Japanese policymakers do look to India. Last month, both countries’ trade delegations met for the 12th time to explore the possibility of a free-trade deal. They have good reasons to do so.
Business between the two countries is booming. In fiscal 2008, India surpassed China as the destination for direct Japanese investment with a total of ¥809 billion. The figure for China came to ¥679 billion.
Among the most prominent deals concluded in India were the takeover of generic drug maker Ranbaxy by Daiichi Sankyo and the stake taken by NTT DoCoMo in mobile phone carrier Tata Teleservices.
Overall, the trend in FDI is reflected by the figures for bilateral trade, which soared from $4.1 billion in 2001 to more than $10 billion in 2007. Of course, mergers and acquisitions never go as well as planned, so it must be said that Ranbaxy is struggling for profitable returns. Nevertheless, it still doesn’t diminish the view that India is rising and could someday overtake China as Japan’s leading trade partner.
China’s the giant in Asia, and Japanese companies are present there in great numbers. Roughly 1,500 Japanese companies have operations in China, versus 450 for India.
But one area in India that Japanese industry has been focusing on is automobiles. Unlike other markets, however, India has seen Japan’s smaller players come to the fore, especially Suzuki. In many other markets, this niche player struggles to crack the top 10. But in India, Suzuki is No. 1, commanding more than 50 percent share of the market via subsidiary Maruti Suzuki.
Suzuki has turned India into its export hub for Europe, thereby helping propel India toward the top of the Asian auto export list. India now exports more cars than China and ranks fourth behind Japan, South Korea and Thailand.
In a sign of its potential for Japanese products, India has emerged as Suzuki’s biggest market, surpassing its home market of Japan. Anchoring this has been the overall growth of the Indian economy, which was liberalized in 1991 after adhering to decades of state-run economic policy. After opening up and deregulating many of its industries, India has been growing at a pace of 6 to 7 percent year, second only to China.
None of this has escaped the attention of the European Union, which, like Japan, has been an active player in the Indian economic revival. Trade between the EU and India doubled from 28.6 billion euro in 2003 to over 55 billion euro in 2007. EU investment in the country tripled over the same period of time.
Commercial interests reached the point where the EU — like Japan — decided to initiate talks into signing a free-trade pact with the subcontinent. Their talks, which have been under way since 2007, are also starting to get serious.
India’s auto sector is 100 percent open to FDI (versus 49 percent for China), and most companies avail themselves of that control. Domestic manufacturers now only have about 20 percent of the market left — a share that is falling quickly — with the rest controlled by foreigners. But India still imposes high tariffs on imported cars to make foreign firms manufacture locally.
One major road block to an EU-India trade deal is agriculture, where India insists on protecting its millions of small farmers. Other big problems include soft topics, like the EU’s insistence on putting human rights clauses in the preambles of trade treaties, and differences on worker treatment, child labor, and other issues that India, which likes to assert itself as the world’s biggest democracy, says are inappropriate to address in such treaties.
As for Japan, India’s pharmaceutical companies are eager to lower barriers to doing business there because it can take five to seven years to get clearance for new products.
Another sore point is agriculture. Indian mango growers had to wait 15 years before they could begin selling their goods in Japan. Considering, however, the failed Doha talks and the lack of positive prospects for their renewal, bilateral agreements will be the next best choice.
In the case of the EU, 2010 has been mentioned as a possible deadline for signing a deal, but it seems doubtful things will be resolved so quickly. By comparison, Japan and India held their first Joint Study Group meetings in 2005 and there is still no deal in sight.
India’s population is expected to surpass China’s in the next 35 years, so the prospects for growth appear to be strong. China, for its part, is facing a demographic crisis similar to Japan’s, with 438 million people predicted to be over 60 years old by 2050. Of these, 100 million will be over 80.
India, however, has a much more youthful demographic makeup. Half of the population is younger than 24, and less than 5 percent were over retirement age as of this year. By 2020, this figure will still be less than 10 percent, meaning a large chunk of the populace will have plenty of time left to consume goods and services.
Prime Minister Yukio Hatoyama often speaks of his goal of establishing an East Asian community. Clearly, this should only be a first step and India would have to be included as a member if the wider Asian Community is to be represented in the long run. Quickly concluding both FTAs would help the EU, Japan and India all boost their growth rates.
Whichever FTA is signed first, however, will also put pressure on the other pair of negotiators to reach pragmatic compromises. The race for India is on.
Jochen Legewie is president of German communications consultancy CNC Japan K.K.