Economic relations between India and Japan are key to regional stability

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Author: Akash Sahu, Manohar Parrikar-Institute for Defense Studies and Analysis

India and Japan seem to tick all the right boxes for developing a deeper partnership. Japanese Prime Minister Fumio Kishida visited India on March 19, 2022 and met Indian Prime Minister Narendra Modi during the 14th Annual India-Japan 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 ($42 billion) in India over the next five years to finance public and private projects of “mutual benefit”. The leaders also welcomed the signing of the exchange of notes on 300 billion yen ($2.5 billion) in loans to India.

Japan’s Expanded Partnership for Quality Infrastructure (EPQI), which was announced in 2015, aims to provide high-quality infrastructure in developing countries. India has been the largest recipient of Japanese Official Development Assistance (ODA) since 2005. This funding has been channeled to critical sectors such as energy, communications and transport infrastructure, particularly power grids. metro and railway.

About 1,455 Japanese companies are registered in India and the Indian government has set up a “Japan Plus” office within the Ministry of Commerce. Japan has previously 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 North East 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, trade and services exchanges are insufficient and characterized by imbalances. India’s merchandise exports to Japan remain limited, with 13.2% of all tariff lines excluded from the Comprehensive Economic Partnership Agreement (CEPA) between the two countries.

Japan’s free trade agreements with East and Southeast Asian economies and favorable tariff regimes in trading blocs like APEC and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership have had an impact on the attractiveness of Indian exports. The high number of non-tariff measures (NTMs) on goods entering Japan and technical barriers to trade also negatively affect Indian exports to Japan. Since a large portion of India’s exports come from micro, small and medium-sized enterprises (MSMEs) and the agricultural sector, NTM compliance costs make exports to Japan unfeasible.

Indian services exports to Japan have increased but remain below 1 percent of Japan’s total services imports. Although Japanese foreign direct investment (FDI) in India has increased, it is still far below Japanese FDI in countries like China and Indonesia. A complex business environment, lack of infrastructure and costly logistics have limited Japanese FDI in India. Japan’s slow opening of borders is also creating problems for its expatriate community, including Indian scholars and students of politics.

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

Japanese Cabinet Secretary for Public Affairs Noriyuki Shikata has expressed hope that India will reconsider negotiating its 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 access to trade and minimum tariffs on 91% of goods will benefit RCEP members. India’s withdrawal from RCEP will further hurt Indian exports and limit India-Japan collaboration in manufacturing.

Increased dialogue between New Delhi and Tokyo can help ensure a conducive business environment for Japanese FDI in India and build confidence among Indian policymakers to re-enter RCEP. The India-Japan CEPA can be revised to include areas of concern and assistance to help small Indian producers with the initial costs of compliance. Concerted efforts to learn the Japanese language in India can help boost the export of services, and the relaxation of visa restrictions will facilitate greater exchange of citizens between the two nations.

Japan could leverage its influence in multilateral banks, such as the Asian Development Bank (AfDB), and align Japan International Cooperation Agency (JICA) projects with those of the AfDB to alleviate the shortage issues. funds from India, suggests associate researcher at MP-IDSA Titli Basu, reiterating that this will only “advance Japan’s own economic, commercial and strategic interests”. Japan can benefit from India’s large-scale human resources and economic growth, as noted in the recent editorial by Kishida, which hails India as a “major manufacturing base” and appreciates its digital society and initiatives economic security, including supply chain resilience. Stronger economic ties between India and Japan can help synergize their foreign policy, which is crucial for maintaining the balance of power in the Indo-Pacific.

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

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