Over the last two decades, India and Japan have come to realize the importance of cooperation in the changing global environment.
By Rajesh Mehta & Anand Mishra
India’s relations with two of its most formidable partners, the US and Japan, show a stark trend. On all security and strategic matters, all three talk in the same language of military cooperation, maintaining crucial SLOCs free from domination of any one country and a law based global order. However, on trade and commerce, India’s relation with both the US and Japan are cases of glass more empty than full. Much has been written about the decoupling of the strategic and economic relations between India and the US, but the similar decoupling in India-Japan trade and economic relations is not much discussed. In this essay, we try to analyze the dynamics of this discrepancy which has kept the Indo-Japanese economic relations at a suboptimal level.
Over the last two decades, India and Japan have come to realize the importance of cooperation in the changing global environment. The increasingly aggressive Chinese behavior in South and East China Seas, its willingness to militarize conflicts, and its desire to dominate sea lanes in East Asia have made New Delhi and Tokyo close ranks in security and strategic areas, displayed in Japanese participation in Malabar naval exercises and reemergence of Quad 2. Both have identical outlooks of the Indo-Pacific and are also cooperating providing an alternative to the predatory Belt and Road Initiative of China through Asia Africa growth Corridor. India also supports deepening Japanese involvement in South Asian states’ infrastructure building. This long-term alignment of interests has accentuated post-Covid-19.
On the economic front also, there is widespread acknowledgment of high complementarity between Japan and India in multiple sectors. According to multiple studies, both countries stand to gain much from cooperation in automobile, pharma, chemical, electronics, textile and food processing. In each of these cases, India offers a sound manufacturing base and market for Japanese.
The Covid-19 led disruption to Japanese supply chains and the $2.2 billion assistance promised to investors to diversify their production base is a statement of desire on behalf of the Japanese government to see Japanese businesses reduce their overdependence on Chinese manufacturing complex. And while the Covid-19-induced disruption has provided the trigger, there are more fundamental reasons in play here. The US-China trade war has forced most large global players, including Japanese, to take a good relook at their supply chain. Some have already planned to move their manufacturing bases out of China, and many more are scouting for alternative bases. Rising labor costs – which according to come estimates have gone up as much as three times in the last five years – along with increasing forced-tech-transfer and belligerent IPR violations are other major factors fueling the leave-China sentiment.
Can India provide a destination for Japanese investment? Japan has been the largest donor to India and has concluded immensely successful Delhi Metro. It is the lead foreign participant in the National Industrial Corridor Development Corporation (NICDC) with JBIC holding 26% in the venture which aims to create five industrial corridors with industrial cities. Japan is also investing in high-speed railways and industrial townships housing clusters of Japanese companies. From an attractiveness perspective, India provides a huge and cheap pool of manpower which is highly trainable. This labor pool can provide price advantage to companies with globalized value chains, including electronics and automobiles. India also has a well-developed engineering sector which could easily absorb manufacturing technology and reduce the allied-industry development lead time. India is also a huge and growing market for Japanese products, from automobile to consumer electronics which promises very long-term profitability. Further, India can act as a good export base; Hyundai has exported more than three million India-made cars to 88 countries. The geographical location of India also makes it a cost-effective base to export to Africa, Latin America and the Middle East.
The million-dollar question is with so much of large ticket projects and such complementarities, why does India occupy such low space in Japanese business landscape? The devil lies in details. While many states roll out red carpet for investors and promise hassle-free investment regime, the ground reality is not as rosy. The poor physical infrastructure in bad roads, unreliable electricity and clogged ports increase the cost of production, wiping away all gains made on cheaper labor. The regulatory environment is stifling despite jumps in India’s ease-of-doing-business ranking. Compared with this muddled environment, investors find real one-stop approvals with efficient physical infrastructure in China and ASEAN countries. As Mr. Satoshi Suzuki, the Japanese ambassador to India says, “Japanese companies have invested a lot in India in past decades, and nearly 1,500 companies have set up their base. Still, India-Japan economic cooperation has not performed its full potential yet. India should leverage this opportunity by looking at what India’s competitors such as ASEAN countries are doing to attract Japanese investment.”
Historically, Japanese investments have gone where reexport potential is high. But the export ratio of Japanese companies in India remains at an abysmal 17.8%, thanks to the multiple abovementioned problems. This is lower than even Myanmar and Bangladesh where Japanese companies earn 24% and 53% of their sales from export respectively, according to JETRO. The figure for a large market like China is 32% and for tiny Laos, its 66%. The relative importance of the Indian market or manufacturing base for Japanese businesses is also reflected in the number of Japanese businesses operating here. Compared to over 33000 in China and about 13000 in ASEAN, just over 5000 Japanese entities operated in India in 2018.
Indian policymakers need to move beyond platitudes and advertisements on high Indo-Japanese business relations and address the issues that bedevil Japanese investment. India is competing with China and ASEAN countries that have a history of attracting foreign investments through developed infrastructure and efficient regulatory systems. Only when India addresses these problems – which essentially are its domestic political economy problems – it will be able to fundamentally transform the economic relationship between the two historically aligned nations, a relationship that has hitherto remained an unfulfilled promise.
(Rajesh Mehta is a Leading International Consultant & Policy Professional. Anand Mishra is a research scholar at the Johns Hopkins School of Advanced International Studies, specializing in strategic and military affairs of the Indo Pacific. Views expressed are their own.)