India needs Japanese investments for infrastructure, and Japan needs access to Indian markets for growth, writes ABHIRUP BHUNIA andGEETHANJAlI NATARAJ
The Japanese Prime Minister's visit to India assumes significance at a time when the world is slowly coming out of the financial crisis and the macroeconomic foundations of both countries are being tested. As it stands now, there is much scope for strengthening existing ties. Commercial and economic engagements should be at the heart of a 21st century Indo-Japanese engagement even as strategic considerations at the global high tables continue to act as a major pillar of this growing bilateral.
Japan and India face two different kinds of economic predicaments. While Japan has suffered from deflation for more than a decade now, India is reeling under price rise. Under the so-called ‘Abenomics', Japan has been seeking to undo the depression by engaging in massive quantitative easing that will inject liquidity into the system, boost demand, unleash investments, and drive up prices. It is in testing times such as these that mutual cooperation can benefit both countries.
The Comprehensive Economic Partnership Agreement signed between India and Japan in 2011 has cemented ties between the two and signaled to the world the seriousness of the relationship. Under the CEPA, tariffs have been slashed on more than 8,000 products, including apparel, agricultural products and machinery, and this also covers services, labour and investments. Of course, with the CEPA coming into effect only in August 2011, it is too early to confirm its impact. But still in the first year of its implementation, India's exports to Japan went up by 24 per cent and its imports by 40 per cent. The estimated trade volume in 2014 is $25 billion, rising from $18.3 billion in 2013.
As the figures demonstrate, India's trade deficit with Japan has grown to somewhat uncomfortable levels following the CEPA and Japan seems to have benefitted more. But in all fairness, India is yet to realise the full benefits: For instance, over a period of 10 years, Japan will eliminate tariffs on 97 per cent of its items under CEPA.
Also, there is nothing new about the interest of Japanese firms in India. The Sonys and Suzukis of Japan have long been household names here. Bilateral cooperation in electronics has received a boost in recent times with Japanese firms looking beyond China, even as they deal with huge losses in market share to South Korean and Taiwanese firms. But Japanese technology remains dear to India and India's market size, rapid economic growth and rising demand for consumer durables continue to attract Japanese firms. last year, many Japanese firms announced massive investments in India. They have plans to set up manufacturing plants and undertake product innovation tailored for the local market.
But what's been particularly heartening is Japan's assistance in India's infrastructure development. India needs heavy investments, worth trillions of dollars, to beef up its crumbling infrastructure. Japan has strongly contributed to this effort, reflecting its growing responsiveness to India's needs. Of course, there are gains for Japan too in this: Japanese firms are entering into profitable joint ventures with Indian companies. And with Japan's capacity to invest in capital-intensive long gestation projects, it might be just what the doctor ordered for India. And Japan.
Buoyed by the incredible success of the Delhi Metro, which was largely funded by low cost loans from the Japan International Cooperation Agency, the Chennai Metro Project too is being funded by Japan. That the focus of JICA's activities is on India is borne out by the fact that over 50 per cent of the value of all JICA projects in South Asia is cornered by India. The projects are all in strategic sectors that offer Japanese companies a strong business opportunity. This is a win-win partnership.
On the strategic side, Japan's economic cooperation with India is also a hedge against a rising China which is a direct threat to Japan as also India, if to a lesser extent. Trilateral talks between the US, India and Japan counterbalances Chinese aggressiveness in the region. Thus, with India-Japan ties poised to reach historical heights, China's aspirations to establish itself as a regional hegemon will not go unchallenged.