April 26, 2005

India beckons Land of the Rising Sun

Asia Times, 26.04.2005

After Chinese Prime Minister Wen Jiabao conducted his "most important trip of the year" to India, Delhi awaits yet another high-profile guest, set to arrive this Thursday. Japanese Prime Minister Junichiro Koizumi's visit will add a new dimension to India's "Look East" policy, one that offers more long-term opportunities for India than the "Middle Kingdom".

The visit comes at a time when the Indian economy is enjoying a sustainable growth rate of 7%, poverty down by 24.9% and buoyant stock markets – the time is ripe for Prime Minister Manmohan Singh to grasp the hand that has long been extended at Delhi by Tokyo, and long ignored. As with his much-anticipated handshake with Wen, the world will be watching.

The poorly defined political relationship has hampered trade between the two countries. Japan-India trade stood at about US$4 billion at the end of the 2003–04 financial year. Worryingly, the figure has stayed almost stagnant since 1997–98, and has even dipped on occasions. Contrast that with China-India trade, which grew almost 79% to $14 billion at the end of 2004. Japanese Defense Minister Shigeru Ishiba summed it up aptly at the seventh Asia Security Conference, "India is an invaluable ally. But economic ties are far lower than full potential."

This amounts to no more than an utter failure of Indian policymakers to realize the potential Japan offers. In fact, with typical foresight, it is Japan that has taken the first step to rectify this mistake. It has made a conscious effort to boost the poor infrastructure in India, to make it easier for its own companies to invest in the country. Already, India is Japan's largest overseas aid receiver, and on March 31 it announced another $1.3 billion as a "soft loan" for eight projects, varying from the Delhi Metro to building flyovers in Kolkata to irrigation projects in Rajasthan.

Although India-Japan joint ventures, such as Hero-Honda, Maruti-Suzuki and Toyota-Kirloskar, have been successful, actual inflow of direct investment from Japan to India is abysmally low.

While Delhi contemplates "the mother of all free-trade agreements" with China, a far better option for an FTA is Japan. Although India does enjoy a trade surplus with China, that may change soon after the Olympics in Beijing are held in 2008: the bulk of Indian exports to China are raw materials such as steel, which it needs for its soaring construction sector. Companies operating in "sexy" sectors such as software development and information-technology services have their most important client bases in the Western world, and such companies as TCS, Satyam, Infosys, etc are setting up in China to add to its export kitty.

Contrast this with Japan, which offers a vast and wealthy market for Indian companies to export to. Moreover, Indian manufacturing is still relatively heavily protected vis-a-vis the Association of Southeast Asian Nations and the US/European Union. With an FTA, Chinese manufactured goods will beat their Indian counterparts on prices, and because India is mostly a price-elastic market, the fate of Indian companies might be grim.

With Japan, the goods imported would compete with the quality tag rather than the price tag, thus providing some leeway to Indian firms. Moreover, if India manages to create a conducive investment environment with good infrastructure, generous tax breaks and flexible labor regulation, we might have a scenario on our hands where Japanese companies flock to India to set up base.

With FTAs, the most common fatalist cries are about foreign companies steamrolling into the Indian market. These arguments have some validity when applied to China, but fall flat if we study prospects of India-Japan trade, especially in the manufacturing sector. A vast majority of Japan's nearly $400 billion imports appeal to sectors with strong export prospects in India – machinery and components, metals, textiles and chemicals. In textiles, little needs to be said about India's prospects in the post-Multifiber Agreement world. Even going by conservative estimates, it should boost to $50 billion by 2009–10. In chemicals, Japan's Mitsubishi Chemicals has already recognized India's potential by erecting a massive plant in Haldia, West Bengal. In a recent report by McKinsey, it was stated that India had the potential to raise its exports in just four sectors from $10 billion currently to $90 billion by 2015. These were identified as textiles, automobile components, chemicals and electronic products, all high on Tokyo's import list.

