A bullet train into infrastructure gaps?

The early ?80s witnessed a renewed thrust on public expenditure funded infrastructure development in India. The focus was on thermal power stations and coal mining. This phase saw the growth of bilateral agreements on technology, equipment, and project financing. These included agreements with Japan for equipment for coal and power generation. Japan was thus, aggressively involved in the development of Indian infrastructure.

Liberalisation policies in the ?90s distanced government spending from the power, coal and agriculture sectors. Private power projects were tried out with little success. This decade also witnessed the stagnation of the Japanese economy, which became more inward looking. While Japanese automobile and electronics firms made their presence felt in the Indian market, government-to-government projects did not happen. Over the years, India?s trade structure has changed; interaction with Japan has remained stagnant. After the Japanese post-Pokhran sanctions in 1998, relations touched a further low.

As a destination for Indian exports, Japan?s share has been declining. It halved to 2.68% in 2003-04 from 6% in 1996-97. Top export commodities to Japan are gems and jewellery, marine products, ores, and chemicals. The share of Indo-Japan trade in India?s total trade stands at a mere 3.08% for 2004.

Over the last two years, however, there has been a renewal of Japanese interest in India. Two important events contributed to this. The first was the India-Thailand FTA, which enabled Japanese manufacturers in Thailand to take advantage of trade opportunities. India?s presence at Asean meetings, its negotiations with Singapore and China, and India?s growth pace caught Japan?s attention. Moreover, there were several international reports on emerging India. Presence in India became important. Over the last 18 months, there has been a spate of government and business delegations from Japan.

All along, the progress of ODA from Japan to carefully identified projects, has been substantial. The most visible is the successful Delhi Metro Project. It was against this background that ideas of India-Japan collaboration on large infrastructure projects resurfaced in 2003 and 2004. The argument was the need for closer trade ties; the political and strategic imeperatives in the region, and the mutual opportunities waiting to be exploited. The suggestion was to kick start the new initiative with the launching of a major, cutting-edge technology, infrastructure project for joint implementation. Among many candidates were the cross-harbour bridge in Mumbai, and a high speed (?bullet?) train, for which Indian Railways had already done some prefeasibility studies. Other metro rail projects were also on the agenda.

Political changes last year paused these initiatives?there was concern that budgetary allocations should not be skewed towards a single large project. At the same time, the performance of the Japanese economy has also been erratic. The visit of the Japanese prime minister is an opportunity to take a call on all these issues.

There are great opportunities, but progress will not be easy. Japan faces major challenges. Painful restructuring over a decade has still not ensured the health of its financial institutions. Competitors, notably China, are challenging technology and markets. In a growing Asia, identification with the US alone is no longer sufficient. Its reserves vis-a-vis the US dollar cause an embarrassing pressure on its currency. The demographic profile is a cause for concern, and pension and medical costs are likely to rise significantly in the future. Government finances are strained. The finance ministry in Japan is reported to be strongly opposed to increases in the ODA budget, of which India is among the largest beneficiaries.

From Japan, India is looking at opportunities in IT and ITES, agriculture, financial services and biotechnology, where entry could be difficult. Japanese companies are likely to be interested in large equipment supplies that would have to be obtained through competitive offers. Japanese multinationals have multi-country production facilities, and a structured trade dialogue can address only bilateral tariffs. On the surface, there seems to be a mismatch between the opportunities sought by both sides.

Yet, the opportunities arise from these very obstacles. Given the sentiments in China, Japan would be eager to source, and seek markets in India. Most of the textiles and garments used in Japan are from China; post January 2005, China has been aggressively marketing textiles into the US. It is important for Japan to develop an alternative source, and India can become a great one. Light engineering products, especially automobile ancillaries can be sourced from India, as Toyota is trying to do in Bangalore. Pharmaceuticals and chemicals should have a great market in Japan. Traditional items like marine products can benefit from Japanese technologies, so that they can be delivered fresh. Shipping, road construction, power and other infrastructure projects would require sophisticated equipment that could be sourced from Japan. The IT and software sectors are huge growth areas.

Japan has been a friend, providing technology, assistance and equipment for India?s growth process. Large Japanese business houses are reinvesting in the Indian potential. There are opportunities for Indian business in Japan. It is important to restart the political processes. Why not large, visible, jointly funded infrastructure projects, as in the ?80s? A bullet train?

The author is a former finance secretary and economic advisor to the Prime Minister