Blog · April 28, 2022

India–Japan economic ties key to regional stability

Author: Akash Sahu, Manohar Parrikar-Institute for Defence Studies and Analyses

India and Japan seem to be checking all the right boxes to develop a deeper partnership. Japanese Prime Minister Fumio Kishida visited India on 19 March 2022 and met Indian Prime Minister Narendra Modi at the 14th India–Japan Annual Summit in New Delhi. While the two leaders discussed a wide range of issues at the event, economic cooperation was central.

Kishida announced that Japan will invest 5 trillion yen (US$42 billion) in India over the next five years to finance public and private projects of ‘mutual interest’. The leaders also welcomed the signing of the exchange of notes on 300 billion yen (US$2.5 billion) in loans to India.

Japan’s Expanded Partnership for Quality Infrastructure (EPQI), which was announced in 2015, aims to deliver high-quality infrastructure in developing countries. India has been the largest recipient of Japanese official development assistance (ODA) since 2005. This funding has been channelled into critical sectors such as power, communication and transportation infrastructure, especially metro and rail networks.

There are approximately 1455 Japanese companies registered in India and the Indian government has set up a ‘Japan Plus’ desk at the Ministry of Commerce. Japan has already been involved in Indian infrastructure projects such as the Delhi–Mumbai Freight Corridor and the Delhi–Mumbai Industrial Corridor. The India–Japan Act East Forum was held in March 2022 for the sixth time and focused on connectivity projects in Northeast India.

But the increased streamlining of political goodwill between Tokyo and New Delhi has not translated into economic integration. Given the large size of their economies, the exchange of trade and services is insufficient and characterised by imbalance. India’s merchandise exports to Japan remain limited with 13.2 per cent of all tariff lines are excluded from the Comprehensive Economic Partnership Agreement (CEPA) between the two countries.

Japan’s free trade agreements with East and Southeast Asian economies and the favourable tariff regimes in trade blocs like APEC and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership have impacted the desirability of Indian exports. The high number of non-tariff measures (NTMs) on goods coming into Japan and technical barriers to trade also negatively affect Indian exports to Japan. Given that a large part of India’s exports come from micro, small and medium-sized enterprises (MSMEs) and the agricultural sector, the compliance costs for NTMs make exports to Japan unfeasible.

The export of Indian services to Japan has increased but remains below 1 per cent of Japan’s total services imports. Though Japanese foreign direct investment (FDI) to India has increased, it remains much lower than Japan’s FDI to countries like China and Indonesia. A complex business environment, lack of infrastructure and costly logistics have constrained Japanese FDI into India. Japan’s slow opening of borders is also creating problems for its expat community, including Indian policy researchers and students.

India’s continued economic development is not merely a domestic concern. Only an economically strong India will be able to sufficiently contribute to regional security, particularly in the maritime domain. To mitigate the risk of violent escalation in its territory and neighbourhood, India may integrate into the economic systems and supply chains of East and Southeast Asia.

Japan’s Cabinet Secretary for Public Affairs Noriyuki Shikata expressed hope that India will reconsider negotiating entry into the Regional Comprehensive Economic Partnership (RCEP). The ‘Rules of Origin’ clause allows RCEP members to impose higher tariffs on products produced in non-RCEP countries. Meanwhile, free trade access and minimal tariffs on 91 per cent of goods will benefit RCEP members. India’s withdrawal from RCEP will further hurt Indian exports and limit India–Japan collaboration in the manufacturing sector.

Greater dialogue between New Delhi and Tokyo can help ensure a favourable business environment for Japan’s FDI in India and build greater confidence among Indian policymakers to re-enter RCEP. The India–Japan CEPA may be reviewed to include items of concern and aid to help smaller Indian producers bear initial compliance costs. Concerted efforts towards learning the Japanese language in India can help boost the export of services, and loosening visa restrictions will facilitate a greater exchange of citizens between the two nations.

Japan could leverage its influence in multilateral banks, like the Asian Development Bank (ADB), and align Japanese International Cooperation Agency (JICA) projects with the ADB to ease India’s fund crunch issues, suggests Associate Fellow at MP-IDSA Titli Basu, reiterating that this will only ‘further Japan’s own economic, commercial and strategic interests.’ Japan can benefit from India’s human resources and large-scale economic growth, as conveyed in Kishida’s recent op-ed, which hails India as a ‘major manufacturing base’ and appreciates its digital society and economic security initiatives, including supply chain resilience. Stronger India–Japan economic ties can help synergise their foreign policy, which is crucial to maintaining the balance of power in the Indo-Pacific.

Akash Sahu is a Research Analyst at the Manohar Parrikar-Institute for Defence Studies and Analyses (MP-IDSA), New Delhi.