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India and Japan should deepen strategic engagement At this juncture, there is a strong case for India and Japan to broaden and deepen economic and political engagement to enhance strategic depth and leverage. The two countries had envisaged “global partnership” in 2000, and it is time to give greater substance to it. That India is the single largest recipient of Overseas Development Assistance is a strong signal from Japan, but it needs to be complemented by more robust economic and political relations.
The following indicates the extent to which the bilateral economic relationship needs enhancing. Merchandise trade between the two has been relatively stagnant since 1997-98 at around $4 to 4.5 billion. In contrast, India-China trade has accelerated, exceeding $10 billion in 2004. In services trade also, perceptions are that India-Japan trade has not been buoyant, though bilateral country data for services trade are not available. India should urgently consider capturing and publishing disaggregated country-level data on services trade.
There are 265 firms from Japan which have invested in India, with total FDI stock of only $2 billion. This is in sharp contrast to Japan’s FDI stock of $50 billion in Southeast Asia, and $40 billion in China. This large imbalance cannot be solely explained by objective factors.
India ranks third in the world in FDI attractiveness. Harvard professor Tarun Khanna has observed that India’s FDI policies are more attractive than China’s, though India lacks marketing and soft skills to translate these into actual investments.
In sharp contrast to Japan, its traditional rival, South Korea, has been proactive in establishing a substantial manufacturing presence in India. At current rates, India’s trade with South Korea is set to overtake its trade with Japan in the near future.
In a November 2004 seminar on ‘Building a New Asia in Tokyo,’ former economic ministry official, Professor E Sakakibara, argued that primary responsibility why many win-win opportunities have not been realised lies with the mindset of Japanese policy and business establishments, and with opinion-makers and researchers. They have not been monitoring India’s unilateral liberalisation and rapid integration with the world economy. The fact that Indian IT companies have been providing key support to manufacturing firms in Japan to become more competitive has not been recognised sufficiently in Japan; neither has the fact that the location (India) where some of the key (such as chips) are designed or further developed should be regarded as an integral part of the electronics chain. Japan’s business rivals from US, and the EU as well as South Korea and China, have been using India as a location for design and R&D activity to become more competitive. He urged the Japanese establishment to make concerted efforts to broaden and deepen engagement with India.
The case for broader and deeper partnership may be summarised as follows.
First, Japan’s energy security and trade flows are heavily dependent on secure routes through the Indian Ocean. India has common interests with Japan in keeping this route secure, and is developing capability to constructively cooperate with Japan. Such cooperation will also be welcomed by the US, thereby fulfilling a key requirement for Japan’s engagement.
Second, there are strong demographic complementarities. Japan’s population in absolute terms will begin to decline by the end of this decade, and median age of its population will continue to increase due to individual ageing. India, in contrast, is entering a demographic gift phase resulting in rising proportion of population in the working age group. Japan can extend its economic space and technological capacities , particularly in biotech, pharma IT, space and certain manufacturing areas, such as auto design. This will permit Japan to access knowledge professionals from India without necessarily requiring their physical movement.
Third, India and Japan have teamed up with Germany and Brazil to coordinate efforts to become permanent members of the UN Security Council. The economic and strategic widening and deepening of bilateral relations will enhance their leverage in pursuing this goal.
Fourth, there has been a perception that Japan has not reaped diplomatic and tangible economic benefits proportionate to its role as investor, aid provider and trading partner of Southeast Asia. The capability of Southeast Asia to absorb further large scale Japanese investments has diminished since the 1997 East Asian crisis. The risk of over-concentration by Japan on the performance of Southeast Asia (and China) has risen substantially. As a result, increasing comparatively miniscule FDI stock in India represents lowering of overall global risk for Japan. It will also open up opportunities for Japanese business to participate in a mega market.
India’s economic growth is founded on a strong private sector, that has set itself ambitious target of global competitiveness in many areas. FDI has a critical role to play in India’s growth strategy. FDI, particularly from the US, EU, and South Korea is already doing so. The longer the Japanese companies defer their decisions to invest in India, the greater will be the opportunity cost of the delay.
Foreign FIs have invested about $60 billion in India’s stock markets alone. Japanese presence in venture capital and private equity funds in India is limited. There are many small and medium-sized Indian companies and startups which provide opportunities for private equity and venture capital firms. It would be useful if the joint study group agreed by the Prime Ministers of both countries gives priority to considering specific ways to bring about wider and deeper engagement.
India’s policymakers, business community, media, and researchers need to make concerted efforts to mitigate substantial information and perception gaps in Japan about India. Proficiency in commercial diplomacy and soft power skills will be vital in this task. The ultimate determinants of India’s success in engaging not only Japan, but also other major powers, will continue to be its economic and governance records, and perusal of strong and credible national security polices.
The writer is professor, LKYSPP, National University of Singapore. E-mail: sppasher@nus.edu.sg
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