Indian auto part makers oppose the opening of the market to imported components.

The Japanese insist that India should allow Japanese inputs duty-free into the country and in turn they would allow Indian pharmaceuticals and agricultural products into Japan which are currently barred by Japanese non-tariff barriers.

Once the FTA is signed, Japanese carmakers would be able to import parts duty-free and then produce vehicles in India cheaper, to cater to overseas markets.

Japan's free trade agreements with ASEAN and eight other countries allow parts of a product to be made anywhere, assembled anywhere else, and sold somewhere else. The Japanese are able to produce each component where it is deemed to be cheapest, and coordinate production in factories in different East Asian countries as if they were one country. The Indians are not keen for this to happen – understandably so because unlike these countries which have small domestic markets, India has a huge internal market.

Overcoming reservations on both sides, India and Japan now seem on the threshold of a compromise that will make the FTA possible. Once that happens, India expects Japanese investment to flow in on a massive scale. That is why it is keen to clinch the deal. Commerce Minister Kamal Nath, who is normally very hawkish on what he perceives to be Indian interests is confident that with agricultural produce being very expensive in Japan, an FTA would not affect the competitiveness of Indian farm products.

Currently, Japanese investment in India is nothing to write home about. Japan is the sixth largest investor in India and though it invested $US1.5 billion in 2007 as against $0.5 billion in the preceding year, reflecting a quantum jump, the investment is still small when seen against the potential.

According to Japan External Trade Organization's annual survey of Japanese firms operating in ASEAN and South Asia, India is the region's most attractive destination in the medium term. Indo-Japanese trade too is growing. It almost doubled to $10 billion in the past three years, and is expected to touch $20 billion by 2010 – mostly Indian iron ore against Japanese machinery.

After years of procrastination, there is no mistaking that the Japanese are indeed heading for India. This time, hopefully, there will be no last-minute hiccups.