Love in Tokyo: Modifying indo-japan trade ties

Now that Narendra Modi has taken over the reins of  Indian Government after a euphoric win by a massive mandate, it is time for him to set domestic and international priorities in motion. In the domestic front, the Modi government is expected to devote energy and resources to revive and put the economy on the fast-track growth mode again. But this may not be accomplished and sustained without strengthening its strategic economic and security partnerships with likeminded states in Asia and the world. In the Asian context, Japan seems to come to the top for an economic partnership in the present set of circumstances. Why? The business ties between the two countries have thus far remained very low in international standards, keeping a vast space for exploration and growth for both the countries. The assumption of power by the charismatic Modi in India bodes well for such a partnership because of his positive view on Japan and personal relationship with the Japanese premier Mr. Shinzo Abe. Moreover, writes Brahma Chellaney in the Japan Times on May 19, 2014, ‘Modi mirrors Abe’s soft nationalism, market-oriented economics, and new Asianism, seeking close ties with Asian democracies to create a web of expected interlocking strategic partnerships.’ The Abe government, on the other hand, holds the view that a strategic partnership with India will be immensely beneficial. So this time the call for cooperation looks to be mutual.

The promise and prospects of economic cooperation between India and Japan could be understood by comparing the huge presence of brand Japan in the South East Asian countries. Contrary to this, India highlights the marginal show of Japanese presence, though Sri Lanka and Bangladesh might have a better position in this regard. But in the same vein, South Korea, a smaller and junior partner in the international arena, has put up much better show through its top value brands like Samsung, Hyundai and others in the larger couture of India. Of course the Maruti-Suzuki joint venture, recently constructed Delhi Metro and on-going Toyota project in Bangalore could be used to showcase Japan in India. But the modest presence of these initiatives in the vast Indian economic and geographic canvass could not justify the huge potential of brand India as an investment destination. 

Interestingly, the poor presence of Japan in India seems to be reciprocal. No element of surprise, brand India is nowhere visible in Japan.  

This picture of mutually minimal presence could be substantiated further by the figures of trade and investment between the two countries. As per the Japanese External Trade Organization (JETRO), its total trade with India amounted for only US$15.81 billion in 2013 (exports $8.67 billion against imports of $7.14 billion). This was 10.4 percent less than the total trade of  $17.64 billion (exports $10.62  and imports $7.01) in 2012. By another account, Japanese trade with India constituted 1.04 percent and 1.01 percent of its world total for the corresponding years of our description. Again, though the year on year contraction of trade with India reflected the overall Japanese trade situation for 2013, the decline was much deeper in the case of India than with most of the countries in East and South East Asia.

The picture for Japanese investment in India may not be much to cheer about. In 2013, India received 2.16 billion of FDI from the Japan down from $2.80 billion in 2012. For India, 2008 seems to have remained the special year as the Japanese investment peaked to $5.55 billion. Since then the Indian attraction seems to have diminished among the Japanese investors as investment declined in every subsequent year. At the end of 2012, Japan had a total of $15.11 billion FDI stock in India, just 1.45 percent of its world total of $1,040.46 billion.

India’s inconsequential positioning as a destination for Japanese investment or in the direction of Japanese trade seems quite surprising when they are compared with those of most of the East and South East Asian countries. Just to make the picture clearer, in 2013 Japanese investors invested a total of $40.47 billion in Asia. That included $9.10 billion in China, $8.96 billion in Taiwan, $10.17 billion in Thailand, $3.91 billion in Indonesia and $3.27 billion in Vietnam. South Korea and Singapore also received more investment than India. Bringing history in perspective, Japan emerged as a major source of foreign investors in the world during 1980-90. The depreciation of yen in 1985 is considered as a major factor for the massive outflow of investment from Japan. By observing the pattern of Japanese outward investments, authors posit, ‘The main motive behind Japanese FDI in Asia is to set up an export hub, while the main motive of Japanese FDI in the United States and the EC  is to maintain or capture the local market.’ Ideally, India could have been a serious contender for Japanese investment since it started liberalisation programme way back in 1991. But the Japanese investors mostly ignored it.

The picture and pattern are almost similar for trade relations between them.  Japan is doing almost half of its world trade with the countries in East and South East Asia. Excepting Brunei, Cambodia, Laos, and Myanmar, all other countries in these regions have a bigger share in Japanese trade than India. Even tiny Vietnam (when compared with India) had a total trade of about $25 billion with Japan in 2013. Individually, China is by far the single largest trading partner of Japan, leaving even US behind at the second spot since 2004.

However, since the beginning of the 21st century there was little doubt that India is a powerful economy rising on the global rank. But Japan chose to ignore it. The Japanese Inc. couldn’t comprehend the importance of India. By its economic weight, India is the eleventh largest economy by nominal gross domestic product (GDP) and third largest by purchasing power parity (PPP) and not to forget its 1240 million people. Since 1980, its economy has been growing steadily on an average of 6 percent annually. Though the present GDP growth is hovering around 5 percent, it holds the promise to grow eight-plus-percent for a foreseeable future. It also has one of the the highest private domestic consumption as a share of GDP (57 percent in 2008) in the Asia Pacific region(JETRO). All these statistics hold the promise that India can become a huge market for Japanese high tech products and services. Not only that, it can also work as a hub for entering the growing markets of the neighbouring countries including Bangladesh, Sri Lanka and Pakistan.

