Indo-Japan Trade and Investment Ties: Business as Usual?

Many countries in the last decade have felt themselves to be living in an environment of uncertainty. Although India has been able to maintain relatively high GDP growth despite an unpredictable and uncomfortable global business environment, the negative impact on India has been conspicuous (yet unrecognizable amid the stagnant global growth). The GDP growth rate contracted considerably, from 9.32 percent in 2007-08 and 6.72 percent in 2008-09 to an estimated 7.11 percent in 2016-17. FDI inflow in India also declined over the years, from USD 47.14 billion in 2008-09 to USD 21.12 billion in 2010-11, before escalating to USD 60.08 billion in 2016-17.

Meanwhile, the domestic investment climate has improved significantly, thanks to Indian Government’s various policy reforms and initiatives – such as clearance of Insolvency Law, abolishment of Foreign Investment Promotion Board (FIPB), and implementation of Goods and Service Tax (GST). These efforts have helped the Government to restore foreign investors’ confidence in the Indian market. Lately, Prime Minister Narendra Modi’s persistent push to improve India’s ranking in World Bank’s Ease of Doing Business index has also been noted positively across the world.
Notwithstanding India’s below par ranking at 130th position, and therefore the continuous reservation expressed by foreign investors on starting their businesses in India, Japan continues to invest steadily and heavily in Asia’s third largest economy. As of October 2016, the total number of Japanese firms registered in India was 1,305. As many as 76 new companies established their businesses in India since October 2015. Japanese ambassador to India Kenji Hiramatsu recently said many new Japanese manufacturing firms have expressed their desires to setup their businesses in India.

On investment front, Japanese investment in India stood at USD 4.7 billion in 2016, up from USD 2.6 billion in 2015. Japan is also the 3rd largest foreign investor in India. The total Japanese FDI in India reached USD 25.7 billion between 2000 and 2017. Japanese FDI into India has primarily been in automobile, chemicals, pharmaceuticals, electrical equipment and telecommunications sectors. However, betting high on Indian government’s policy reforms, these Japanese firms are intending to diversify their investment across sectors.

Several Japanese companies are now manufacturing their products and components in India with an objective of tapping the burgeoning domestic demand. They are also looking to take advantage of the country’s relatively low-manufacturing cost and export their India-manufactured products to various international markets including Africa, Japan, Middle East and several other Asian neighbouring countries. Japan is the 10th largest trade partner of India. Their bilateral trade stood at about USD 5 billion in 2016.

The question is why Japan sees itself playing an important role in Indian developmental agenda with its colossal investment across multifaceted sectors? It is not difficult to find a possible and positive explanation. India-Japan history has been underpinned by their historical linkages in spiritual and religious affinity. Buddhism, for example, started in India and soon found itself spread throughout Japan. There has always been a sense of admiration among the Japanese towards Indians for sharing their religious beliefs and knowledge. In the modern time, the two countries share a common belief on democracy, individual freedom, international rule of law, infrastructure, and economic development of neighbouring regions. Presently, they have widened their scope of bilateral cooperation and currently working on connecting Africa and East Asia through Asia-Africa Growth Corridor, a project widely seen as an alternative to China’s Belt and Road initiative.

There is a plenty of enthusiasm on the part of the Japanese Government as well as firms. They positively perceive that India and Japan have the potential and responsibility to work towards their national and regional developmental goals.

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