As Japan’s Prime Minister Shinzo Abe arrives in India on 11 December 2015 on his maiden trip since Narendra Modi was voted to power in continuation to the annual summit between the two countries, it is worth taking stock on what are likely to transpire during the “historic” visit. It is seen to be “historic” because it is expected that the much-delayed civil nuclear cooperation be sealed. Among other issues likely to dominate discussion between the two leaders are expanding defence cooperation, including maritime security, aimed at providing stability in the Asia-Pacific region and enhanced content to economic ties. Japanese assistance on infrastructure development, including the introduction of first Bullet train in India, is the other issue likely to figure prominently in the talks.
The nuclear issue has been the thorniest one that top leaderships have been unable to resolve so far. This is because the issue is so sensitive in Japan that no political leader has been willing to risk his/her political career. Consensus remains eluded and the anti-nuclear sentiment has only been accentuated by the unfortunate Fukushima incident. India waits if Abe can do something out of the box and clinch the deal, for which India is eager without compromising with its stance on nuclear policy. While India is committed to develop its ambitious civil nuclear programme, it is committed to its no-first use principle and maintains moratorium on future nuclear testing. India also refuses to sign the Nuclear Non-Proliferation Treaty as it is seen as discriminatory. This particular stance remains as the biggest stumbling block in Japan as Japan is reluctant to engage in nuclear commerce with NPT non-signatory countries. Though officials in either country do acknowledge that some “distance still needs to be covered”, Abe’s keenness to engage with India provides some optimism that a deal could be “in the realm of possibility”. This is not to say that the issue is not complex and either side is expected to exercise caution till the pact is finally sealed.
Though India has signed similar nuclear pact with the US, France and others, it is unable to engage in nuclear commerce as Japanese firms play a crucial role in the US and French nuclear industries. Therefore, an Indo-Japanese pact is crucial for fully realizing India’s civilian nuclear cooperation with these two countries. Japanese forging major, Japan Steel Works (JSW), is a supplier of the critical reactor equipment of reactor pressure vessel for most firms worldwide. Therefore the text of the agreement that satisfies both countries is important for the JSW to engage in nuclear commerce with India. Japan has realized that India would be unwilling to surrender its “strategic autonomy” as it sees a demand to sign the non-discriminatory NPT would be outside the purview of a civil nuclear pact. Japan is expected to respect Indian’s stance and Abe is expected to rely more on trust and shed rigidity. It remains to be seen how Abe deals with his domestic constituency that remains staunchly anti-nuclear in order to ink the pact.
Though the strategic partnership content in the bilateral ties has assumed more teeth and grown from strength to strength since the Vajpayee period, the real icing on the cake would be if a pact on the nuclear issue is reached during Abe’s forthcoming visit. Unfortunately, after years of tough negotiations, the Fukushima tragedy slowed down negotiations. Modi and Abe have brought some turnaround by reopening negotiations. Tokyo has already agreed to reprocessing right for India of used nuclear fuel and there are speculations that India may also offer Japan a site for setting up a nuclear power plant.
Japan faced critical nuclear dilemma after the Fukushima accident and all its nuclear reactors were shut down for a review of the status of each nuclear plant. Reopening of any plant had to go through tough safety standard. This was done with a view to prevent any damage from any future accident. Abe is committed not to abandon nuclear as a source in Japan’s total energy mix and few reactors have been reopened, though the percentage of energy from nuclear has dramatically brought down. This gives hope for the India-Japan civil nuclear pact. Japan has already civil nuclear cooperation agreement with Russia, Vietnam, Jordan, South Korea and Kazakhstan. Some of these countries have already similar partnership with India. Therefore, apart from France and the US, an India-Japan deal would bring in many other players to the nuclear business.
The US’ Westinghouse has already plan to set up a plant in Gujarat and a nuclear deal between India and Japan shall provide momentum to this. This is because Japan’s nuclear major Toshiba Corp. has major stakes in Westinghouse Electric Co. and Japan’s state-of-the-art nuclear technology is world class with competitive price globally. Currently, Indo-US contact group are engaged in discussing the Gujarat plant and the Nuclear Liability Law by involving lawyers and insurers. Also, General Electric Co. has a venture with Hitachi Ltd. A deal between India and Japan shall help India access cheaper financing and specialized steel from Japan used for nuclear projects.
