India, Japan bhai, bhai

Written by Prabir De | Updated: May 8 2008, 03:31am hrs
The world witnessed the Japan-India friendship year in 2007. A strong relationship structured over half-a-century forms the foundation of Indo-Japanese cooperation today. Substantial complementarities characterise the economic engagement between Japan and India. Capital, technological skills and new product development are some of the advantages of Japan. On the other, Indias strength lies in knowledge-based services and high quality, labour force, which gained international recognition. Japan is looking for Indian skills whereas India needs Japanese technology. An honest collaboration between the two countries is, therefore, fast emerging.

Meanwhile, at the start of the 21st century, with a perspective to further enhance friendly cooperative relations that had been nurtured historically, both countries agreed for a Japan-India Global partnership in August 2000 on the occasion of former Prime Minister Moris visit to India. Additionally, in 2005, a joint statement called the Japan-India Partnership in a New Asian Era was declared.

There is a perceived advantage in trade in services. The services sector is a significant player as it contributes over 50% of GDP in India and above two-thirds in Japan. In addition, the huge gap in population dynamics of Japan with India, with the former having an ageing society and the latter a large younger population base is another aspect that makes the Japanese and Indian economies complementary.

Japan is the worlds second-biggest spender on technology after the US. The total IT outsourcing market in the country grew to $15 billion in 2005 and the market is forecasted to grow by 5.8% through 2010 to 2.34 trillion yen. This provides vast opportunities for Indian companies to collaborate with Japanese counterparts.

There is a recent spurt in Indian investments in Japan, driven by software companies. About 70 Indian companies have established their offices in Japan. During 1996 to 2006, Indian direct investment through joint ventures and wholly owned subsidiaries in Japan was only $7.55 million, much lower than the potential.

The two-way bilateral trade between Japan and India has been growing rapidly, reaching almost $9 billion in 2006. Unfortunately, this figure is not commensurate with the two countries economic power and potential. Japan ranks 10th among Indias export destinations (share 2.5%) and 10th among import sources (2.8%) and India ranks 26th among Japans export destinations (0.6%) and 28th among import (0.6%).

As for other comparable major economies in 2006, the trade value between Japan and China was 211.23 billion and between India and the US was $32.02 billion indicating substantial potential for further expansion of trade between Japan and India.

A Joint Study Group between the two nations was formed in April 2005, and its report was submitted in June 2006. This study indicates that there is a huge untapped potential to further develop and diversify the economic engagement between India and Japan. Following the recommendations of the JSG report, India and Japan are now negotiating an Economic Partnership Agreement (EPA). The sixth round of negotiations on the Japan-India EPA was concluded last April in Tokyo. The seventh round of these negotiations is coming up on May 2008 in New Delhi.

Both the countries expect the bilateral trade to cross $20 billion by 2010this is not to deny that both the countries apply high tariffs to some of their commodities that carry relatively higher comparative advantage. Meanwhile, India has high tariff rates, particularly on machinery and parts, which probably are discouraging Japanese trade and consequently FDI into India.

Inevitably, tariffs will be liberalised in coming days due to EPA, perhaps in case of non-agricultural goods. Japan is in a advantageous position since its overall average applied tariff is much lower than that of Indias. Any tariff cut would not make any substantial impact on Japan, since the tariffs have already been low in Japan. Generally speaking, the same will have greater impact (presumably negative) on some part of Indian industries and trade. Therefore, tariff elimination should be dealt cautiously. To compensate the revenue loss from tariff liberalisation, India should actively source technology and investments from Japan and enhance the exports (goods and services) to that country.

Improvement of Indias economic infrastructure is closely linked to the prospect of FDI. Japans cumulative FDI inflow (on approval basis) into India between 1991 and 2007 stood at $3.65 billion only, accounting for about 6.45% of the total FDI inflows. However, considering Indias potential as an investment destination and Japans economic size, the current FDI volume is rather unsatisfactory.

The future of India-Japan economic relations is nonetheless bright. Japanese companies have started considering India as a future export hub of their products such as Mitsubishi, Suzuki and Honda. Japanese SMEs are excited about Delhi-Mumbai Industrial Corridor (DMIC). In order accommodate new investments and relocation of Japanese businesses from other countries to India, we need quicker development of modern industrial zones along the DMIC (similar to Shenzen in China which accommodates about 10,000 Japanese SMEs).

We also need more air links between India and Japan. It is unclear, despite largest Japanese FDI in India went into West Bengal, why there is no direct flight between Kolkata and Tokyo.

India is actively engaged in improving the international environment. It has agreed to provide visa on arrival to Japanese citizens (along with citizens of 17 other nations) from October 2009 onwards. India and Japan have agreed to currency swap pact to help both the nations tide over any short-term BoP crisis. With Japan, negotiation on Bilateral Investment Promotion and Protection Agreement is also ongoing.

Both Japan and India have collective responsibility for ensuring peace and prosperity in Asia. Efforts to advance Japan-India cooperation in furthering Asian regional integration will be in the interest of both countries and in creating a successful Pan-Asian economic community.

The author is fellow, Research and Information System for Developing Countries (RIS), New Delhi. He may be contacted at prabirde@hotmail.com The views expressed are personal