India, Japan bhai, bhai

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: 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 2010—this 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 India’s. 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 India’s economic infrastructure is closely linked to the prospect of FDI. Japan’s 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 India’s potential as an investment destination and Japan’s 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).