A decade ago, not many people in India had tried ‘sushi’, fewer would have used ‘San’ while addressing someone and almost no one would have known of ‘Shinkansen’. However, our Japanese vocabulary has grown rapidly over the past few years, with India and Japan coming closer in friendship than ever before in the history of the two nations.
Bonded by the collective ideologies of democracy, broad-mindedness and diversity, the countries share an analogous cultural and social link. With political relations between them continuing to be warm and cordial since India’s independence almost seven decades ago, the relationship between the two has bloomed in the last decade, with Japan making mega investments in India.
For Japan, India has huge potential, especially in Shinkansen. The country losing out on its railway bid in Indonesia and Thailand to China, coupled with stiff competition in East Asia and Africa, has resulted in it turning its eyes to India—a lucrative destination for investment opportunities. Moreover, with conventional sources of capital drying up in India, Japan has emerged as the perfect partner and investor to significantly augment growth of infrastructure in the country. This makes the relationship equally relevant for the two nations.
Economic relations between India and Japan got the first major boost with the then Japanese Prime Minister Yoshiro Mori visiting India in 2000 with a vision of developing a global partnership with the country. The current Japanese Prime Minister Shinzo Abe’s visit to India in December 2015, in continuance of his promise of substantial investment in the Make-in-India initiative, has significantly accelerated the stream of investment from Japan to India.
In the past decade, trade from India to Japan, and vice-versa, has doubled, which is a clear indication of the two countries’ growing interest in each other. Japanese private sector companies are increasingly focusing on India, and more than 1,200 Japanese organisations now operate in the country.
Traditionally, Japan has been a capital-rich country looking for opportunities to invest in emerging economies in order to get the highest return. Japanese companies that make up the Nikkei 225 currently lay claim to cash reserves of approximately $1.5 trillion, which means they are very well-placed to pursue new M&A opportunities. Japan’s Government Pension Investment Fund, with assets of over $1.1 trillion, amended its portfolio norms in 2015. This has the potential to unleash more than $100 billion into international bond markets. Japanese organisations with such ‘deep pockets’ are on the lookout for the right opportunity. It is up to India to strategise and implement reforms in the country and present a bright prospect to these organisations.
In this scenario, it is relevant to mention the investments made by Japan in Asian countries, especially in Thailand, where it is the top foreign investor, with most of its investments being in the automotive, metal processing, electrical appliances and electronics industries. What makes Thailand an attractive investment destination are competitive costs, incentives relating to duty-free import of machinery, clear and transparent foreign investment regulations, etc. Further, the country has a special incentive scheme—exemption from corporate income tax (without a cap) for certain specified sectors such as creative product design and development centres, some manufacturing sectors, and the electronic design and software domains.
India needs to make a concerted effort to attract substantial investment from Japan. The government has already put in place schemes such as the Modified Special Incentive Package Scheme (M-SIPS) to invite investment in the country’s electronics manufacturing sector. As we know, M-SIPS is aimed at promoting investment in the electronic system design and manufacturing sector by offering various inducements, including cash incentives (amounting to 20-25% of capital expenditure), reimbursement of indirect taxes for capital equipment, etc, to eligible investors meeting its prescribed thresholds (which varies from
R1 crore to R5,000 crore, depending on the type and nature of product being manufactured). In addition, the government has made certain amendments in M-SIPS, including extension of the term offered to investors by another five years and widening its scope to cover additional verticals in order to make the scheme more attractive to foreign investors.
The special economic zone (SEZ) policy announced in April 2000 was a step taken in this direction by the government with a view to overcome the shortcomings experienced on account of multiplicity of controls and clearances and the absence of world-class infrastructure. The policy was intended to promote SEZs as an engine for economic growth, supported by quality infrastructure complemented by an attractive fiscal package with the minimum possible regulations.
The commerce minister has recently proposed that units located in SEZs should be allowed to sell their products in the domestic market after paying the same preferential tariffs applicable to manufacturers in countries with which India has a free-trade agreement, in order to counter the hit faced by SEZs due to a fall in global demand.
The Indian government fully understands the importance of this opportunity and has been making a conscious endeavour to further it exponentially; for example, by setting up a special committee of officials, which is separate from the ‘Japan Plus’ team, to research, reach out to, promote and facilitate Japanese businesses in India. These and other socio-political efforts have borne fruit, and India and Japan are inking several agreements on development of infrastructure in the country.
The most recent of these initiatives is Japan’s proposal to build India’s first high-speed railway; the construction of which is expected to begin in 2017 and completed by 2023. The total cost of the project is estimated at $12 billion, and Japan has offered to finance it at a negligible interest rate. Moreover, it has agreed to modernise 400 railway stations across the country and invest $140 billion in the Indian Railways over the next five years. In the past, the Japanese government had given a loan to India to develop the Western Dedicated Freight Corridor (DFC) under the Special Terms for Economic Partnership (STEP). The DFC is an ambitious project that involves the construction of two corridors, the Eastern and Western, which will eventually link the four metro cities of Delhi, Mumbai, Kolkata and Chennai.
In addition, demonstrating its support towards Make-in-India, Japan has announced a special financial package of $12 billion for Japanese companies wanting to invest in India for Make-in-India-related projects. This is called the ‘Japan-India Make-in-India Special Finance Facility’.
India has also made a commitment to initiate some special benefits to attract investments in industrial townships set up by Japan in India; and 11 sites have been identified, including Tumkur in Karnataka, Ghilot in Rajasthan, Mandal in Gujarat and Supa in Maharashtra. The townships will support the growth of industrial areas to boost economic development. A giant stride was taken in development of the India-Japan economic relationship during the visit of PM Abe to India when it was decided that Japan would, for the first time, import cars manufactured by Japanese companies in India.
With the signing of the MoU on civil nuclear energy, both the countries have exhibited that their cooperation goes beyond trade into strategically important areas. This deal will enable India to import Japanese nuclear technology and services. The final agreement will be signed after the technical details are finalised. In order to deepen defence relations, the two countries have signed deals on security-related operations and manufacturing of defence merchandise.
India’s strategic location between the Middle East, China and newly emerging economies such as Bangladesh, Bhutan, Burma and Sri Lanka makes it conveniently accessible for a large part of the world. Compared to Japan, it is geographically easier to tap markets such as Africa from India, since the country is a bridge between the East and the West. India’s strength lies not only in its geography, but also in its culture. With similar societies that have strong cultural ties and a progressive outlook, this partnership between Japan and India, therefore, not only seems desirable, but also inevitable.
India and Japan are compatible partners. Japan has an ageing population and India a young one; India needs investment and Japan is looking for an opportunity to grow its economy. Therefore, they understand each other’s requirements and realise that making a concerted effort to strengthen ties between them is the need of the hour. Moreover, we have to bear in mind that while India ranks low in ‘ease of doing business’, it offers attractive business opportunities and has enormous business potential, and at a time when most global economies are showing a downward trend, it is on an upward trajectory. These are catalysts that attract Japanese investment.
The author is director, Corporate Tax, PwC India