Even Japanese investment into India is likely to be in sectors in most need of such a boost. Studying Japanese investment in China, we see that 31.5% of all investment has been in transportation and telecommunications. India's pathetic infrastructure and tele-density are well known; Japanese investment already is making a difference in transportation – with a higher dose, the effects can only be positive.

Putting aside all rhetoric of "Chindia", it seems that the economies of Japan and India are far more complementary. Thus should begin a "Japindia" story.

In fact, where Chindia falls short, Japindia could work in politics. The two countries share similar democratic ideals and have similar aspirations in the world. Japan is a member of the Group of Four (G4), along with India, and they are actively backing one another's bid for a permanent membership of the United Nations Security Council. China is opposed to the inclusion of both.

Indeed, China-Japan relations have been a lot frostier compared with Sino-Indian ones. Not to forget the ballistic missiles that remain aimed at Tokyo, the recent vehement protests and attacks on Japanese companies from Beijing to Guangdong in view of Japan's history books, and aspirations to enter the Security Council, Tokyo must be getting wary of keeping nearly 170 billion of her golden eggs (read dollars) in the China basket. India and China offer similar attractions – abundance of cheap skilled and unskilled labor and a huge domestic market. China has one up on India when it comes to its investment climate – something India has been trying to rectify, yet progress should be much faster.

By collaborating with Japan, India has a chance of cornering China it its own back yard, a trick China has played quite successfully on India over the years by cozying up with Pakistan and Bangladesh. Both Japan and India have long-standing border issues with China, and both view the latter's rise as a potential threat to stability in the region.

Going one step further, a paper submitted to Yale University last November by Shyam Sunder mentioned a possible "India-Japan-Taiwan Trialogue" to boost trade, investment and political relations. Interestingly, India is yet to show explicit support for China's Anti-Secession Law against Taiwan. Taiwan faces a similar dilemma as Japan – while its economic relationship with China is growing rapidly, politically the two are drifting apart. With US support increasingly uncertain in any dispute with China, Taiwan may well want to channel its investment elsewhere. India would be the natural substitute destination for redirected Japanese and Taiwanese investment.

The cadres in Beijing will be watching carefully as Koizumi lands in Delhi. They would be concerned with the prospects of a Japindia – the juxtaposition of two of its arch rivals in Asia and the world. The visit will put the ball in Delhi's court nicely. For decades, it has let other countries dictate and pace the direction of bilateral relations. Now it has a grand opportunity to seize the initiative and firmly entrench ties with Japan, a far more profitable bet for India than China. After all, why go for the second-largest economy in Asia when the largest is ready at hand?


- 15 comments by 1 or more people Not publicly viewable

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  1. "The recent vehement protests and attacks on Chinese companies…"

    Surely he means Japanese?

    "$170 billion of her golden eggs (read dollars)"

    He should probably have skipped out the $ if he wanted that to work.

    26 Apr 2005, 16:36

  2. I asked Asia Times to make the corrections. In my original article there were no mistakes. I think they have done something wrong while editing it. Thanks for pointing it out Hamid.

    Namaste.

    26 Apr 2005, 17:55

  3. Hu ZhenYu

    Taiwan Singapore is Chinese.

    Korea and Japan are culturally very similar to China. Both Japanese and Korea can read Chinese naturally. This makes them the natural business partner.

    India is altogether a different race, different culture. I do not think Aruniís political wish can be developed into business reality.

    Although, there are some conflicts these days between China Japan, Korea Japan. But still business is as usual; big companies are not worried at all.

    Taiwan Singapore Japan Korea, none of them achieve industrialization through democratic government. What really matter is oriental culture and racial pride.

    26 Apr 2005, 20:20

  4. epoch

    ZehnYu,

    The differences in language and culture don't stop America and China from doing business together. Why should they stop India and Japan ?