Modi and Abe have already built some bonhomie and if the two leaders can keep the momentum at the negotiating table and reach an agreement that would be a defining moment in both countries’ foreign policy and send a strong message to the world that differences can be resolved by dialogue. Modi is keen to convince Abe and get Japan’s support by joining the list of countries India can rely on for nuclear technology or fuel to help bring reliable and clean power to its 1.3 billion people. The truism, however, is that India need not be disappointed if the deal is not reached this time as a lot of grounds need to be covered to satisfy the Japanese side.
India’s nuclear exile ended when India and the US reached an agreement in 2008, leading to the Nuclear Suppliers Group to lift a three-decade ban on sharing technology and fuel, including uranium supplies. The NSG, formed in 1974, the year India conducted its first nuclear test, is charged with reducing proliferation by controlling the transfer of materials used to develop an atomic weapon. Since then India has travelled a long way by signing agreement on civil nuclear cooperation with a number of countries such as the UK, France, Australia and Canada; and even secured supplies of uranium from Canada and Australia. In order to meet its growing energy demand, India is keen to use both nuclear and renewable energy sources to meet its climate goals. In fact India is committed to this at the United Nations global-warming talks in Paris in December 2015. India is keen to receive from Japan certain niche technologies, considerable experience in nuclear safety and funding for its civil nuclear program and therefore need a deal to be clinched soon. India has tried assiduously to convince Japan that its anxieties to engage in nuclear commerce with India are unfounded.
On the eve of Abe’s departure to India, Chief Cabinet Secretary Yoshihide Suga told reporters that Japan is “aware of various arguments concerning nuclear cooperation with India”. The Japan Times recently observed even if a deal is signed, “India’s efforts to raise nuclear capacity are challenged by laws that leave equipment makers, in addition to the plant operators, liable for accidents. Foreign and local suppliers including General Electric Co. have opposed the rules”. India is keen to expand its nuclear generation capacity to 10 gigawatts by 2019 from 5.8 gigawatts in 2015. Meeting its goal of 63 gigawatts by 2032 requires imported fuel supplies and reactor designs. This makes India’s plans ambitious. Given the sensitivity of the issue and extreme caution exercised by in Japan, it would be too optimistic to expect that a deal will be reached during Abe’s forthcoming visit.
Defence cooperation/Maritime Security
Irrespective of the uncertainty involved in the nuclear issue, Abe’s visit will lead to a further boost in bilateral ties as there are several other issues on which both have common viewpoints. As two important strategic partners in Asia, the two nations have been expanding their defence relations, including strengthening of maritime security cooperation amid aggressive Chinese policies in seas of East and Southeast Asia. Abe is a strong advocate of shedding Japan’s post-war pacifist policies and pursue a more pro-active foreign policy in the defence/security domain not to project power but to demonstrate Japan’s willingness to share some of the region’s security burden that have been lately come under strain because of China’s assertiveness. In this framework, expanding security relationship with India through a possible document on the purchase of US-2 amphibious aircraft to add to India’s military strength seems logical. Though pricing is a sticky issue in the purchase of US-2 but after the initial purchase from Japan, Delhi has plans to jointly manufacture the equipment in India as part of Modi government’s Make in India program. An agreement on this is expected to be reached.
Maritime security cooperation is another frontier as a tri-nation between India, Japan and the US Malabar naval exercise to be conducted annually can address to maintain peace in sea. Indeed, India has become increasingly important for Japan especially in the 21st century. Japan’s “National Defense Program Guidelines and beyond” categorically mentions India as one of the most important countries together with Australia and South Korea. Abe’s forthcoming visit to India is expected to further help consolidate and expand this relationship.
The single factor that seems to have driven both India and Japan closer is China whose aggressive behavior in the South China Sea has caused considerable unease in the region. Vietnam and the Philippines are the main victims to China’s brazen aggressive posture and some localized conflicts have already taken place. Though there is little possibility of this to escalate at a nuclear scale, preventing such a possibility has led to other stakeholders to come together to address the issue through dialogue so that peace and stability is maintained in the region. Here, the personal chemistry shared by Abe and Modi may help.
