Column : Woo Japan for FDI

Updated: Nov 19 2012, 06:42am hrs
As the islands dispute with China takes its toll, Indias attractiveness grows

Pradip Shah

The recent tension between Japan and China triggered by the dispute over the Senkaku (or Diaoyu for the Chinese) islands has revived distrust between the two countries and will have far-reaching consequences on trade and investment flows between them. It also offers an opportunity for India to woo Japanese direct investment into India.

Japan was amongst the earliest countries to start investing in China in the 1980s after China liberalised foreign direct investment into the country. Japan had some unhappy experiences initially but accelerated its investment plans after China joined the World Trade Organisation in 2001. Japanese investment went into China with many strategic goalsfinding an alternate market for Japanese products, given the trend of ageing and shrinking of Japans domestic population; manufacturing products at Chinese costs to address the Chinese buyer with affordable prices; and creating lower-cost production bases to address world markets more competitively with its technology-intensive products.

But the emotional Chinese reaction to the islands dispute, with calls for boycotting Japanese products, has shaken Japanese confidence in China as a growing market for Japanese products. Further, Chinese companies have sought to copy, adopt and improve on Japanese technologies, and can become a competitive threat for Japanese companies in the future. And with Chinas workforce expected to shrink from 2017 onwards, its rising wage costs, coupled with a strengthening renminbi, will reduce the competitiveness of Japanese production bases in China.

This is an opportunity for India to warmly welcome Japan to invest in Indiain India, for India; and in India, for the world.

We need to position India for Japanese decision-makers. India will add in the decade from 2010 about 136 million to the workforce, a source of potential competitive advantage versus China, which will see only about 23 million additions; China benefited in the earlier decade with additions of 118 million. India will turn out 5.7 million university graduates in 2015 and 7.2 million in 2020, the worlds largest number; additionally, the lack of global free trade in services keeps service sector costs relatively attractive vis-a-vis the developed world. India thus offers an opportunity to blend blue collar and white collar skills for global competitive advantage. Further, private consumption is 57% of the GDP in India versus 35% for China, which has depended on unsustainable investment demand for growth; India offers a more dependable domestic market. China saw explosive growth in consumption once it crossed $3,300 in PPP per capita income in 1997; India is on the cusp of such an income-level and will emulate China in growth of consumption.

India is at no competitive disadvantage as compared to China on certain matters. Like China, India has growing income-inequalities with threat of social unrest; unquantified environmental costs (water will be a major problem in both countries in the future); corruption; lack of effective rule of law; and overbearing government interference in business and private life.

Unhappily, India has a large trade deficit (unlike China), a current account deficit, a large fiscal deficit contributed by populist fuel, fertiliser and food subsidies, and a high debt to GDP ratio (76% versus 37% for China in 2009). These negative fundamentals should translate into a secular trend of a weakening currency (with uncertain capital inflows disrupting this trend for temporary periods), which can be put to some advantage in aiding exports. We also have had manifestly weak leadership at the Centre; hopefully, surprising leadership in some states will likely have a positive demonstration effect on governance across the country.

There is also a need to dispel the negative fallout of the Maruti Suzuki labour problems. It needs to be pointed out that the local management cannot escape responsibility for its egregious labour practices. Shortly after the violence at Maruti, Mr Bernd Bohr, chairman of the global automotive business of Bosch, another large employer in India, was quoted saying that in accordance with his company policy Bosch did not employ contract labour in manufacturing and followed the policy of providing equal pay (for the same work) and that, overall, the labour cost advantage of India is quite significant even with 100% non-contract employment.

In addition to this message, the government must pro-actively seek to create a climate for attractive living, learning and leisure for Japanese visitors. Elements of these soft initiatives would include visa-free, hassle-free entry into India for citizens of Japan, intensive and continual training of Indian embassy staff in civility, courtesy, responsiveness and marketing India, incentivising opening of Japanese language schools and restaurants, and actively encouraging inter-country mobility for work.

Japans FDI into India between April 2000 and March 2010 was $3.7 billion, just 3.4% of total FDI flows into India. Japans FDI into China in 2010 alone was $7.2 billion; another $8.9 billion went into Asean countries. The Financial Times reported that last year Japans net outward foreign direct investment more than doubled to $116 billion, close to the record of 2007, reflecting a string of big M&A deals, new production bases and enhancements of existing facilities. According to data from the Japan External Trade Organisation, 2012 is on course to mark a new high out of total overseas Japanese investments. The Wall Street Journal in August 2012 stated that Japanese companies were sitting on $2.6 trillion of cash.

To make this happen, the government must put this task of wooing Japan for FDI into India in the able hands of Mr Chidambaram, the finance minister. In an interview in October, he expressed his preference for increasing non-debt inflows like FDI. And, speaking in Tokyo in October, he was clearly marketing India as a safe and attractive destination for investment. He has articulated ideas like the National Investment Board as a one-point, empowered entity for all clearances. He is seeking to reverse the damage caused by overzealous revenue officials. He has the ability for management and leadership on a national and transnational scale. And he can make possible large investment flows from Japan.

The author was founder managing director of CRISIL, and runs IndAsia Fund Advisors, a corporate finance and investment advisory business