India’s infrastructure gets Japanese boost; here is how immense the impact will be

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Published: October 4, 2017 4:33:22 AM

While India is one of the fastest growing economies in the world, a key factor obstructing its growth and development is the lack of world-class infrastructure.

india japan ties, japanese investment in india, india japan investmentEstimates suggest that this lack of adequate infrastructure reduces the country’s GDP growth by 1-2% every year.

While India is one of the fastest growing economies in the world, a key factor obstructing its growth and development is the lack of world-class infrastructure. Estimates suggest that this lack of adequate infrastructure reduces the country’s GDP growth by 1-2% every year. The success of ‘Make in India’ depends a lot on how well Indian firms get integrated into global production networks, which rely on timely delivery, certainty and competitive cost of production. This integration and success of ‘Make in India’ is possible only with developed infrastructure facilities that reduce trade and transaction costs, making production competitive. Given the fiscal position of the government, nearly 50% of the total infrastructure investment in India in the 12th Five Year Plan is expected to come from the private sector.

In the above context, the Japanese Official Development Assistance (ODA) has come has a blessing and eased the burden of borrowing in the Indian market. According to the ministry of finance, government of India, Japan has committed an “official development assistance” of 371.345 billion yen (about `21,590 crore) during 2016-17 for various infrastructure projects, including the Dedicated Freight Corridor, in India. The most recent example being the visit of the Japanese Prime Minister Shinzo Abe to India when both he and the Indian Prime Minister Narendra Modi laid the foundation of India’s first bullet train project in Gujarat’s Ahmedabad on September 14.

Prime Minister Modi is keen to build high-tech projects and the 508-km high-speed rail link between Ahmedabad and Mumbai would demonstrate India’s capability to build high-tech projects based on the Shinkansen bullet train model of Japan. The project also sends out a signal to the Chinese that India and Japan are a formidable pair in the region and China’s growing assertiveness is very immature on its part. The bullet train is expected to begin operating in 2022, on the occasion of India completing 75 years of Independence.

The strategic and global partnership between the two countries has been a win-win for both. Given the poor fiscal situation of the government to invest in large-scale infrastructure projects, Japan’s contribution to India’s infrastructure is immense and unparalleled in any other country—Japanese assistance, both technical and financial, has been of great benefit. In fact, Japan’s postwar experience, leading to its subsequent economic boom in the 1970s, is a success story that India has been seeking to emulate. The massive assistance provided by Japan for India’s infrastructure has helped and will help India grow by leaps and bounds in infrastructure development.

The most popular project funded by the Japanese is undoubtedly the Delhi Metro—a project that has now changed the lifeline of the Delhi National Capital Region (NCR) and its transportation system. The project began in March 1995 and had a capital investment for phases 1 and 2 of $2.7 billion. Around 60% of this figure was financed through a loan from the Japan International Cooperation Agency.

The Japanese have also contributed significantly to the Delhi-Mumbai Industrial Corridor (DMIC) Project and the Chennai-Bengaluru Industrial Corridor. The DMIC is a Japanese-Indian collaborative project for comprehensive infrastructure development. It will create the country’s largest industrial belt zone linking industrial parks and ports of six states and cover eight cities in phase 1 between Delhi and Mumbai in order to promote exports and FDI. The Japanese ODA loan will focus on constructing approximately 1,500-km of track along the western corridor between the two cities, connecting major centres in the six states, as well as introducing electric locomotives capable of high-speed, high-capacity transportation. The project, which will be completed in 2040, is expected to make a far-reaching contribution towards India’s economic development. India and Japan have also agreed to start a network connecting the Pacific to the Indian Ocean as they eye joint development of infrastructure. The Pacific, Indian Ocean corridor is aimed at contributing to Asian stability connecting the two oceans and is expected to take off when Modi visits Tokyo for the Annual Summit with Abe from November 10-12 this year. Further, the two countries have come together to sign a civilian nuclear accord, paving the way for Japan to supply fuel, equipment and technology for nuclear power production to India.

The economic impact of these projects is immense. The advantages of greater labour mobility, courtesy the Delhi Metro, are evident in the number of satellite office districts that have been established around Delhi. The Japanese have also aimed to achieve larger-scale socio-economic impacts, even though almost 95% of ODA-related projects are in the infrastructure sector. For instance, safety measures at construction sites have been greatly enhanced. And the work flow is thoroughly organised, allowing for timely completion of projects—Delhi Metro completed its various sub-projects before schedule on more than one occasion.

However, trade relations between the two countries have not taken off in a big way. In fact, the potential lies untapped. A look at the data over six years shows that exports from India to Japan hit $6.81 billion in 2013-14. After that, these have steadily declined to $3.85 billion in 2016-17. The total trade between the two countries hit a high of $18.61 billion in 2012-13 and then declined to just $13.48 billion in 2016-17. In spite of the Comprehensive Economic Partnership Agreement (CEPA) signed in 2011, trade momentum between the two countries remains low, largely due to various non-tariff measures imposed by Japan on India’s exports. It is apparent that Japan has benefited more from CEPA and, therefore, the government is currently renegotiating some aspects of CEPA again with Japan to help the Indian Industry do better in Japanese markets. The Department of Industrial Policy & Promotion (DIPP) had set up ‘Japan Plus’, a special management team to facilitate and fast-track investment proposals from Japan. Japan Plus has been operational since October 8, 2014. Japan is the fourth-largest FDI contributor to India, with major interests in pharmaceuticals, automobiles and services sectors. In fact, according to DIPP, Japanese investments in India during 2016-17 reached $4.7 billion, registering a substantial jump from $2.6 billion during 2015-16. Cumulative Japanese FDI in India has been $25.67 billion between 2000 and 2017, and Japanese FDI constituted 8% of India’s overall FDI during this period.

The growing Japanese investment in infrastructure and the large number of Japanese factories shifting to India will be greatly beneficial. The increasing flow of Japanese FDI into India is also expected to give a huge boost to Indian economy, which has been suffering from weak investor confidence over the last couple of years.

In recent years, the two countries have strengthened bilateral ties through new initiatives and programmes ranging from economic and cultural linkages to defence and security. In the new Asian era, Japan and India need each other. India’s interest in Japan is also attributable to its ‘Act East policy’. Given the volatile geopolitical frictions in the region, growing ties between Japan and India in all spheres augur well for the region. India has also a lot to learn from a country like Japan with respect to hard work, efficiency and commitment to work. Japanese are the most polite and industrious people in the world and one can only hope that, apart from their world-class technology, we also imbibe their culture, values and pride.

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