Cooperation in infrastructure development
Though Indian economy is registering appreciable rate of economic growth, a major bottleneck has been inadequate infrastructure and India is trying its best to improve this with forward-looking policy change. Indeed, India needs to redouble its efforts particularly the urban infrastructure. India expects Japan to play a key role to support such efforts. Both countries signed a Comprehensive Economic Partnership Agreement (CEAP) that took effect in 2011 but both are yet to realize the full potentials of trade and investment relations that CEPA provides for. Indeed, Japan can see India as a major production hub and platform for exports to the Middle East and Africa.
Despite the economic slowdown in Europe and also in China, India remains as one of the fast-growing emerging economies, with its economy growing by an average of 7.3 per cent annually over the past decade. As said, this growth rate shall be difficult to sustain if the existing inadequate infrastructure remains unattended. Power remains a key area where improvement is urgently needed. Electricity consumption is forecast to increase significantly in the coming years as per capita income increases. Per-capita power consumption was less than a quarter of that in China in 2008. If India’s per-capita gross domestic product continues to rise at the current pace, it could to equal to China’s current levels in 10 years. This means power consumption would have reached three times the current level.
Since 2000, India has upped its investment on infrastructure and this needs scaling up further. For example, road connectivity has increased eight times during the past four decades but it is not enough as the number of vehicles added on the road have grown by 200 times over the same period. Existing railways in the trunk routes between Delhi and Kolkata and between Delhi and Mumbai are highly saturated. The government is seized of this matter and has therefore set a target of $1 trillion in infrastructure investment in the five years from 2012, with $274 billion to be spent on power generation and $75 billion to $90 billion on road construction so that the gap is bridged.
Being the first recipient of Japanese ODA in 1957, Japan has remained the largest donor to India since then, despite some setback in bilateral ties over the nuclear issue in late 1990s. That was a temporary aberration and correction was soon made when misunderstanding was removed. Over the years, Japan has played a major role in India’s infrastructure development. Much of the aid money has come in the form of soft loans for infrastructure projects. Loans from the Japan International Cooperation Agency covers 52 per cent of the $7.7 billion cost of the Delhi-Mumbai Dedicated Freight Corridor, which is to be completed by 2018. Japan has also offered soft loans of $4.5 billion of the total $90 billion in expenses of the Delhi-Mumbai Industrial Corridor project, which aims to create multiple mega-industrial zone in the area complete with three ports, six airports and a six-lane freeway. These infrastructure projects also provide opportunities for investments by Japanese firms because the government plan requires half of the $1 trillion investment to come from the private sector. Construction of more wind and solar power plants — planned as part of the efforts to boost electricity generation capacity — will be an area where investments by Japanese firms with advanced technologies will be also welcome.
The economic growth has unleashed expansion of urban growth with population estimated to account for more than 40 per cent of the country’s total by 2030. As a result, demands for better quality infrastructure in the form of water, electricity, sewerage, public transport and low-cost housing are likely to grow. In 2001, urban population was 285 million; it grew to 377 million in 2011, accounting for 31.16 per cent. This is likely to grow further to 590 million in 2030, with cities then generating 70 per cent of the net job creation in that year, producing more than 70 per cent of the GDP. The government is seized of this matter and making policy plans by putting more funds and making efforts to better city management in order to help sustain growth.
First Bullet train?
Japan is a world leader in high speed railway and India is keen to tap Japan’s technology on this. When Modi visited Japan in August 2014, a decision was taken to conduct a feasibility study on running bullet train between Mumbai and Ahmedabad. It is expected that a deal on this is likely to be signed on the country’s first bullet train. Tokyo is expected to provide with $8.1 billion loan, bulk of this high-speed-rail project, though the Ministry of Finance raised eyebrows over price. Earlier in 2015, Tokyo lost a contract to China for HSR in Indonesia and therefore offered lowered interest to India for its first bullet train project. The total cost of the project linking the 505-km between Mumbai and Ahmedabad railway line is estimated to be likely $14.6 billion.
