Why Is Japanese Investment Sagging In India? – Analysis
Globally, Japanese investment in overseas declined during COVID 19 pandemic. In India, it nosedived. It plunged more than half in 2020. It declined by 54.9 percent in 2020 against 30.8 increase in 2019 (according to Japanese statistics). Deepening of Japanese investment in India raised eyebrows in the country, against the backdrop of a survey by JETRO in 2019, which unleashed an upbeat mood among the Japanese investors to expand their operations in India.
In contrast, the fall in Japanese investment in China was at much lower level than global average fall in 2020. Japanese investment in China dropped by 7.5 percent in 2020, against the global average of 33.5 percent. This was despite the fact that Japanese government discouraged Japanese investors to invest in China. Japanese Government granted a special incentive of US $ 2.2 billion to shift Japanese investment from China to ASEAN, including India and Japan.
Why did Japanese euphoria in India turn apathetic during pandemic? One section of analysts argue that the downturn in profitability and suffering of losses by large Japanese investors in India, gloomed the Japanese sentiment. More than 50 percent of Japanese investors surveyed in India projected losses in their operating profits in 2020, according to a JETRO survey. This is the highest among all nations in the world. Ironically, the ratio of losses in China was at low ebb, 19.5 percent. This reflected that Japanese investors were unnerved by Japanese government discouragement and would like to continue to repose confidence in China’s potential.
Beside the disquieting situation erupted by large scale losses, India’s withdrawal from RCEP infused a new drag on Japanese sentiment in India. A number of Japanese subsidiaries in ASEAN established close tie up of business relations with the Japanese investors in India under the gamut of India-ASEAN FTA. A large part of components, parts and intermediates are imported into India from these subsidiaries in ASEAN under FTA. With India abruptly withdrawing from RCEP at the end of last year, Japanese subsidiaries are likely to divert business towards RCEP member countries, which offer bigger market and ensures sustainability in duty free access. This goes against India’s small market and resurrection to protectionism in the post COVID 19 pandemic. Nearly 400 items are under consideration for hike in custom duties, according to Budget 2021-22.
RCEP accounts for 27 percent of global merchandise and 30 percent of global GDP. Excluding India, its market size by imports is nearly US 4941 billion, which is ten times bigger than India. This will leverage more scope to the Japanese subsidiaries in ASEAN to do profitable business within the block. Eventually, the new dynamism in global trade, driven by the large multilateral trade block, will attract more Japanese investment in RCEP. Given the situation, it can be surmised that increase in Japanese investment in Thailand and Malaysia during COVID 19 pandemic were the eventuality of re-shoring of Japanese investment from China to Thailand, in the event of large Japanese government incentive to decouple from China. To this end, India rallied behind in the opportunity for re-shoring of Japanese investment from China, after the withdrawal from RCEP.
India witnessed a major structural changes in foreign investment during COVID 19 pandemic. Against the backdrop of Japanese investment plummeted during pandemic, investment from global rich states, like USA, Singapore, UK and Netherlands, spurred in India. Total FDI in the country increased by over 19 percent in 2020-21. Unperturbed US investors skyrocketed investment by over 290 percent in 2020-21. This was followed by other major foreign investors, such as Singapore, Netherlands and UK. Digital economy emerged the pivot to the turning point for spike in India’s potential for FDI. US investors were allured by India’s target of 1 trillion US Dollar digital market by 2025.
Demand for digital services increased rapidly during COVID 19 lockdown to reduce the human contract. India is the second largest internet connection nation in the world. With nearly half a billion internet connections and the second most smartphone users, India has emerged a global leader for digital economy
Japan rallied behind to the new mode of economy in India. It preferred to be circumscribed by formal economy, such as manufacturing, as the core business activity in India.
Globally, Japanese race in digital transformation is slower than developed nations like USA, China, EU, S. Korea and even India, according to a McKinsey survey. One of the reasons is lack of adaptability to digital transformation in Japan. They do not feel that they are sufficiently prepared for digital transformation. The barriers, which restricted Japanese challenges for digital transformation, were lack of digital talents and understanding among the senior corporate managers. The survey focused that cultural entrenchment of the senior managers (such as seniority by age, lifelong employment in one company) deflated the understanding of the benefits of digital economy. Eventually, the lack of support from the senior managers shadowed the challenges to digital transformation in Japan, according to the survey.
US investors stepped in Indian shoes for building a new model of economy to push Make in India. In contrary, Japanese investors lagged behind to pursue India’s new vision. They continued to plank on formal economy like automobile and electronic. Automobile and electronic industries are import intensive industries. These industries received backlash with protectionist movement in the post Covid period.
Eventually, pandemic dented automobile industry in India, which is dominated by Japanese. In April 2020, not a single car was sold in the country, making a history. This resulted a major fall in operational profit of Japanese companies in India. The sharp decline in auto sales and financial crunch in small and medium scale industries, related to auto component industries, imparted a debilitating impact on Japanese investors in India.
