India - Japan: Case for Strategic Engagement 

— Prof. Mukul Asher
National University of Singapore 

India has made good progress during the past decade in constructively engaging key countries and regional organisations around the world. This has been made possible as India tries to translate its economic potential into actual performance, and pursues strong and creditable national security policies.

At this juncture, there is a strong case for India and Japan to broaden and deepen economic and political engagement with a view to enhancing strategic depth and leverage of each country. The two countries had envisaged “global partnership” in the year 2000. It is time to give greater substance to this partnership. The fact that India is the single largest recipient of Japanese Overseas Development assistance (ODA) is a strong signal from Japan but it needs to be complemented by more robust economic and political relations to achieve the strategic engagement.

The following indicate the extent to which the bilateral economic relationship needs enhancing. Merchandise trade between the two has been relatively stagnant since 1997-98 at around USD 4 to 4.5 billion. In contrast, India-China trade has shown substantial acceleration, exceeding USD 10 billion in 2004. In services trade also, perceptions are that India- Japan trade has not been buoyant, though bilateral country data for services trade are not available. India should urgently consider capturing and publishing disaggregated country-level data on services trade.

There are 265 firms from Japan, which have invested in India, with total FDI stock of only USD 2 billion. This is in sharp contrast to Japan’s FDI stock of USD 50 billion in Southeast Asia, and USD 40 billion in China. This large imbalance cannot be solely explained by objective factors. India has demonstrated capacity to compete in the 21st century. It ranks highly (third in the world) in FDI attractiveness. Harvard University’s Professor, Tarun Khanna has observed that India’s FDI Policies are more attractive than China’s through India lacks marketing and soft skills to translate these into actual investments. Over 80 percent of foreign ventures in India are profitable, and most are earning above average returns.

In sharp contrast to Japan, its traditional rival South Korea has been pro-active in establishing a substantial manufacturing presence in India for both domestic and export markets. At current rates, India’s trade with South Korea is set to overtake its trade with Japan in the near future.

In a November 2004 seminar on Building a New Asia in Tokyo, former high-level economic ministry official Professor E. Sakakibara persuasively argued that the primary reason why many win-win opportunities between the two countries have not been actually realised lies in the mind –set of Japanese policy and business establishments as well as opinion-makers and researchers. They have not been monitoring India’s unilateral liberalisation and rapid integration with the world economy with sufficient focus and depth. The fact that Indian IT companies have been providing key support to manufacturing firms in Japan to become more competitive has not been recognised sufficiently in Japan; and nor the fact that the location (India) where some of the key (such as chips) are designed or further developed should be regarded as an integral part of the electronics chain. Japan’s business rivals from US, and the EU as well as South Korea and China have been using India as a location for design and Research and Development activity to become more competitive. He, therefore, urged the Japanese establishment to make concerted efforts to broaden and deepen engagement with India.

The case for broader and deeper partnership between India and Japan may be summarised as follows:

First, Japan’s energy security and trade flows are heavily dependent on secure routes through the Indian Ocean. India has common interests with Japan in keeping this vital sea route secure, and is developing capability to constructively cooperate with Japan in this area. Such cooperation will also be welcomed by the U.S, thereby fulfilling a key requirement for Japan's engagement.

Second, there are strong demographic complementarities between India and Japan. Japan’s population in absolute terms will begin to decline by the end of this decade, and median age of its population will continue to increase due to individual ageing. India in contrast is entering a demographic gift phase resulting in rising proportion of population in the working age group. India could have nearly 50 million well-qualified internationally competitive persons to address the demographic complementarity with Japan, EU, U.S, South Korea and others.

Japan can substantially extend its economic space and its technological capabilities and capacities through partnership with Indian firms, particularly in biotechnology, pharma IT, space and certain manufacturing areas such as auto design. Such partnerships will permit Japan to access knowledge professionals from India without necessarily requiring the physical movement of these professionals. Japan would thus be able to extend its economic opportunity set, and diversity global business risk.

Third; India and Japan have teamed up with Germany and Brazil to coordinate their efforts to become permanent members of the UN security Council’ The economic and strategic widening and deepening of India- Japan relations will enhance leverage of each in pursuing this goal. The current composition of the Security Council does not reflect the realities of the 21st century. All four countries have a strong case for full permanent membership of the Council.

Fourth, there has been perception in some circles that Japan has not reaped diplomatic and tangible economic benefits proportionate to its role as investor, aid provider, and trading partner of Southeast Asia. The capability or Southeast Asia to absorb further large scale Japanese Investments has diminished since the 1997 East Asian Crisis. The risk of over-concentration by Japan on the performance of Southeast Asia (and China) has risen substantially. As a result, substantially increasing comparatively miniscule FDI stock in India represents lowering of overall global risk for Japan.

It will also open up opportunities for Japanese business to participate in a mega market. Before the end of this decade, India’s GDP in current terms is set to exceed USD 1000 billion, and its international trade in goods and services is expected to reach USD 500 billion. India’s economic growth is founded on strong private sector that has set itself ambitious target of global competitiveness in many areas. FDI however has a critical role to play in India’s growth strategy. FDI, particularly from the US, EU, and South Korea is already doing so. The longer the Japanese companies defer their decisions to invest in India; greater will be the opportunity cost of the delay.

The presence of Japanese financial institutions in India’s increasingly sophisticated and competitive financial and capital markets is also extremely limited. Foreign Financial Institutions (FII’s) have invested about USD 60 billion in India’s stock markets alone. Japanese presence in venture capital and private equity funds in India is also limited.

There are many small and medium size Indian companies and startups in high technology areas, which provide substantial opportunities for private equity and venture capital firms.

It would be useful if the joint study group agreed upon by the Prime Ministers of the two countries in November 2004, gives priority to considering specific ways to bring about the wider and deeper engagement between the two countries.

India’s policymaker, business community, media, and researchers on their part need to make concerted and focused efforts to mitigate substantial information and perception gaps in Japan about Indian proficiency in commercial diplomacy and soft power skills.

The ultimate determinants of India’s success in engaging not only Japan but also other major powers will continue to be its economic and governance records, and perusal of strong and credible national security polices.