That brings out the serious question why has Japan so far failed to understand and exploit the economic expansion possibility offered by India? Or why has India failed to be a hub for Japanese investment and trade? It is common to see many argue that though the Japanese are buoyed by the ‘Indian growth story’, their reticent approach to trade and investment is due to the tough business environment prevailing in India. The tough environment again is a manifestation of tax inefficiencies, land acquisition difficulties, administrative red tapism and bottlenecks, complicated legal environment, over unionized labor force, etc. Incidentally,  India’s differential tax regimes where multiplicity of taxes charged by the Centre and the States has deterred FDI from all destinations including Japan’s. Moreover, labor force in Japanese sense should be docile, disciplined, punctual, obedient to hierarchy and rule based robotic creatures. Indian workers do not fit that well in a factory of Japanese origin.   

The recent spat between Vodafone and the Indian government followed by India’s unpopular decision to retrospectively implement the General Anti-Avoidance Rule (although later reversed) may have further impacted investment decisions from Japan. Similarly, other examples of India’s systemic inefficiencies such as lack of any significant movement in the Delhi-Mumbai Industrial Corridor, which has been the beneficiary of Japanese investment, highlight the opaque and complicated land acquisition process.  So, some of the Indian problems are also Japan specific.

There is no denial and these can aggravate the investors’ hardship in India. But identifying India’s shortcomings for reasoning Japanese reluctance to come to India may only mask some of the inherent deficiencies, lack of foresightedness and psychological barriers the Japanese Inc. suffer from. Taking the cover under the illusion that ‘industry needs a certain culture to flourish, and that culture does not prevail in either Africa or India’ may not be sufficient to explain Japanese failure in creating an economic space in India and beyond.

For example, an analysis of post-war Japanese economic engagement in Asia highlights that Japan seems have drawn a mental boundary for Asia that ends in Myanmar. One of the explanations for this is that they are not that easy to go outside their cultural ambit that lasts up to Myanmar. So the India centric Subcontinent, which is now a potential centre of economic growth, did not fit so far with their cultural domain. The middle east does not draw a better picture either. Being an energy deficit country, Japan has remained dependent on middle-east oil. Striking out oil related transactions with the Middle East leaves Japanese trade with those countries to minimal.  Again, the whole of Africa is nearly out of Japanese businesses radar till now. To substantiate, in 2013, Japanese bilateral trade with all African countries was about one-half of that with Thailand.

Not only that, the conservative Japanese businesses have a flocking in tendency, and they follow the guide of the government to go out for doing business. In developing South East Asia the government promotion, protection and help were sometimes done through the use of official development assistance (ODA). As we know, Japan started becoming a sizable aid donor in the late 70s to mid-1980s when its foreign aid policy got changed dramatically. By 1978, Japan appeared as a major bilateral donor in Asia and by the year 1989; Japan emerged as the number one donor in the world surpassing the United States. Noticeably, Japan’s foreign aid policy in the 1980s was directed towards building economic and political relation mainly among east and South East Asian countries. The Ministry of International Trade and Industry (MITI) wanted to use development assistance as a key strategy to restructure Japan’s FDI and trade relations with Southeast Asia, mainly bailing out the Japanese industry from the effects of the high yen. Terry in 1995 wrote Aid for that matter was used ‘as seed money to attract Japanese manufacturers or other industrial concerns with an attractive investment environment.’ In the late 1970s and 1980s, the ASEAN-4 countries, namely Malaysia, Thailand, Indonesia and Philippines were among the top recipients of Japan’s foreign aid. 

Unsurprisingly, Japanese FDI and trade with these countries grew in tandem from that period. China is no exception in this regard.

 Unfortunately, the mutual political goodwill between Japan and India has not yet been translated into serious economic engagement. And blaming India for this may not be fully justified. Not only that, Japan is now facing increasing competition in its domestic and external markets, mainly from China. The rise of an assertive China is quickly changing the Asia’s economic and political order and the geostrategic landscape. In this context, Japan needs to expand its economic horizon crossing the hereto established boundary, importantly to increase its strategic depth in international economic relationship. India stands out for such a Japanese economic engagement.

Indeed, Japan and India cannot afford to postpone their prosperity through mutually assured negligence. The two must see their cooperation as essential, rather than optional. A strong economic engagement will automatically deepen the political understanding between them that may discourage any eventual emergence of a China-centric Asia. This is not to propagate an economic non-cooperation between India and China. Maintaining a balance in the relations with China, Japan and to some extent Russia could be tricky in the emerging context, but with his emphatic win, this also becomes the responsibility of the Modi government.   

Munim K.Barai is a Professor of Finance and International Business at Ritsumeikan Asia Pacific University, Japan.

Rabi N. Kar is an Associate Professor of Commerce and Business at University of Delhi