Going back in time, the end of World War II set the stage for fraternity between the two countries. The year 1957 witnessed a momentous alliance between India and Japan. Japan extended its first yen loan to India in 1958. It marked greater strengthening of economic ties between the two countries. India-Japan trade talks on overall bilateral trade and investment began in 1978. Since 1986, Japan has been Indias largest aid donor through several channels, including official development assistance. But relations between the two countries turned delicate in May 1998 when India conducted underground nuclear tests. However, relations improved gradually and in the year 2000, the two countries envisaged a global partnership and attempts were made to build on engagement through creation of a strategic plan of action.
In 2007-08, Japan ranked third amongst Indias trading partners. Bilateral trade between Japan and India has been rising steadily since 2003. From $4.37 billion in 2003-04, it rose to $6.5 billion in 2005-06, to $7.45 billion in 2006-07 and to $10.17 billion in 2007-08. The growth rate during this five-year period was 35.56%. The Confederation of Indian Industry estimates that the trade volume could touch $15 billion by 2010 if issues like trade facilitation and non-tariff barriers were addressed. Similarly, there is a conscious effort on the part of the Indian government to improve investment relations with Japan as well.
Indias robust economic growth in recent years has not gone unnoticed in Japan. Japan is now the sixth-largest foreign investor in India. Further, Indo-Japanese trade relations have helped India to bring cumulative FDI inflows to the tune of $2.4 billion during 2000-08 into its domestic market. Japans contribution to Indias FDI inflow was only 4.29% of total FDI inflows between 1991 and 2007, and investment volumes have also fluctuated, though inflows have been increasing since 2007. Japanese investment is largely below potential because investors are troubled by Indias complicated bureaucracy and poor physical infrastructure.
Second, Japanese companies are generally cautious about their investments in India after having had bad experiences in the 1980s with real estate in their own country. The Japanese economy was taken over by a huge and intoxicating speculative boom, which started to burst in 1990. In the 1990s some of their hi-tech companies that entered Indian markets early like Toshiba could not survive. These two factors have ensured that both Korea and China are ahead of Japan in market penetration in India. However, the inception of economic reforms in India in 1991 has brought about a sea change in the manner in which institutions function. There is an enabling environment for both trade and investment and tremendous scope for Japanese high value-added products in the Indian market, especially in consumer electronics and light engineering goods. Given the high quality of Japanese products, Japanese investors too can cater to the demands of the price-sensitive Indian consumer. Therefore, Japan must overcome its fears about the Indian economic climate to fully benefit from a partnership with India.
The main agenda of this years annual summit between the two countries was to build on basic infrastructure and pave the way for an enhancement of the bilateral relationship.
Defence ties (particularly joint patrolling of key marine passages), counter-terrorism, energy security, nuclear issues, and measures against global warming, a free trade agreement and raising the economic profile of both countries were high on the agenda this year. At the end of the 4th Annual Summit, the PMs of the two countries issued a joint statement that is expected to act as a catalyst in enhancing the India-Japan strategic relationship.
It is believed that Japan should pursue the larger vision of Asia wherein the India-Japan relationship will serve to promote Japans economic interests and security in a multi-polar world. Both countries have denied that enhanced cooperation between them is aimed at curbing growing Chinese influence in the region, but the Japanese PMs visit is a strong indication that Japan wants to keep the two major democracies actively engaged.
The author is fellow, National Council of Applied Economic Research, New Delhi