75 Years of India-Japan Relations: Growing with The Times

10 Jan 2023

The friendship between India and Japan, exemplified by 70 years of close diplomatic relations, is deep-rooted in centuries-old spiritual affinity and cultural and civilisational ties. The two countries have a shared vision of global peace and prosperity, and are leveraging their ‘Special Strategic and Global Partnership’ to bring about a more equitable global economic order against the backdrop of the ‘Asian Century’. 

Historically, the India-Japan bilateral economic relations were determined by India’s interest in attracting Japanese investments, technology and know-how, whereas Japan viewed India as a growing market for its exports, and a source of key natural resources and raw materials. The India-Japan Comprehensive Economic Partnership Agreement (CEPA) and its implementation from August 2011 accelerated bilateral economic and commercial exchanges between the two countries.

Deep Cooperation Endeavour

During Hon’ble Prime Minister, Mr Narendra Modi’s state visit to Japan in September 2014, then Hon’ble Prime Minister of Japan Mr Shinzo Abe pledged $35 billion in investment in India’s public and private sectors over a period of five years as well as double the number of Japanese companies operating in India. Subsequently, during the visit of Hon’ble Prime Minister of Japan, Mr Fumio Kishida’s visit to India in March 2022 the two sides expressed satisfaction that the investment target announced in 2014 had been achieved and stated the shared intention to realise JPY 5 trillion of public and private investment and financing from Japan to India in the next five years, to finance appropriate public and private projects of mutual interest. The two sides also renewed the bilateral currency swap agreement of USD 75 billion.

At the strategic level, India and Japan have deepened the cooperation in defence and security, peaceful uses of nuclear energy, and in the outer space. On the economic front, the bilateral cooperation is embellished by the launch of the MAHSR-Shinkansen Project, inauguration of Japan India Institutes for Manufacturing ( JIIM), ‘Make in India’ outreaches organised under the agreed roadmap for promoting Japanese investments in India, partnership in new technologies such as AI and IoT, visit of state level delegations from India to Japan and prefectural delegations from Japan to India, opening of India Japan Startup hub in Bengaluru, participation of Japan as partner country in World Food India and launch of Japan India Food Council in Tokyo with Japanese Food processing companies as members, increasing cooperation in healthcare sector, etc.

Trade Ties: High on Potential

The deepening economic relations have, however, not contributed to bilateral trade relations realising the true potential, particularly since both the economies are among the largest in the world. Value of India-Japan bilateral trade increased from US$16.95 billion in FY2019-20, to US$15.35 billion in FY2020-21 and US$ 20.57 billion in FY2021-22. Moreover, Japan’s exports to India were a mere 2.35% of India’s total imports, and India’s exports to Japan were just 1.46% of India’s total exports, as recorded in FY2021-22.

Down the years, the India-Japan bilateral trade was concentrated in a narrow range of products with India’s exports dominated by raw materials and minerals, such as, mineral fuels, mineral oils, marine products, iron and steel and chemicals, etc., whereas Japan’s exports were dominated by capital and knowledge-intensive manufactured goods, such as, electronic goods, non-electrical machinery and transport equipment. 

A key reason for India’s rather modest share of Japanese imports, especially in regard to manufactured goods, is the lack of supply chain linkages and offshored production arrangements between the two countries. Intra-industry trade based on offshoring of production by major Japanese firms forms the basis of much of the trade between Japan and other major Asian economies like Malaysia, Thailand and Taiwan. The relatively high cost of doing business in India that includes logistics is viewed as another factor inhibiting Japanese offshored manufacturing in India. Indian industry will be called upon to move up the global value chain and become a viable and reliable supplier to the Japanese manufacturing industry. There is also significant scope for Indian agricultural and pharmaceutical exports to Japan. 

Trade in services is another area where India and Japan could deepen the bilateral flows. Japan is a significant global player in services, but the presence of Japanese services and firms in the Indian market is much lesser than in other parts of Asia. India leads in IT, business processing and R&D investments. Investors from the west favour India for its highly educated workforce, management talent, rule of law, transparency, cultural affinity, and regulatory environment as highly favourable factors. The private sector could play a key role in strengthening India-Japan trade in services.

Bilateral Investment Flows

In regard to bilateral investment flows, Japanese FDI in India has increased in recent years but remains small compared to Japan’s total outward FDI. Japanese outward FDI to India in FY2020-21 and FY2021-22 stood at US$ 1.95 billion and US$ 1.49 billion, respectively. Cumulatively, from 2000 until June 2022, the investments to India have been around US$ 37.79 billion, ranking Japan fifth among source countries for FDI. In recent years, Japanese FDI into India has mainly been in electrical equipment, general machinery, chemicals & pharmaceuticals, financial & insurance, construction, transportation, wholesale & retail, and services sectors.

The number of Japanese companies registered in India was 1,439 as of June 2022 compared to 1,455 in 2020 with manufacturing firms accounting for half the total, according a joint survey by the Embassy of Japan in India and the Japan External Trade Organization (JETRO).

The number of Indian companies working in Japan is over 100 now, and India’s Net FDI in Japan during FY2021-22 was (minus) US$ 1.38 million. Indian investments in Japan are limited and mostly in the field of IT.

Looking ahead, cross-border partnerships could be deepened in areas like defence manufacturing, clean energy, information and communications technology, biotechnology, pharmaceuticals, etc.

The partnership opportunities are being augmented by the Memorandum of Cooperation (MoC) between India & Japan on a Basic Framework for Partnership for Proper Operation of System Pertaining to “Specified Skilled Worker” (SSW) signed on 18 January 2021 that will further promote the movement of skilled workers from India to Japan in designated 73 operations in 14 specified industries fields / job categories.

The India-Japan partnership foretells deeper, broader collaborations and joint ventures in diverse sectors between the two countries, with the private sector playing an instrumental role in the joint initiatives.

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