Columns: Love in Tokyo

Written by N Chandra Mohan | Updated: Sep 4 2014, 06:13am hrs
Japans engagement with India has reached an inflexion point with Prime Minister Narendra Modis recent visit. Like Modi, Indias previous premier, too, shared a warm equation with Japanese PM Shinzo Abe. But that didnt translate into big-ticket investment opportunities as it has now. There has been talk of billions and millions. But there has never been talk of trillions, gushed Modi at the end of the official leg of his five-day visit. The reference was to the 3.5 trillion yen ($33.8 billion) promised by Japan

for bullet trains, smart cities, rejuvenation of rivers like the Ganga and clean energy projects.

No doubt, all of this helps in realising Modis vision of building a diamond quadrilateral of bullet trains connecting major metropolises in the country on the Tokaido Shinkansen model. He has talked about dedicated freight and industrial corridors and the first railway budget of the NDA government has invited 100% FDI for such big projects. Japans willingness to help out with such proposals is reflected in the massive investment commitment which comprises a mix of public and private funds and Overseas Development Assistance (ODA), of which India is the largest recipient.

However, getting the commitment from the Japanese and using this money are two different things. India does not exactly have a good track-record in utilising ODA funds. For instance, less than a fifth of what was committed could be taken in FY14. A trillion-yen question is also whether India is ready to seize the prospect of attracting the second massive wave of outward investments from Japan that is heading for ASEAN shores. The Japan India Investment Promotion Partnership aims to double both Japanese FDI and the number of companies operating in India over the next five years.

Both these numbers arent exactly flattering as Japanese businessmen (like other foreign investors) have their concerns about investing in India. The flagship venture is the Suzuki-controlled Maruti Suzuki India Ltd, which triggered the automobile revolution in the 1980s with its hatchback model, the Maruti 800. In the late 1990s, its frictions with the Indian government cast a shadow over the bilateral relationship. Later on, some Japanese companies have made terrible mistakes as well, like

Daiichi Sankyos ill-fated takeover of Ranbaxy in 2008. Labour troubles have also been a hardy perennial.

Net FDI inflows from Japan, in fact, have more than halved to $2.1 billion in 2013 from the peak level of $5.5 billion in 2008 according to Japan External Trade Organisation. All of this comes at a time when Japan desperately seeks an alternative to investing in China. There are deep-seated changes also taking place in its domestic economy that is hollowing out its manufacturing activity. Unable to compete with a strong yen and with shrinking demand back home, Japanese firms are increasingly establishing new production bases, enhancing existing facilities abroad and acquiring foreign businesses.

Japans net outward flows hit a high of $135 billion last year and are likely to remain at this level in the foreseeable future. Clearly, this opens a wonderful window of opportunity for India to attract some of these outflows. But to do so, it must first of all enhance its attractiveness as a destination for FDI. If its business environment does not improve, the Japanese (like other investors) will simply lose interest and shift elsewhere. Current indications are that they prefer ASEAN members like Thailand, Indonesia, Malaysia and Philippines, where they invested eight times more than in India last year.

So this is a good time to lay down clear and transparent policies to attract large-scale investments towards this end. A stable, predictable and non-adversarial tax regime for all investors facilitates this objective. Indias interests are to attract FDI from all sources and not just Japan. It obviously cannot tailor its policies to take care of investor concerns from only a select few countries. FDI from everywhere is welcome if it augments productive capacities; upgrades the Indian economy technologically; helps build infrastructure and leads to employment generation.

For such reasons, Modis commitment to institute a special mechanism like a Japan Fast Track Channel to speed up investment approvals from that country doesnt make strategic sense. The Japanese, for their part, were rather keen that this proposal was included in the joint statement made by both governments. Fortunately, it was not. The point is that there would be competing demands by other countries for a similar mechanism. Chinas President Xi Jinping, who will soon visit India, will most certainly unveil mega investments. Wont such proposals also warrant a fast track

However, none of this should detract from the positives of Modis visit. The Japanese have so far been sitting on the wall, endless debating whether or not to invest big-time here. Since the 1990s, many Japanese trade and investment missions came to the country, raised a few queries and quietly left. Even to this day, investments from that country are a miniscule fraction of what they have invested in Asia. But this bids fair to change. Japanese companies operating in the country are just over a 1, present. But with the trillions of investments waiting to kick in, this number can easily double especially if small, micro and medium scale enterprises set up shop in states like Gujarat. Japans gaze is bound to shift more firmly towards investing here as romance blossoms between New Delhi and Tokyo.

The author is a New Delhi-based

economics and business commentator