Global Times, a leading Chinese daily, hogged the headlines with an outcry that “Japan can’t replace products from China in India’s low income consumer market” in the wake of upcoming visit of Japanese Prime Minister Shinzo Abe to India in September.
In a paradox, incidentally last year while Japanese investment in India rocketed, 110 Japanese firms in China went bankrupt and overall Japanese investment in China dipped.
The Chinese rant on Abe’s upcoming visit that “sweet words won’t bring real money” is dissipated with the rise of the Modi-Abe hobnob in the recent past.
In 2015, Toshiba and Panasonic announced that they would stop producing television sets in China. These are some of the examples that reflect the Japanese frustration with China and underscore the trend of Japan’s exit from the country. The paramount reason for China losing the hub for Japanese investment has been the ebbing of low cost competitiveness due to wage hikes and heightened political tensions. The majority of these 110 firms were Japanese apparel manufacturing companies in China.
“Any loss to China is a gain to India”. The catchphrase is widely spread among the foreign investors. Against this backdrop, India poses potential to emerge as an alternative as a low cost manufacturing destination. The report noted that to offset the high cost manufacturing in China, the Japanese apparel companies shifted to Vietnam and Myanmar, implying these two nations are most cost effective manufacturing destinations for Japanese investors. Nevertheless, these shifts do not epitomize these two nations having an edge over India in low cost manufacturing competitiveness in all sectors
According to a Delloit survey in 2016, India will be the “New China” in low cost manufacturing countries in the next five years. India will rise to 5th rank in the global manufacturing competitiveness index in 2020 from the 11th position in 2016, the survey said. Besides low cost manufacturing, the other favorable parameters, which highlight India in manufacturing competitiveness, are a vast number of English speaking scientists, researchers and engineers.
With China losing the powerhouse of low cost manufacturing competitiveness, five Asia Pacific nations will emerge as the choice for low cost manufacturing destinations in place of China, the survey said. They were Malaysia, Thailand, Indonesia, Vietnam and India. India will be the frontrunner, with the other four nations chasing, according to the same survey.
Given the global accreditation for the upside in India’s manufacturing strength, will Japan ponder India as a New China for investment? Presumably yes, if the current trend of Japan investment in Asia Pacific is a case in point. While the Japanese investment in all the major Asia Pacific nations witnessed a downturn flow, investment in India sparked. In between 2014 and 2016, Japanese overseas investment (according to Japanese sources) in China dropped by 21 percent. In Hong Kong , it plunged to 36 percent. In Thailand – known for being a Japanese automobile Detroit –it fell by 27 percent.
On the contrary, Japanese investment jumped in India and increased moderately in Vietnam during the two years period of 2014 t0 2016. Japan’s overall overseas investment witnessed a much faster growth and more in value terms in India than in Vietnam. During the two year period of 2014 and 2016, Japanese investment in India rose by 53 percent against the moderate growth of 12 percent in Vietnam. In 2016, Japanese investment in India was double of that in Vietnam (US $ 3.7 Billion in India against US $ 1.9 Billion in Vietnam).
Besides foreign direct investment, Japanese deployed a huge amount of investment in private equity and venture capital in India. During the first half of 2017, Japanese firms invested at least US $1.43 Billion in Indian private equity and venture capital. This was three times more than US $459 million in 2016, according to a Japanese media, Japan Times.
In fact, the dynamism of India-Japan relations took a new dimension after China enforced its assertiveness for Asian hegemony through OBOR.
Low cost manufacturing competitiveness should not be the sole reason for Japanese attraction in India. The truth of the matter is that Mr Modi tried to re-write a new chapter on India-Japan relations. He emphasized a shift from bilateral strategic economic relations to a global partnership, with an eye on two countries’ global role in world economy and world geopolitics. Modi reiterated that India and Japan were the two oldest democracies in Asia and were among the three biggest economies, and he asserted that the 21st Century is to be decided by Asian countries — and a India and Japan global partnership should be the engine for 21st Century growth.
Modi’s shift to woo Japanese investment from automobile to infrastructure and defense and development of smart cities are the new directions of India-Japan relations. Presumably, these will create a new vista for Japanese investment in India. India has liberalized its FDI policy in railway infrastructure and defense, which hitherto were restricted for the foreign investors. It permitted 100 percent FDI in railway infrastructure, including high speed train projects, railway rolling stocks, railway electrification e.t.c and FDI cap in defense was raided from 26 percent to 49 percent.
In pursuance to these policy changes, Modi’s yearning for the Japanese bullet train and technical cooperation in making US-2 amphibious aircraft in India, besides importing the aircraft from Japan, are all pointers to allure the Japanese investors in infrastructure and defense.
Toeing Modi’s initiative and in a bid to vie for his heart, Japan’s Prime Minster Shinzo Abe made an ambitious target for doubling Japanese investment within five years. Abe committed US $35 billion in Japanese investment for different infrastructure projects for five years to bolster the “Make in India’ project. Setting up India’s first high speed rail from Ahmedabad to Mumbai and institutional framework for transfer of technology, such as setting up task force, are some of the examples to spearhead “Make in India: initiatives, which will usher in wider dimension of closer relations between India and Japan.
Japan has always been playing a true partner’s role for India. Even in bad days, Japan extended its full cooperation to rescue India. During the drought in 1967-68, Japan was the biggest donor to India.
Japan is the third biggest investor in India. Japan’s ODA was the backbone of India’s infrastructure development, such as power, transport and environment related projects. Delhi Metro – a marked breakthrough in India’s transport – was largely financed by Japanese ODA.
Nevertheless, the Chinese nudge has evoked a new chapter in India-Japan relations.
(Views are personal)