The Hindu Business Line : India and Japan — Needed, greater economic engagement

A comprehensive economic engagement between India and Japan is vital. Trade needs to stepped up, and infrastructure problems and bureaucratic delays have to be addressed urgently to make India an attractive investment destination.

DESPITE Japan being the world's second largest economy and India being the second fastest growing country, the engagement between the two has not been substantial and has actually weakened, in relative terms, since India started the process of reforms and integration with the world economy in the early 1990s.

In 1993-94, Japan was India's third largest trading partner. Ten years later, in 2003-04, Japan had slid to becoming its sixth largest export destination and seventh largest import source. In 1993-94, India's exports to Japan were a healthy $1,748 million, constituting 7.8 per cent of India's total exports. In 2003-04, India's exports to Japan were only $1,714 million, marginally down in absolute value from 1993-94, but substantially lower in real value and making up just 2.7 per cent of India's exports.

A somewhat similar position prevails in imports also. While India's imports from Japan in 1993-94 were worth $1,514 million, or 6.6 per cent of India's total imports, in 2003-04, they were $2,675 million, just 3.4 per cent of the total.

In 2004-05, India's exports to Japan grew 15.6 per cent over 2003-04 to reach $1,982 million, but the share in India's total exports fell further, to 2.5 per cent. Indian imports from Japan in 2004-05 grew 12.6 per cent, to $3,012 million, but its share in the country's imports fell significantly, to 2.8 per cent. Even in trade composition, there has not been much change. Gems and jewellery, marine products, minerals and iron ore and textile products still dominate India's exports to Japan, while machinery, transport equipment, electronic goods, chemicals and metal products continue to be India's major items of import from Japan. In 1990, Japan, in terms of FDI stock at $1,320 million, was the fourth largest investor in India after the UK, the US and Germany, constituting 4.9 per cent of total FDI stock in India. In the 14 years since then, only $1,275 million worth of Japanese investment has flowed into India.

In 2002-03, 2003-04 and 2004-05, actual inflow of Japanese FDI into India was only $66 million, $67 million and $122 million respectively, of the total FDI inflow of $5,035 million, $4,673 million and $5,536 million respectively.

While in the last decade Japan has emerged the fourth largest investor in India in cumulative approvals, it is the sixth largest in terms of actual inflows. Though Japanese investment has grown in India in the last decade, there is still a great deal of caution exhibited by its companies.

This is also reflected in the fact that while there has been a significant increase in technical collaborations, financial collaborations have not picked up substantially.

In view of this dismal milieu, despite the huge potential, it is important that the two Asian countries re-engage and re-strategise their bilateral relationship.

The steps taken by the two governments earlier this year, when the Japanese Prime Minister, Mr Junichiro Koizumi, visited India to evolve a strategic orientation of the Japan-India global partnership through an eight-fold initiative, are indeed in the right direction and need the full support of the business communities in both countries so that the gap between the potential and the ground reality is effectively bridged.

What is required is a comprehensive economic engagement, through expansion of trade in goods and services, investment flows and other areas of economic cooperation, apart from an exploration of a Japan-India economic partnership agreement as enunciated by the two governments.

A strong and vibrant small-scale sector is the backbone of the Indian economy, and several small units are keen on forming strategic alliances with their counterparts in other countries. As Japan is very strong in this area, there is a tremendous opportunity waiting to be exploited for mutual benefit.

Indian SMEs are also looking for technological upgradation, and Japan can be an important source of technology for India, especially in such areas as electrical equipment, transportation, chemicals, industrial machinery and metallurgical industries. Other potential areas for co-operation are infrastructure, tourism, automobiles, engineering and pharmaceuticals. Some of the major problems in investing in India, as perceived by the Japanese, have receded in recent years, but a lot more needs to be done to attract Japanese investment of a significant level. Problems commonly outlined by Japanese companies pertain to inadequate incentives such as tax exemption, complicated tax procedures with wide variations between different States, complicated provisions in the Companies Act, rigid labour laws, high import tariffs compared to Asean levels, and poor infrastructure.

While VAT has been implemented in most States from April 2005, other State levies such as octroi, and entry tax remain a problem. In the power sector, where Japanese companies have shown some interest, the main problem areas are low tariff rates, political intervention, bureaucratic delays, low payload factor, transmission and distribution losses and delays in establishing a regulatory framework.

These problems need to be addressed urgently so that India can become an attractive destination for Japanese direct investment. Japanese technology and finance, matched with India's technically skilled and relatively cheaper labour, have the potential to produce competitive goods that can capture the global market.

New Delhi's recent decision to set up an exclusive Japan Cell under the Department of Industrial Policy and Promotion (DIPP), to promote greater Japanese investment in India as a single-point contact and facilitation point, is welcome.

It is hoped that this cell will provide the right impetus to drive greater Japanese interest in India, which will translate into investment on the ground, especially since Japanese companies have in recent times been facing some problems in China.

(The writer is Joint Secretary in the International Affairs Division of PHDCCI. The views are personal.)

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