    03 Jun 2005, 08:59

  5. guest

    fully agree with epoch's comments, let's start to learn to speak Japanese then

    11 Jul 2005, 15:30

  6. Iron Farmer

    It has been about 2 years since the last time I came here. I am bit disappointed to see your pathetic political and writing skill stayed the same without show progress. First the data you quoted were outdated; please refresh yours with this Indian source;
    http://inhome.rediff.com/money/2006/nov/30raman.htm

    Again, lies and true are very obvious. Lies cannot sum up right and it is inconsistence. In your article, contradict yourself many times, the logic is totally confusing. You tried to convince someone with something you don’t know, what is the point? Plain stoopid. Japan’s failed (actually did not try) on FTA with the 10 South-East Asia countries where China inked an agreement to open up FTA by 2010 with them. Currently have 5000 merchandise are trading at next to 0% taxes. Do you know why Japan fails? It closes the agriculture market with its partner. Japan only wants to FTA on industrial goods. What is the advantage can India milk from Japan? Read your words again, do u feel funny?

    Aruni claimed:

    • one (Japen) that offers more long-term opportunities for India than the “Middle Kingdom”.
    • “the mother of all free-trade agreements” with China, a far better option for an FTA is Japan. Although India does enjoy a trade surplus with China

    Support data:
    1 Japan-India trade stood at about US$4 billion at the end of the 2003–04 financial year. Worryingly, the figure has stayed almost stagnant since 1997–98, and has even dipped on occasions.
    2 China-India trade, which grew almost 79% to $14 billion at the end of 2004.
    3 Although India-Japan joint ventures,,,have been successful, actual inflow of direct investment from Japan to India is abysmally low.
    4 With an FTA, Chinese manufactured goods will beat their Indian counterparts on prices, and because India is mostly a price-elastic market, With Japan, the goods imported would compete with the quality tag rather than the price tag

    Even the Americans have tons of cash in pockets, they stay a way with pricey Japanese goods. Chinese product with acceptable quality and low prices dominate the most compatible US market. You suggested the poor Indians to buy expensive Japanese product instead of the Chinese ones? Looks like your own people voted Chinese with cash. Keep day dreaming, poor boy.

    Aruni wrote: “In fact, where Chindia falls short, Japindia could work in politics. The two countries share similar democratic ideals and have similar aspirations in the world.”

    For a person has major in policals knows so little about US and Japan. What a joke!

    01 Dec 2006, 04:20

  7. Iron Farmer

    epoch asked:
    “The differences in language and culture don’t stop America and China from doing business together. Why should they stop India and Japan ?”

    China is the middle and low end producer. Japan and US are on the top end. They need each other. China provides efficient solution for manufacture. Indian provides low cost solution of “English-based” service. India – West is a good combination. Japan uses 2,500 Chinese words(characters) what is about 5th Grade elementary level without attaching Chinese classes. Their culture similar means there are easier go together, Japan is strong in industry, China has great infrastructure and in convenient location.

    No thing stops India and Japan, only China is too attractive to Japan so Japan invested little over 20 times in China.

    01 Dec 2006, 04:36

  8. Read the article guys! Its not about dissing Japan, claiming that they’re stupid not to trade with India. All it says is that India has the potential to be a better trading partner than China. It just needs to realise this.

    03 Dec 2006, 16:33

  9. Iron Farmer

    You keep saying potentials, it has been years or decades to develop the India-Japan trading. What were the trade volume and growth in the last 5 years. The reality is not the same picture you drew. Japan’s strong field is industry, it is also a 2nd largest software export country behind US. Games and cartoon movies are on top of US. But these are Japanese based, not English. China supports a lot of related service to them. India’s top 2 export are iron + steel and call center service. China bought 10s of million tons from India. Guess what, Japan own many iron ore companies in South America, Japan sells them to China too. That is why Japan buys so little from India. Japanese products are pricey, Indians can afford much neither. Farm products are extremely restrict to import into Japan, it won benefit India and 3rd world counties in the future. Get it now?

    05 Dec 2006, 04:55

  10. Iron Farmer

    I tell you a true, nobody change change it in the near future at least:

    India-Japan: Political warm, economic cold.
    China-India: political cold, economic warm
    China-Japan: political cold, economic hot.
    China-US: political warm, economic red-hot.

    On the earth, there are 2 clear winners, US is a superpower. China is a growing superpower.
    India chose a power and targets the 2nd superpower as enemy. It is is not stupid, what is it?

