There’s room for more FDI from Japan

The announcement that Japanese PM Suga Yoshihide will soon be visiting India for a physical summit with PM Modi has raised expectations. Recently, they met at the Quad Summit. Suga visited Washington on April 16 for his first meeting with President Biden. His next visit would be to India. Suga made initial visits to Vietnam and Indonesia in October 2020.

In the last two years, India-Japan summits have been stymied. In 2019, the Abe-Modi Summit at Guwahati was cancelled due to the local situation there. Its focus was on Japan’s support to the North-East. In 2020, the Summit was impaled by Abe’s sudden resignation a few days earlier. It was held, but was bereft of the substantive aspects. Suga wants to complete this before he busies himself with the Olympics in July and an election in September.

In recent months, the focus has returned to summit-level preparations, and while the focus will be on strategic aspects, on the economic side, higher investment, digital economy collaboration, and promoting Indian exports to third countries are anticipated.

Japan provides about $4 billion as annual ODA (Official Development Assistance). This supports projects for critical infrastructure and green economy. This includes the ongoing high speed railway project. India remains interested in leveraging its special strategic partnership with Japan, to secure FDI, modern technology, and expand access into markets which it may have lost by keeping away from RCEP and TPP.

The Quad has played an important role in increased Japanese strategic interest in India. For Japan, the level of ODA and FDI are the strategic indicators, and it seems determined to use these to enhance the partnership with India. Strategic Resilient Value Chains are assuming importance, too. These either support China+1 endeavour or enhance existing FDI to give the +1 impact without relocation.

The Quad vaccine initiative, where India will be the manufacturing hub, the US will provide the technological support and Japan the finance, is the kind of model India pursues.

A Working Group on this is under way. During Suga’s visit, the India-Japan-Australia Supply Chains Resilience Initiative (SCRI) may be firmed up. How that succeeds will have an impact on the pace of its implementation.

Keen to rope in Asean

Japan is keen to bring in Asean as a partner to the SCRI. Of the 1440 Japanese companies which are exporting from India, 26 per cent do so to the Asean utilising the India-Asean FTA. They would like to leverage these existing regional value chains for the SCRI. India is not keen on this for now, as the inclusion of Asean could divert FDI from coming to India.

India wants to use the SCRI to bolster its own economic initiatives and keep leverage when negotiating the revision of the India-Asean FTA. Guidelines on how SCRI will function are expected to emerge from the summit. Connectivity and standards may be a focus of this. These will help in creating B2B collaboration.

At the time of the 2020 summit, to overcome the shock of the pandemic, Abe nudged efforts to increase FDI commitments to India. Such a strategic push was planned, though Japanese companies abhor short time-frames. In 2018, Japanese companies had committed about $10 billion over a few years. Since then, about $2.75 billion came in 2019 and about $1.25 billion in 2020. Closer follow up of those commitments will yield more results.

Among the ongoing projects are the $6 billion Nippon Steel plant in Odisha; the new $1.5 billion Maruti plant in Haryana; NEC’s data centres each worth $10 million, which could rise to $1 billion; and the MIST submarine cable link between Asean and India could be completed by 2022 with an investment of $700 million.

Smaller investments focus on the digital space. An AI based cancer detection system where Japanese technology and hardware will join Indian digital capacities is on the anvil. Olympus’ remote testing systems are joining another IT company to expand production. Suzuki is behind a rural ride sharing app for buses.

PLI scheme

Other segments of interest are medical devices, electronics, appliances, and food processing for which the PLI (Production Linked Incentive) scheme is being closely studied. FDI will further emerge once the proposals under the North-East Forum come to fruition. Similarly, at some point the HSR project will lead to FDI into electronics and services for supplying the large project.

Japanese M&A has brought in FDI too. Over $3 billion has come from Orix buying wind energy assets, Yanmar for tractors, JTEKT acquisition of its auto parts partner and Nippon Life entering the insurance business. Close to 100 M&As by Japanese companies occurred between 2015 and 2020 and brought in $10 billion. Cumulatively, Japanese FDI in India is over $200 billion with $35 billion in the last two decades.

The idea of the Asia Africa Growth Corridor, though not so talked about now, is bearing fruit through exports. Japanese companies seek African markets for export, and often expand existing facilities with new FDI to create capacity for this. Daikin for ACs, Mitsubishi for equipment, Toyota Tsusho for capital goods, Toshiba for power equipment, Isuzu for mini trucks and others are doing the +1 in India with an eye on overseas markets.

These plans often lead to regional production hubs which will generate more employment and exports. Japan believes that India has the best chance for an PTA (preferential trade arrangement) with AfCFTA which will benefit their production lines. Such arrangements can get Japanese companies to enhance the quality of their FDI and raise technology levels for competitiveness beyond the Indian market. In that lies a win-win possibility

Japanese investment in India is the best vote of confidence in India’s revitalised economy. Its ODA and FDI are key strategic elements in the partnership.

While Japan needs India’s IT capabilities, it realises the importance of manufacturing and job creation. The Japanese FDI is among the best in class of India’s FDI partners. Thus, the Suga visit could strengthen the strategic partnership with new elements of ODA and higher FDI which could be a marker for other partnerships.

The writer is a former Ambassador to Germany