With India investing heavily in infrastructure, Japanese assistance—both technical and financial—has been of great benefit. Japan’s post-war experience, leading to its subsequent economic boom in the 1970s, is a success story that India has been seeking to emulate. Economic cooperation between the two countries was initiated in 1958 and has held strong ever since. The cooperation began with an official development assistance (ODA) loan—the first ODA Japan extended to any country. With a total of 384.1 billion yen in ODA pledged to India by Japan in fiscal year 2017-18, New Delhi has become the recipient of the highest loans made to any country by Japan in a single year.
The latest ODA to India for the construction of the Mumbai subway network marks yet another watershed moment for India-Japan relations, and was signed after the ninth round of bilateral talks between the two countries. The hugely successful Delhi Metro project (one of India’s notable infrastructure projects) built with contributions from Japan International Cooperation Agency (JICA) loans has gone on to become a glorious testimony to Indo-Japanese relations. The Mumbai-Ahmedabad High-Speed Railway (HSR) project is also an ambitious project to boost the economy that is being supported by JICA, marking Japan’s continuing partnership in India’s quest for better infrastructure, industrial growth and economic development. The economic impact of these projects is immense.
Another important point to note is that the ODA given by Japan is unique because it is focused on physical infrastructure projects such as railways, roads, ports and renewable energy, having a direct impact on jobs and growth. In comparison, the ODA extended by other countries such as the UK and by the Organisation for Economic Co-operation and Development (OECD) largely focus on social infrastructure such as education and health. Thus, Japan’s ODA assistance to India in physical infrastructure sectors has contributed immensely to the development of world-class infrastructure in the country. The economic complementarity is hard to miss. While Japan Inc’s discovery of India dates back to the 1990s, Japanese industry is well poised to feed into the rejuvenated demand for engineering and technological capacities needed to fuel the massive programmes of Make-in-India, Smart Cities, AMRUT and the like.
JICA’s loans include projects such as desalination plants in Chennai to water and sewerage networks in various cities (Bengaluru, Bhubaneswar, etc), in addition to much larger infrastructure projects in HSR, freight corridors and urban transportation. JICA’s presence in India is diverse, and reflects a commitment to holistic economic development. The Japanese projects also send out a signal to the Chinese that India and Japan are a formidable pair in the region and China’s growing assertiveness is immature on its part. The ODA story is, in a sense, complemented by the FDI story. Japan is now the third largest source of FDI to India, the inflows of which jumped to $4.7 billion at the end of 2016-17, up manifold from $1.71 billion in 2013-14. The number of Japanese firms in India was 1,305 as on October 2016, up by 76 from a year ago.
In her recent visit to Tokyo, India’s external affairs minister Sushma Swaraj invited Japan to join programmes like Smart Cities. Earlier, the urban affairs minister had made a pitch to Japanese industry seeking investments in India’s impending urban development mega schemes across sectors.
Japan’s economic gains come from the fact that India is a large market, with vast infrastructural gaps that need to be plugged in its quest for the next phase of industrial growth. Often, loan agreements come with local sourcing clauses, which mean that Japanese firms have a large market to access through soft loans. The plethora of mega schemes in India offer an unprecedented opportunity for Japanese industry to geographically diversify investments. Nevertheless, the economic part of the relationship remains far below potential. Despite a Comprehensive Economic Partnership Agreement (CEPA) between the two countries, bilateral trade has dipped, with India’s exports halving to $3.85 billion in 2017 from 2013 (India’s imports from Japan for the same year accounted for $9.76 billion). Bilateral trade totalled $13.61 billion in 2016-17, a decrease of 6.21% from the previous year’s figure of $14.51 billion. While the CEPA still accounts for a small fraction of total trade, the poor trade numbers are a cause of concern, with India’s trade deficit running high. It is against this backdrop that the India-Japan CEPA is being renegotiated to enhance India’s exports to Japan.
The two countries, under Narendra Modi and Shinzo Abe, decided to elevate bilateral ties to a “special strategic and global partnership” in 2014. Since then, bilateral ties have been on a high, particularly with JICA’s consistent funding support to India’s growth story. The India-Japan bilateral ties, for now, seem to be best captured by JICA’s efforts in India, complemented by Japan’s FDI inflows to India—both seeking to leverage economic complementarities. Importantly, Japan’s presence in India, through both ODA and FDI, allows for transfer of skills—organically via spillover effects, or through targeted capacity building efforts (by JICA), which India can greatly benefit from at a time when rapid technological progress is fuelling the demand for a new set of engineering, management, financial and other skills.
The strengthening of bilateral relations between Japan and India seems poised to transcend sectors, including infrastructure, nuclear energy, defence, science and technology, ICT, etc. However, the ties should not be looked at from an economic standpoint alone. Japan has exhorted India as Japan’s “most important partner” in its “Free and Open Indo-Pacific Strategy.” At the same time, India struck a strategic tone by underlining the two countries’ shared democracies, with “respect (for) openness, rule of law, sovereignty and territorial integrity.” For India, the contribution of Japanese ODA has been a huge help in bridging the infrastructure deficit in the country and China’s recent territorial actions only reinforce the logic of strong Indo-Japanese ties.
India’s need for foreign investment/capital and Japanese necessity for sustaining growth amid an ageing economy has fashioned perfect complementarities. With Asia continuing to be the growth centre of the world economy, the partnership ranging from sharing joint platforms for maritime exercises to efforts at people-to-people and cultural ties, Japan and India represent a strategic relationship that will have stood the test of time.
By: Professor of economics, Indian Institute of Public Administration, New Delhi