    05 Dec 2006, 05:12

  11. Yes, the policy framework in India for bilteral economic relations with Japan has been long overdue for an update. I am not questioning the fact that I am merely hypothesising in the article, but an educated guess is possible given the complimentary nature of the Indian and Japanese economies. That does not by any means discount the fact that China and Japan too have complimentary economies.

    As far as all the superpower talk is concerned, please spare me the jingosim. Neither China or India are- or going to be- a superpower if they continue like this. They are simply emulating Western political and economic (and cultural) models and trying to be the best within the frameworks set by Western theorists. The Anglo-American grip on the world’s ideas is very strong, and it can only be challenged if a serious enough examination of the original political, social and economic theories of Indian and Chinese scholars was carried out.

    06 Dec 2006, 11:41

  12. Iron Farmer

    Like what I said, India is not interest in expensive Japanese goods, Japanese are not favor what India can offer neither. The limited India-Japanese trade was already inflated by $1.3B economic aid(low interest loan) by Japs government. By Chinese experience, those loans are tiredly restrictive to import specify Japanese products. Even though,
    India promotes Japanese trade for political reason to balance China. On the other hand, Chinese products and investment are unfairly constrained in India. The result is Indians(poor people) are greatly welcome Chinese import. It jump 30% a year soon will be top trade partner for India. Can you explain me what potential Japan offer can count Chinese?

    Superpower means 3 things. Economic, political and military strength. From cold war, everyone know the key of superpower is economic power. economic is backing up by political and military protect it. US is an undisputed power, the 2nd power is China. On the economic front, you may argue Japan is larger. But the world knows the Chinese economic is about the equal size and growing. China has $1 trillion dollars reserve is far for Japan to catch up. On the political area, Japan is little baby thing can be ignored. In Asia, only 2 counties can make rules as international rules. China said nobody can touch
    N.Korea, then nobody touch it even it conduct a nuke bump. China said Iran is ok. not a country is able to fight it. On military, China building up hardware and software faster than everyone. at least twice the Japanese speed. CIA told China spends $100 billion a year on defense. is far more than Russia. Russia was a superpower, it is no longer a power in US’s view. Russia’s GDP is even smaller than India.

    I.Farmer

    07 Dec 2006, 02:40

  13. You’ve missed the point completely.

    What you talk about (economic and military power) is merely relative power, i.e. how strong is country ‘x’ compared to country ‘y’. What I am talking about is structural power, i.e., the country that decides what the definition of ‘strength’ is. The strength of Anglo-Americanism is far more than you give it credit for. Today’s economic and political models are Western, as are lifestyles and mass culture.

    Can’t you see how Westernised Chinese and Indian societies are becoming? Families are getting fragmented, people have become rampant consumerist, and even China’s Marxism is a Western concept (what is left of it).

    09 Dec 2006, 12:22

  14. Iron Farmer

    I see what do you mean power. Whoever copy the Western system will be power. Anyone does not duplicate those system will never be a power. In the previous argument 2 years ago, you still did not willing to accept China was 2 times GDP size of India. This year China is more than 3 times the size in real GDP. How can you explain China grows 15% annually where India grows only 3% per year?

    China grows 10.5% GDP. currency RMB appricates 5% against US dollar, Goldman expect 5.7% next year.
    India grows 7-8% GDP. currency Rupee depricates 10% in the last 2 years, inflation is near 7%.

    As the result, India had $700s billion GDP years ago, still hunding around there.

    09 Dec 2006, 14:29

  15. So you are ok with the fact that “anyone does not duplicate those systems will never be a power”? I am not. For ancient civilisations like India and China, surely there becons a more promising destiny, scripted on their own terms.

    As far as number crunching for the GDP is concerned, international measurements are usually in constant dollars and accounting for inflation. Hence it is preposterous to suggest that India’s GDP has not increased in real terms over the years. Over the last two fiscal years, India’s growth has notched up to the 7.5-8% mark and China’s has remained near the 10% mark for a while now.

    10 Dec 2006, 19:50


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