CAD crisis: Knock on Japan’s door

In these days of tumultuous financial markets and a falling rupee, India could turn to one of its time-trusted friends, as it did during the 1991 crisis: Japan.

The India-Japan Comprehensive Economic Partnership Agreement (CEPA) could become a useful instrument in this regard. This could be the right follow-up to the recent visit by the Prime Minister to Japan.

Since the signing of the CEPA in February 2011, India’s trade deficit with Japan has been increasing. We export mangoes and apparel and import power equipment or, say, rolling stock. One import deal can swamp couple of years’ mango exports. However, it need not be so.

The best use of CEPA does not lie in counting the apples and oranges trade between the two countries. The CEPA should make Japan pay for its exports to India and help improve CAD; not otherwise.

FINANCE FLOWS

How does one work it out? Japan is moving into the post-industrial era. It is now maturing into a financial economy. From 2005, Japan’s net income from overseas is outstripping its trade balance. In 2005, Japan’s trade balance was 103348 million yen, and income balance 114202 million yen. That year was a turning point.

In 2012, the trend sharpened. Its trade balance has turned deeply negative at 58,142 million yen. In sharp contrast, its income balance had surged to 142,724 million yen. Just before the financial meltdown struck the global economy, Japan’s income balance had peaked to 164,670 million yen. That was Japan’s ‘receipt’ (income) from rest of the world annually.

There is another way of looking at Japan’s unstated financial muscle, which also underpins its economic transformation.

According to the latest statement on Japan’s financial assets, released by the Cabinet Office of Japan, the cash, money and deposit under family budget at the end of 2011 fiscal year (March 2012) has been as large as 18 trillion yen. Add to that the security and bond of another 1 trillion, insurance holdings of 3.6 trillion yen, and total family budget assets will be close to 20 trillion yen.

Moreover, if you count the assets of corporates and financial companies, Japan has no less than 116 trillion yen assets: some free, some locked up in existing investments. But, the fact is that no less than half this treasure trove is looking for better investment opportunities.

It is sitting on a pot of gold which is looking for deployment elsewhere in the world, because the scope for earning even a decent return on investment from within Japan is remote.

The interest rate in Japan is 0.3 per cent. If we can lead part of Japan’s “cash, money deposit” to some Indian financial products or financial instruments with higher interest rate, it will create a new India- Japan relationship. Because of these, Japanese loans at very low rate of interest and long payback period are virtually grants.

Given these financial flows, Japan is one of the wealthiest countries, forget all the comparisons on the basis of purchasing power parity and size of national income.

Understated as the average Japanese is, he is quietly in his way one of the richest investors going around. With CEPA in place we must make an effort to capture a part of that investible surplus. India-Japan CEPA should not be only about merchandise trade, it should be about overall trade in which Japanese exports to India should eventually include finance.

In return, India should also export, apart from goods, incomes from Japanese investments in India. We can have a stable trade in financial flows, – the kind of investments that Raghuram Rajan and P Chidambaram are talking about in the face of the rising current account deficit and falling rupee. Japanese investment in infrastructure sector or FDI in manufacturing or in insurance or banking will, by its very nature, be long-term capital.

But, is India prepared for this kind of investment?

Moves by India

A leading Japanese economic researcher pointed out that Japanese companies are venturing out these days. But they feel comfortable doing business with Japanese banks. More so, if Japanese SMEs are going out of the country they like to be escorted by their customary Japanese banks. They provide free consultancy services and hand-holding in a foreign land.

To attract Japanese investments and FDI, we should tweak the regulations marginally to allow funds flow from Japanese parent companies into Indian branches of Japanese banks and corporates as loans. I give two examples.

First, Japanese banks may be allowed to borrow foreign currency from the head office, branches or correspondents outside India up to 100 per cent of the unimpaired Tier 1 capital.

Second, external commercial borrowing (ECB) should be allowed to finance short-term, working capital under certain conditions -- for instance, working capital up to a certain amount.

Limitations in the ECB usage deprives foreign banks and corporations of opportunities to finance important infrastructure needs. The India-Japan Summit Meet a fortnight back made ambitious statements. But these will remain hollow without any follow-up.

(The author was former Economic Adviser to FICCI and member of an Indo- Japan Study Group to examine feasibility of an FTA.)

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