India and Japan marked their 12th annual bilateral summit last week. A two-day blitz of investment pledges and the much hyped Mumbai-Ahmedabad bullet train, it showcased a relationship that is fast maturing into a strategic economic partnership.
The timing is also all but expected.
Both Prime Minister Narendra Modi and his Japanese counterpart, Prime Minister Shinzo Abe have promised resurgent economies to their voters.
Further, both countries are increasingly uneasy over China’s naked ambitions, despite having flourishing trade and business ties with the mainland.
These common concerns have manifestly transformed current Indo-Japanese bilateral engagement.
Japanese aid and investments into India are not just filling critical infrastructure gaps in the country, but are also directly benefit Modi’s economic reforms programs: Make in India, Skill India, Digital India, as well as Startup India.
Japan aid and investments key to economic ties with India
At the recent summit, Japanese agencies – Japan International Cooperation Agency (JICA) and Japan External Trade Organization (Jetro) – coordinated interactions with 450 Japanese firms, including Mitsubishi Heavy Industries, Hitachi, Suzuki Motor, Keidanren or the Japan Business Federation, Mitsui, and Toyota Motor.
Even more important, though, was the participation of medium-sized (worth US$1 to 10 billion) companies from Japan. These firms are looking at a wide range of sectors in India: manufacture of tractors, agro-chemicals, real estate, construction, defense, andinfrastructure.
Moreover, to encourage continued investments, PM Modi announced that Japanese industrial townships will be built in four states: Gujarat, Rajasthan, Andhra Pradesh, and Tamil Nadu.
The following are key areas that have fostered strong economic relationships between India and Japan in recent years.
Aid for development: JICA is Japan’s national agency responsible for managing its overseas development assistance. Aid funding is a pillar of Japanese foreign policy, and underlines its past relationships with other Asian countries like Thailand, Malaysia, South Korea, and China.
In 10 years, JICA has provided India with soft loans worth US$23.36 billion at 0.1 – 1.4 percent rates, repayable over 30 to 50 years, for infrastructure projects in transport (55 percent or US$11.37 billion), water (16 percent or US$4.67 billion), energy (13 percent or US$12.07 billion), and agriculture and forestry (seven percent or US$3.63 billion) sectors, among others.
JICA’s latest marquee project is the US$17.18 billion bullet train, from Mumbai(Maharashtra state) to Ahmedabad (Gujarat state). The bullet train project will create 24,000 jobs, locally manufacture key components, and will, therefore, entail technology transfers.
Major transport projects that have been backed by JICA include the Delhi Metro Rail(the first network in the country), Western Dedicated Freight Corridor (India’s largest railway project between the National Capital Region and Mumbai), roads, bridges, and tunnels in the northeast states, and cargo handling structure in Chennai andVisakhapatnam ports.
Foreign Investments: FDI from Japan is around US$4.7 billion today, climbing steadily from around a mere US$512 million in 2006. Japan now ranks third, responsible for eight percent of total accumulated FDI inflows into India from April 2014 to March 2017.
At the summit last week, 15 Japanese firms signed agreements to invest in Gujarat. This includes automaker Suzuki Motor’s plans to expand its production capacity from 250,000 to 750,000 units annually. Suzuki Motor will also partner with fellow Japanese firms Denso and Toshiba to manufacture lithium-ion batteries for electric vehicles; the factory will be set up at Hansalpur in Gujarat by 2020.
Infrastructure push in northeast India: This region is the country’s gateway to Southeast Asia and shares a historic connection with Japan. Recently, the India-Japan Coordination Forum for Development of North East was established to execute infrastructure building projects such as connectivity and road network development, electricity generation, and disaster management. Towards this objective, Japan will extend a loan of US$348.7 million to India for its ‘North East Road Network Connectivity Improvement Project’.
A memorandum of understanding was additionally signed at the bilateral summit to combine the aims of Japan’s Free and Open Asia-Pacific strategy and India’s Act East Policy. This strategy feeds into the vision behind the proposed US$40 billion Asia-Africa Growth Corridor (AAGC) to connect Africa, Southeast Asia, and India’s northeast. These initiatives come in the backdrop of repeated Chinese incursions into India’s border territory and the South China Sea, and the imposition of its Belt and Road Initiative (BRI) that has left many uncomfortable in the region.
Support for startups in India: Japanese firms invested about US$1.43 billion in Indian private equity and venture capital deals in the first half of 2017 – more than triple the amount in 2016 (US$459 million). Telecommunications giant SoftBank Group Corp., accounted for 98.9 percent of this amount (US$1.40 billion). Other Japanese investors are Mistletoe Inc., GREE Ventures Inc., and Rebright Partners Ltd.
A diverse array of Indian startups have benefited: agricultural marketing Ninjacart, logistics service platform Lets Transport, digital community platform POPxo, real estate service provider Property Share Online Platform Ltd., adventure travel startup Deyor Adventures Ltd., wellness startup Healthians, and Balance Hero Co. (an app enabling prepaid mobile phone users to check their remaining credit balance). Even lesser known Japan-based investors such as Beenos Inc., Digital Garage Inc., and GMO Internet Inc. are now interested in Indian startups.
SoftBank Group Corp.’s investment arm, SoftBank Capital, has invested about US$4 billion in 2017, primarily in the consumer internet space. This includes US$1.4 billion in One97 Communications Ltd., which operates India’s largest digital payment and commerce platform Paytm in May, and US$2.4 billion into homegrown e-commercegiant Flipkart in August.
SoftBank Capital previously backed Indian startups Snapdeal, Grofers, Ola, and Oyo. In future, its investments will be facilitated through a US$100 billion tech-focused fund called Vision Fund. The fund has contributions from Saudi Arabia and Abu Dhabi, besides Apple Inc. and Qualcomm Inc.; it is the single largest capital pool in the world of private equity and venture capital.
Skilling India: Japan is also assisting India’s initiatives towards its workforce capacity-building. Four Japan-India Institutes for Manufacturing (JIMs) will be set up to train workers.
The Japan International Training Cooperation Organization (JITCO), which is a government-instituted body focused on human resource development, has also rolled out a program to up-skill Indian (industrially trained) blue-collar manpower for Japanese firms. Selected workers will be sent to Japan for a three-year, on-the-job training course.
In the healthcare sector, discussions are ongoing between the two governments to train and send nurses from the northeast Indian states to Japan.
Japan India ties – Diversified, and expanding by necessity
The two countries are economically engaged at multiple levels.
Even if the momentum is sluggish on one front, such as trade, it is flourishing in terms of investments and private equity interest.
Strategic interests, and a retreating US in the Indian Ocean Region (IOR), have pushed Japan to seek a closer defense relationship with India. This is complemented by India’s own regional interests.
Both countries are powerhouse economies in Asia, although at differing stages of development. Yet, Japan’s growth has been stagnant for years now, further burdened by an aging population and a shrinking workforce.
India, with its vast market and large and cheap labor supply, along with the Modi government led economic reforms presents Japan with a fundamentally important and timely set of opportunities.
As Prime Minister Abe says, the “Ja” of Japan and the “I” of India together makes “Jai”, the Hindi word for victory.