What are the factors led the project to go in Japan’s favour? The bullet train accident in China in 2011 along with low-cost finance and a promise to have a substantial Make in India component and transfer of technology clinched the deal in Japan’s favour. Japan’s Shinkansen System has the best safety record with no fatalities. Any delay on a trip for whatever reason does not exceed a minute. Design flaws and weak management are said to have caused a crash in the south-eastern city of Wenzhou, China, in which 40 died and close to 200 injured. China was keen on funding and building India’s first bullet train as it sought to enhance its railways footprint across the globe. Though China lost this time to Japan on India’s first bullet train project, India has kept the window open to partner with other countries. China might like to do some soul searching and relook for an offer that could be attractive to India in the future.
Abe’s Special Advisor Hiroto Izumi was in the Indian capital prior to Abe’s visit for high-level talks to finalise the terms of the agreement on the project. The project will cut travel time between the Mumbai and Ahmedabad from seven to two hours. The deal with India would be the second successful case of Japan exporting its bullet train technology to a foreign market, following a deal with Taiwan in 2007. India ranks as the second biggest recipient of Japanese government-backed yen loans as of fiscal 2013, with a running total of 4.45 trillion yen.
The railway loan deal could propel Japan to go ahead of the largest borrower, Indonesia, which had a 4.72 trillion yen tally. Once the deal is inked and India is ready is adopt Japanese train technology, a tender for contract shall be floated. A consortium including JR East, Kawasaki Heavy Industries and Hitachi are expected to bid. Earlier a feasibility study undertaken by the JICA for this 505-km corridor concluded that it would be technically and financially viable. The report was submitted to the Indian government in July 2015, saw the train running at over 300 km up to 350 km per hour, costing Rs. 98,805 crore. Given the scale and novelty of the project, the Japanese government is keen to discuss every little detail to avoid any misinterpretation in future. Issues such as technology transfer, use of skilled labour, equipment manufacturing and maintenance, purchase of materials including coaches and locomotives are to be finalized.
Construction is supposed to begin in 2017, with completion slated for 2023. The project is aimed to be made operational by 2024. . India has plans for seven high-speed-rail corridors, starting with this one. Japan’s soft loan amount is expected to be made available to India at 0.5 per cent interest with repayment tenure of 50 years. Usually, Japan offers this sort of project financing at 1.5 per cent interest and a tenure not exceeding 25 years. But following Modi’s visit to Japan in 2014, Japan agreed to relax conditions and agreed to the rate of interest and repayment time that are extremely attractive for India.
Japan wants India to purchase 30 percent of coaches and locomotives from Japanese companies. The railway ministry is evaluating the cost-benefit ratio of the project. The rate of return on this Rs 98,000 crore project is estimated to be around 4 per cent. So, interest on the loan should not exceed this amount. In its feasibility report, the JICA estimated a high infrastructure cost and therefore suggested a high passenger fare. Since the latest estimate of Rs. 63,000 crore have been escalated to Rs. 98,000 crore now, JICA estimated passenger fare to be one and half times higher than that of the AC first class fare of Rajdhani. This is almost equal to the air fare on the route. The railway ministry wants to go ahead with the project despite the high cost of the project and a high passenger fare because the ministry expects a high traffic on the route. It is estimated that 40,000 passengers would be travelling every day. In most part of its journey, the bullet train will run on elevated corridor. The track would be along the existing railway track.
Japan’s decision to fund the project is part of its broader push back against China’s involvement in infrastructure development in South Asia over the past several years. The project is part of a ‘Diamond Qaudrilateral’ of high speed trains over 10,000 km of track that India wants to set up connecting Delhi, Mumbai, Chennai and Kolkata. There would be scope to extend the Mumbai-Ahmedabad line Delhi in the future.
Besides the bullet train project, India also signed two agreements in November 2015 with Japan for ODA loan of an amount 19.981 billion Yen (about Rs. 1,069 crore) for the Chennai Metro Rail Project (IV) and 82.434 billion Yen (about 4,410 crore) for Ahmedabad Metro Project. The agreements were signed by the Joint Secretary in the Department of Economic Affairs S. Selvakumar and Yutaka Kikuta, Deputy Chief of Mission of Japan to India in New Delhi. Japan’s footprint in the highly successful metro project in New Delhi demonstrates that India attaches highest importance to infrastructure projects, with emphasis on urban infrastructure. A statement issues on the occasion observed: “Within urban infrastructure, provision of metro rail gains more importance because of its environment friendly nature. It reduces the traffic congestion in the cities where the traffic is over flowing and also reduces Green House Gas Emission”.
