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India’s deepening relations with Japan February 26, 2010

Posted by southasiamasala in : Guest authors, India , trackback

Guest Author: Nabeel Mancheri, Jawaharlal Nehru University

This article first appeared on the East Asia Forum on 25 February 2010.

The Annual Bilateral Summit in New Delhi on 29 December 2009 marked a stepping stone in the relationship between India and Japan. During the summit, Dr. Yukio Hatoyama and Dr. Manmohan Singh, Prime Ministers of Japan and India respectively, held discussions on bilateral, regional and global issues and reaffirmed that Japan and India share common values and strategic interests. They pledged to further develop their Strategic and Global Partnership in an effort to strengthen their bilateral relations and ensure peace and prosperity throughout the region and the world.

Until the 1990s, the relationship between India and Japan had been highly asymmetrical. The Cold War created a strategic-political void between the two countries. Economically, India was too inward-looking to be of any great interest to Japan. The post cold-war realities, however, have been forging new strategic bonds.

As a result of the flowering relationship, 2007 was declared the Indo-Japan friendship year. The number of Japanese delegations visiting India over the past few years shows that India is a significant beacon on the Japanese investment radar. India, with its growing economic strength, has adapted its foreign policy to increase its regional as well as global influence, and Japan has been elevated into an important position within India’s ‘Look East Policy.’

Japan and India signed a ‘Joint Statement on the Advancement of the Strategic and Global Partnership’ and a ‘Joint Declaration on Security Cooperation between Japan and India’ in October 2008, providing a major boost to bilateral relations. This is only the third security pact that India has signed with another country, following the United States and Australia. Other accords include: the India and Japan agreement towards greater security cooperation; better trade, investment and economic relations; environmental and energy cooperation; combined efforts to combat terrorism; nuclear non-proliferation and reform of the United Nations Security Council. The two Prime Ministers expressed satisfaction at the finalisation of the Action Plan with specific measures to advance security cooperation, which was based on the Joint Declaration on Security Cooperation between Japan and India issued in October 2008.

The two Prime Ministers also reiterated the importance of Annual Summits, expressing satisfaction with the deepening of the Annual Strategic Dialogue between Foreign Ministers, as well as other policy dialogues at the Ministerial level. They also welcomed the desire to hold Annual Defence Ministerial Meetings in order to enhance dialogue and exchanges in the defence sector.

Economically, India holds persuasion over Japanese investments and looks forward to further cooperation in such areas as the development of urban infrastructure, advanced technologies, renewable energies and energy conservation technologies. Dr. Singh expressed the hope that a balanced Japan-India Economic Partnership Agreement (EPA) would be concluded before the next Japan-India summit meeting, even though negotiations were currently stalled.

Despite their economic scale and a long record of friendly relations and mutually complementary ties, Japan and India continue to be characterised by a relatively small bilateral flow of goods, services, human resources, capital and information. Bilateral trade between Japan and India has been rising steadily since 2003, increasing from US$3.7 billion in 2002-03 to US$6.5 billion in 2005-06, and US$10.9 billion in 2008-09. While Japan ranks 10th among India’s export destinations, India stands 26th among Japan’s export destinations. India’s exports to Japan grew at a rate of 34.7 per cent in 2007-08, but in 2008-09 the rate fell to 21.5 per cent on a year to year basis, probably due to the global financial crisis. Imports from Japan, however, grew at a rate of 37.5 per cent in 2007-08 and 24.6 per cent in 2008-09. The terms of trade are in favour of Japan with a margin above US$7 billion. Japan is among India’s top five trading partners – with a potential to reach US$14 billion by 2012 – as both countries are involved in several developmental projects.

India’s exports to Japan comprise mostly of raw materials and minerals such as marine products and iron ore. Other items include: agricultural products, handicrafts, cotton, carpets and leather garments. India’s imports from Japan have been on the rise due to the huge increase in the import volume of each of the major commodities, such as heavy machines, transport equipment, electronics, pharmaceuticals, biotechnological products and toys.

The Japanese net Foreign Institutional Investors (FII) inflows into India have also progressively increased. Following the first ‘India Investment Funds’ from Japan into India, which includes the Nomura India Security in 2004, the number of such funds has doubled from eight in November 2005 to 16 as of March 2007, with net assets worth US$ 8.2 billion.

