India values the low-cost Japanese STEP (Special Terms of Economic Partnership) loan a lot, given the funding needs of its infrastructure and manufacturing sectors but wants Tokyo to come out with more favourable lending conditions. The idea is to enure that the STEP loan facility brings about time-bound technology transfer to Indian industry and also creates more market opportunities for it.
According to official sources, Nripendra Misra, principal secretary to the Prime Minister, will hold a meeting with senior officials from the department of economic affairs and department of industrial policy and promotion (DIPP) soon to discuss a situation that has arisen after Japan’s reluctance to accept a set of demands raised by India for tweaking the STEP loan conditions at recent meetings in Tokyo with their Japanese counterparts.
The Prime Minister’s Office has called a meeting to resolve the lingering differences between New Delhi and Tokyo over the conditions of the STEP loan facility — the low-cost, long-term Japanese official development assistance (ODA). The STEP loan scheme, introduced by the Japanese government in July 2002 to raise the visibility of Japanese ODA is crucial for India as it helps in the financing of infrastructure and transport connectivity projects, especially in the initial phase when these may be deemed commercially non-viable. Sources said the key demands of India include (a) the prime contractor implementing the projects should be tied to Indian firms and not to Japanese entities as it is now; (b) the percentage of goods and services that are to be procured from “Japan /Japanese firms” should be reduced from “30% or more” to “25% or less”; (c) fixed timelines for the transfer of cutting-edge technology and know-how from Japan (currently there are no such deadlines); and (d) a transparent bidding process for the procurement of goods for all projects to facilitate the participation of more Indian and Japanese firms. The Cabinet Committee on Economic Affairs had, in January 2014, cleared the utilisation of the tied-loan facility given by the Japanese government-owned Japan International Cooperation Agency (JICA) for the $90-billion Delhi-Mumbai Industrial Corridor (DMIC) project. Under this, $4.5 billion will be raised through the STEP loan scheme, while the Indian government will pitch in with an equal amount. Although JICA sanctioned the amount, the government wants the release to be subject to these new conditions.
Sources said New Delhi wants its demands to be included in the STEP loan facility conditions for all the infrastructure and transport connectivity projects for which it seeks Japanese financial assistance in the future. Its demands are aimed at increasing manufacturing in India, especially products with the latest technology that is environment-friendly and sustainable, in line with the Narendra Modi government’s ‘Make In India’ initiative, and also to help Indian companies scale up the value chain in such projects. While the interest rates under the standard ODA loans range from 0.8-1.4% and has a repayment period of 15 to 30 years, the STEP loan is given at a 0.1% interest rate with a 40-year repayment period. STEP loans cover 100% of the project cost and the facility provides for a 10-year moratorium. Incidentally, the western corridor of the dedicated freight corridor project (which runs through the DMIC) is being carried out through the STEP loan scheme.
With Japan relenting to dilute the conditions of this attractive tied-loan facility and wanting Japanese companies to benefit from it, the sources said discussions at the PMO would be on whether the prime contractor should be tied to a fully Indian entity or if it can be tied to a 50:50 Indo-Japanese entity. Under the present STEP loan scheme norms, “joint ventures (JV) with recipient countries are admitted on condition that Japan is a leading partner”. Also, the initial condition on procuring goods and services is that: “Not less than 30% of the total amount of contract(s) (excluding consulting services) financed by STEP loan must be accounted for by either (a) goods from Japan and services provided by Japanese firms, or (b) goods from Japan only.”
After India objected to this clause, Japan agreed to relax the terms to state that the “30% or more procurement” condition can also be met by purchases from companies in India where Japanese entities have a stake of 10% or more. This was to prompt Japanese companies to set up more ventures with Indian companies to not only boost the Indian economy but also reduce the cost of procurement from Japan. But now, the Modi government, keen to push its ‘Make In India’ initiative, wants this percentage of procurement to come down substantially to reduce imports from Japan, encourage Japanese companies to build more manufacturing facilities in India and increase foreign direct investment from Japan. However, if it is retained at “30% or more”, the government wants the sourcing from Japan for the differential to be in fully/semi-knocked down condition to increase assembling in India and in the process generate more employment locally. The sources said the DEA will submit a paper on the matter to PMO before discussions with Misra.