Therefore, India is continuously making efforts to obtain bilateral and multilateral funding to meet its financial requirement for such ambitious projects. Such kind of economic cooperation also demonstrates that overall consensus and popular support for greater cooperation exist in both the countries. The future projection in the bilateral relationship looks bright.
Japan’s help does not remain confined only to metro and bullet train projects but also for highway projects. In fact, Japan is firming up plans for a $1.6 trillion financing institution that will fund highway projects across the country with a 26 per cent stake held by Japanese companies, to achieve a target of 30 km of road-laying per day. This funding arm will also secure all the green and regulatory clearances. Around 62 highway projects were stalled and all have already re-started in late June. When the Modi government took power, there were 240 projects in all under the public-private partnership (PPP) model, out of which 186 were stuck. Out of the remaining, 44 were terminated, 80 re-started and the remaining re-commenced in June 2015.
India currently has the world’s second-largest road network, totalling to some 4.7 million km, transporting over 60 percent of all goods in the country and nearly 85 percent of passenger traffic. However, half of these are in poor shape. Highways account for only two percent of the total roads network but transport 40 percent of goods. The target, however, seems to be too ambitious as the predecessor government too had failed in meeting the targets. However, the government wants to use the project-exit policy for highway developers, which will permit developers to divest 100 per cent equity two years after completion of projects, while also allowing them to invest the same amount in their other stalled projects. This would help in unlocking around Rs. 4,500 crore and support 1,500 km of highways.
As Japan deepens its economic ties with India with infrastructure development and domestic manufacturing, it has identified 11 sites to set up industrial townships in India. Japan hopes these townships would serve as hubs for investments into the country. These include Tumkur in Karnataka, Ghilot in Rajasthan, Mandal in Gujarat and Supa in Maharashtra. Japan will also provide soft-skills training to Indian workers in the manufacturing sector to help bridge the demand-supply gap. Japan aims to double its investment in India to about $35 billion in the next five years. The move would help strengthen bilateral economic ties. The government plans to give concessions to Japanese companies in the industrial townships, equivalent to at least what is offered to units in special economic zones and the proposed National Investment and Manufacturing Zones (NIMZs). Special economic zones are allowed duty-free imports and 100 per cent tax-free export income for the first five years, 50 per cent for the next five years and 50 per cent of the ploughed back export profit for the subsequent five years. Similarly, NIMZs under the National Manufacturing Policy, provide tax incentives to small and medium enterprises.
The development of the townships will be assisted by the respective state governments, the Department of Industrial Policy & Promotion (DIPP) and Japan’s Ministry of Economy, Trade & Industry. According to DIPP, Japan is the fourth-biggest foreign investor in India, contributing 7 per cent to the total FDI inflows since April 2000. Japan brought in $1.7 billion worth of FDI in 2013-14 and $18 billion between April 2000 and February 2015. The other areas identified for the townships include Ponneri in Tamil Nadu, Neemrana in Rajasthan, Jhajjar in Haryana and the Integrated Industrial Township in Greater Noida. Japan will extend its industrial township advance soft-skills development project to impart training to workers in the manufacturing sector. The sectors will be wide-ranging, right from auto components to textiles, food processing and engineering. The concerned ministries in both countries – Japanese Minister for Trade Yoichi Miyazawa and Indian Minister of State for Commerce and Industry Nirmala Sitharaman – signed a five-point agenda for the development of Japanese industrial townships, promotion of investment and infrastructure development, further development and cooperation in the IT sector, enhancing cooperation in strategic sectors and advance Asia-Pacific economic integration.