A 2008 survey conducted by the Japan Bank for International Cooperation (JBIC) concluded that India has become the most favoured investment destination for long term Japanese investments. Japan ranked sixth in terms of cumulative foreign direct investment (FDI) in India, worth US$3,047 million from April 2000 to July 2009. US$517 million of this came in the period of April-July 2009, according to the latest data released by the Department of Policy and Promotion (DIPP).

Some of the Japanese flagship investment projects to India include the Dedicated Freight Corridor (DFC) Project, the Delhi-Mumbai Industrial Corridor (DMIC) Project and cooperation to establish the Indian Institute of Technology, Hyderabad (IITH). Both Prime Ministers committed to the early realisation and implementation of all three projects. The Government of Japan has also committed to provide US$2.18 billion to India in order to undertake nine new infrastructure projects in various parts of the country. This is the highest ever Official Development Assistance (ODA) committed by Japan to India, an increase of 22 per cent over the previous year. India continues to be the highest recipient of ODA from Japan.

India may also see an investment of US$ 10 billion from Japanese companies just in the Delhi-Mumbai Industrial Corridor (DMIC) belt, where several small and medium enterprises (SMEs) in diverse sectors are seriously considering long-term investments. Other major investment projects to India include the plans of Maruti Suzuki India Ltd (MSIL) to invest US$2.25 billion. Suzuki has planned an additional investment of US$2.03 billion by 2010 to increase production and sales. Toyota Motor Corporation has also planned to set up an assembly plant for low-priced compact cars in southern India by 2010. The sectors that attract Japanese investment include transportation (28 per cent), telecommunications (18 per cent), fuel (13.5 per cent), chemicals (12.17 per cent) and trade (6 per cent).

These cases exemplify Japan’s rising presence in India, and Indian companies have also been exploring investment opportunities in Japan. Around 70 Indian IT companies have already established their offices in Japan. Collective figures from 1991 to 2008 demonstrate that Japan ranks third in terms of technology transfers to India. Japan contributed 10.92 per cent of the total technological transfers to India between 1991 and 2008. Japanese companies that have set up business in India have increased to around 850 in 2009.

The reasons behind this interest in India are obvious, as India offers a large domestic market base, but mutual synergies between businesses in the two countries are also driving initiatives. Japan is a relatively labour-scarce, capital and technology abundant country that complements India’s rich spectrum of human capital. India’s prowess in the software sector lends synergy to Japan’s excellence in the hardware sector. India’s abundance of raw-materials and minerals matches well with Japan’s capabilities in technology and capital to produce knowledge intensive manufactured goods. The majority of investments have been in traditional fields like automobiles, auto parts and electronics, although some companies have invested in businesses like pharmaceuticals (EISAI), health drinks (Yakuruto), pulp (Nihon Koso) and rice processing (Yanmar). Japan’s small and medium enterprises have also started to discover India as the new growth market.

The Signing of the ‘Strategic and Global Partnership’ agreement, as well as a variety of other undertakings, including reciprocal state visits every year and the negotiations on (Comprehensive) Economic Partnership Agreement (EPA/CEPA), reflect a deep and mutual interest to seek an even stronger bilateral relationship. In the interest of cultivating mutually beneficial economic ties, it is critically important that those negotiations lead to the early conclusion of CEPA/EPA.

While efforts to establish political and strategic ties are visible in India-Japan relations, the Japanese rationale behind delaying the pursuit of closer ties with India are obvious, particularly at a time when Japan-US relations are set to be reviewed by Japan’s new government. The change sought by Japan’s Hatoyama Government will include new possibilities for improved relations with India, complimenting India’s proactive regional diplomacy in East Asia. The emergence of India throughout this process as a future global player is acting as an additional structural factor.

Comments

1. Dev Kumar Dutta - February 26, 2010

Japan has waited far too long to put relations with India on stronger ground. Smaller South Korea has filled the resultant gap admirably and is today well entrenched in India. In fact Korean brands are among the most popular brands in the Indian market. Besides, it is not India’s new status as an emerging power that effected a Japanese rethink on improving relations with India. Rather, it is closely connected to India’s newly charged relations with the United States that’s brought about the change in Japan’s attitude toward India. The potential is enormous but it is for Japan to decide how it wants to leverage the enormous goodwill it enjoys in India.