India bows (Japanese style) and says, ?Konichiva (hello)? to Japan: it has finally firmed up the ground for a free-trade area with Japan, and it would be hard to plan a better soft-landing for the economy. Not only are there numerous economic complementarities, they will also mostly involve India?s ascent along the value-adding chain. The untapped potential is immense.

For instance, bilateral trade between the two economies currently stands at about $4 billion but that should come to about five times that ($20 billion) by 2010, after the Comprehensive Economic Partnership Agreement (CEPA) gets finalised in December this year.

The CEPA will be of special assistance when it comes to deeper market penetration in items like pharmaceuticals and textiles. That would fill a pressing need since Japan imports pharma products worth $60 billion annually, of which our share is just $200 million. India gets fobbed off also with no more than $100 million, even in the case of Tokyo?s annual $23 billion in textile imports. The CEPA should align bilateral trade more in accordance with India?s revealed comparative advantages and assist in better market penetration. Complementarity will do the rest, by offering a great many trading opportunities.

But the full potential of exchange would be realised only if matters get catalysed by the dual combination of inward Japanese FDI and continued trade liberalisation. That would greatly increase the volume of bilateral trade in capital goods, components and parts?something happening already in sectors relating to processed-, and value-added activities like pharmaceuticals, organic/inorganic chemicals and auto parts.

Meanwhile, there is an immense hiatus between reality and potential?that was quite recently spelt out, on February 18, 2008, by Ashwani Kumar, minister of state for industry. Addressing a JIBCC-FICCI Business Summit held in Tokyo, he revealed that Japan?s share of India?s global trade was a mere 2.3% in 2006-07, and is even now just around 5%.

He reminded the Japanese business leaders also of India?s plans to spend 7-8% of GDP into the development of infrastructure which, in monetary terms, would add up to $450 billion?of which $150 billion would have to come from the private sector, including foreign investors.

Kumar invited Japanese investment in the development of the power sector, civil aviation, logistics, biotechnology, nanotechnology and in agro-processing and ?clean technology?. With reference to the DMIC and Delhi Mumbai Freight Corridor, Kumar said they are very ambitious projects and invited Japan to a partnership in the interests of forging a special economic partnership between the two nations. The project, which will involve a capital outlay of $90 billion and generate three million jobs, should have Japanese companies investing $5 billion in it over the next three years.

As for trade and FDI, it is the latter that seems very likely to lead the former. That has been the experience of Suzuki and other such manufacturers, who have set up Indian bases: they have veered around to using India as one of their global manufacturing hubs. That way, the economy should expect to field stepped-up Japanese investment flows following the final conclusion of the agreement.

Of equal weight will be the fact that the CEPA?s investment norms will ease entry?something which should lift investments by Japanese companies (initially at least) to at least $30 billion.

But the biggest net forex earnings should come from services. Indian professionals, for instance, will have better job market access inside Japan?something almost guaranteed by Japan?s present demographic composition.

Currently it is weighed hugely towards the aged, and their needs spill over from a demand for nursing and skilled data-processing staff, to jobs lower down the ladder. Indeed, India can ride on Japan?s coattails in services since the latter has interests in outward as well as inward FDI in services.

Being a significant investor in many countries, it has itself been more welcoming of FDI in services than in manufacturing. (Japan?s inward FDI in manufacturing fell from 64% in 1990, to 25% in 2000, while FDI?s share in services has been growing in sectors such as healthcare, telecom and finance.

As for the India story, there again the perfect fit arises from this economy?s proven competence in software services as against Japan?s mature computer hardware sector.

Information technology (IT) and software services provide crucial linkages for trade in services. Both India and Japan have strong ICT sectors and India?s software skills and Japan?s hardware expertise constitute strong mutual complements. India?s exports of software services at above $ 17 billion in 2004-05 constituted 44% of global outsourcing.

India?s offshore penetration of Fortune 500 increased from 300 companies in 2003 to 400 in 2004. India has increasing expertise in more sophisticated applications such as financial institutions and stock exchanges, which could assist Japan as its financial market recovers its international attractiveness. Japan has a strong comparative advantage in the production and exports of computers and IT hardware. The current cooperation between Japan and India in the IT field, however, still remains at a low profile, relative to its great potential.

About the only hitch is that Japan seems to be also very interested in entering India?s mega-retail sector?one that has been growing fast. But only time will tell how well rewarded is Japan by its interest in the removal of restrictions in distribution services (wholesale and retail). Currently, retail sector investment through FDI to set up supermarkets and convenience stores is next to impossible?but that may change with the relaxation of rules and the removal of foreign investment regulations in distribution.

Finally, the following seem very promising for India-Japan bilateral trade in services, and they are ripe for enhanced cooperation and improved market access. They include freer movement, and mutual recognition of qualifications and experience via mutual recognition agreements (MRAs). Also, the two governments should promote exchanges and provide training and educational opportunities to improve market access in the partner-country?s market. Special care needs to be taken of the sensitivities that are usually involved in the conduct of immigration policies, employment, public health and safety.

About the sole threat and dissonance has been the fear of cheap agriculture imports from Japan, and latest reports on that say that the negotiations, which had begun after the Prime Minister?s Tokyo visit in 2006, were all but derailed last year by Japan?s insistence that both sides reduce an equal number of tariff lines. India, meanwhile, wanted a 5% difference in commitments.

But the impasse has been overcome since Japan has agreed to India?s demand and both sides have exchanged negative lists. Tokyo has also agreed to India?s demand for the setting up of a dispute settlement body of sorts to resolve complaints about non-tariff barriers (NTBs)?especially ones that relate to pharma products, their testing and approvals.

The main thing, then, is for both sides to understand that what they are attempting should lead to many spill-overs and ultimately result in industrial, and service sector synergies right across the board.