Trade and Investment
Despite expanding economic relations, trade and investment between the two countries though have increased in recent years, still remain far below the potential. The CEPA has yet to have its intended effect of boosting such ties, partly due to limited application of the tariff-free arrangement. Bilateral trade has increased from $3.6 billion in fiscal 2000 to $6.5 billion in 2005 and $18.5 billion in 2011. Japanese investments today account for 7 percent of the total foreign direct investments in India, compared with around 4 percent over the past two decades.
Japanese exports to India picked up momentum after the CEPA came into effect, but India’s exports to Japan have not seen much of an increase. While Japanese exports to India are fairly diversified, roughly 37 percent of Indian exports to Japan are petroleum and related products — which India imports from the Middle East, process at domestic refineries and then exports. Due to the local value-addition requirements under the CEPA, these Indian exports do not qualify for the free trade arrangement. Japanese firms too do not use the CEPA arrangement when they ship auto components and electronic goods to India due to similar requirements, but instead export from their Southeast Asian units to India, using the free trade agreement between India and the Association of Southeast Asian Nations. Due to customs-related problems and various procedures required, the business community does not always use the CEPA route for bilateral trade, adding that generally 20-25 percent of the India-Japan trade goes through the free trade arrangement. CEPA may not be producing the intended results, but it does give confidence that the two countries have agreed to reduce the barriers to bilateral trade and it provides a future direction for more liberalization. If Japanese firms change their outlook and start seeing India as a part of international production chain and not just the market, this route could be mutually remunerative.
While India wants to enter the Japanese market in services, not just in the IT sector, India would expect more engagement of Japanese firms with small and medium-size enterprises in India to help enhance their capabilities. So far, Japanese firms have overlooked Indian SMEs and instead export parts and components from their Southeast Asian affiliates or from Japan. Indian auto component producers supply mostly to European automakers such as Mercedes-Benz and Fiat. India would expect that Japanese firms make this correction.
There is a perception gap between Japanese and European firms at looking at India. While Japanese companies never consider India as a production hub but just as a market, the European and US firms view India as being in the same region as West Asia and Africa and serve Africa and Mideast markets from India. Unfortunately, Japanese companies consider India as part of Asia and think of serving the Indian market from Southeast Asia or China, while overlooking the prospect of producing in India and serve Africa and the Middle East from India. India might be a difficult market to penetrate because of its bureaucracy and rigid laws but Japanese market is not easy either for foreign players to make a presence. It defies logic that if a country such as South Korea is successful in doing business in the Indian market by their competing marketing strategy to make their products attractive and have made a name of Korean brands much ahead of Japanese brands, what hinders the Japanese approach as the business environment presented by India is same for both.
The positive thing in the evolving India-Japan economic relations is that the presence of Japanese companies in India has been increasing by around 100 each year, though it is too small compared to that in China or Southeast Asia. Also, the presence of Japanese business community in India is still far smaller than in China or many Southeast Asian economies. The number of Japanese residents in India was around 6,500 or 7,000 in 2012. But it is growing.
The upward growth trajectory in India-Japan bilateral ties in all fronts shall be keenly watched in Asia and beyond. While the economic component is going to be further deepened and cultural relations flourishing side by side, what is going to assume more importance is in the realm of cooperation in the maritime security. Coping with the China challenge and how the two countries will cooperate to secure maritime security in the Indian Ocean and the South China Sea shall be the most talking point for some time now. Both are also expected to maintain close coordination on the issue of economic integration in Asia. There is also enormous scope for both to work together for multilateral efforts on non-traditional security issues such as energy security, natural disasters, anti-drug and anti-piracy operations.
The 21st century is billed to be the Asian century but it would remain unclear who is positioned at what place in the race. So long as the competition would remain healthy, that would be the point to rejoice. But if the competition takes an antagonistic route, things could get complicated. It is here, China would be expected to do some serious soul-searching. Asia’s prosperity remains in the hands of Asian leaders and it is up to them how to channelize Asia’s enormous energies for the benefit of mankind. The future balance of power would be determined by the kind of role each – India, Japan and China – define for themselves. At the moment, one can draw multiple scenarios, with no definite answer that one can hazard a guess. Modi and Abe are hugely competent leaders to coordinate how they work together and craft a policy in the interest of Asian prosperity. It would be worth-watching what comes out from Modi-Abe bonhomie and their personal chemistry.