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Japan urged to beef up business ties with India

Bilateral EPA a 'starting point' for closer relations

by Takashi Kitazume

Japan has yet to explore the potential of its economic relations with India, even though the strategic importance of Tokyo-New Delhi ties has repeatedly been emphasized, Indian scholars and experts told a recent symposium in Tokyo.

A Japan-India economic partnership pact — on which a broad agreement was reached in October — will hopefully serve as the starting point for bolstering the bilateral ties, they said.

The scholars and researchers from Indian universities and think tanks were speaking at the Jan. 20 symposium organized by the Keizai Koho Center under the theme, “Toward an expanded Japan-India economic relationship.” Go Yamada, a senior economist at the Japan Center for Economic Research, served as moderator of the discussion.

In October, Japan and India reached a broad agreement to activate an economic partnership agreement as soon as possible and also to speed up talks on civilian nuclear cooperation.

The deal to beef up economic ties was reached in a meeting in Tokyo between Prime Minister Naoto Kan and visiting Indian leader Manmohan Singh. The two countries continue working-level preparations for signing the EPA, which will abolish a wide range of tariffs on products ranging from car components to electronic goods and also aims to promote investments.

On the other hand, it remains unclear how soon the two nations can conclude a pact on civilian nuclear energy cooperation, which would allow Tokyo to export its nuclear power technology to India. Bilateral negotiations held since the Kan-Singh talks in October have reportedly exposed differences over conditions attached to the transfer of Japanese technology.

The Japanese government has for years emphasized the strategic importance of its relations with India as an emerging power in Asia with a population of 1.2 billion, and has beefed up top-level exchanges, including mutual visits by prime ministers.

In a keynote speech, Hiroshi Hirabayashi, president of the Japan-India Association and Japan’s former ambassador to India, stressed the country’s rising economic and geopolitical presence in the world.

Its young population — where people 25 years or younger account for more than half the total — gives the nation the potential for a dynamic economic development, he said. With a rapid economic growth of 8 to 9 percent on average in recent years, the ranks of India’s middle class have increased each year by an equivalent of the entire population of Malaysia, he pointed out.

The country’s location is key to security in the sea lanes connecting East Asia with the Middle East and Africa, and it holds a growing importance as a counterbalance against China’s expanding military capabilities, he said.

Hirabayashi also highlighted the increasing importance of the more than 20 million non-resident Indians around the world, especially their growing clout in the political and business communities in the United States.

Today, India is the largest recipient of Japan’s official development assistance, with the amount of aid reaching ¥218.2 billion in fiscal 2009. Ongoing projects include construction of dedicated freight train lines connecting Mumbai, New Delhi and Kolkata to meet the expanding cargo traffic demand due to the rapid economic growth, he said.

Despite these close official ties, Japan’s trade with and investment in India remain modest, said Sanjana Joshi, Japan project coordinator at the Indian Council for Research on International Economic Relations, a New Delhi-based think tank. Even the rapid increases in trade and investment over the past few years do not appear to reflect a change in the overall trend, she noted.

India’s trade with the rest of the world expanded fourfold from 2003 to 2009, and economic ties with East Asia increased, especially after the 2008 financial crisis and subsequent global recessions, Joshi said.

India’s trade with Japan is in fact increasing at a much faster pace than with other countries. However, the annual figure is just about $11 billion in the 2008-2009 period, she said. “Japan is India’s 14th trading partner, and India is the 27th trading partner for Japan. It’s not a very encouraging situation,” she said.

Also in terms of foreign direct investments, “a lot of talk about India’s potential does not translate into action” by Japanese companies, whose investments began to pick up only in recent years, Joshi said. And even the sharp upward trend since 2007 is the result of two or three major deals, rather than a broad-based increase in the number of Japanese investments, she added.

“The problem is that the Japanese business community has yet to decisively ‘walk the talk’ and India remains a country that is important ‘in the long run,’ ” Joshi said.

“The potential of India is well known — has been known for quite a while now. But if the Japanese business community is still going to focus on certain agreements to pave the way and create the perfect business environment, you’re going to miss the bus” as other players enter the Indian market, she said. For example, India’s economic partnership agreement with South Korea was “negotiated in two years and signed, ratified and put into place and we see tangible results in one year,” she told the audience.

The Japan-India economic partnership agreement and the nuclear energy cooperation pact under negotiation “have the potential to change the game” of the bilateral trade and investment relations, Joshi said.

The nuclear pact should be considered as an economic agreement, given the Indian government’s plan to make nuclear power account for 20 percent of the country’s growing electricity demand and open up the market to private businesses, she said.

Ram Upendra Das, senior fellow, Research and Information System for Developing Countries, also pointed out that Japanese investments into India have been “much less than its potential” although it has been a major source of investment inflows since the country started its economic liberalization in the early 1990s.

Taranath Parameshwar Bhat, a professor at the Institute for Studies in Industrial Development, said there is a “considerable amount of scope” in Japanese companies’ participation in India’s infrastructure investments — including telecommunication, railways, roads and ports — especially as the country tries to expand the share of manufacturing sector in its economy.

The share of manufacturing in India’s GDP today stands at around 18 percent, and the sector is largely dominated by small-and medium-sized firms, Bhat said. The government plans to establish national manufacturing and investment zones with a goal of pushing up the sector’s share of GDP to 25 percent by 2015 and doubling the level of employment in the sector, he said.

Kirankumar Momaya, a professor of Shailesh J. Mehta School of Management at the Indian Institute of Technology Bombay, said that despite the country’s growing domestic market and the huge population, many large Indian companies lack international competitiveness. Despite the nation’s rapid economic growth, the number of Indian firms in the world’s top 500 firms remained unchanged at a mere eight from 2005 to 2010 — whereas the number of Chinese firms on the list rose from 16 to 46 during the same period, he noted.

There is a potential for Japan-India cooperation to improve the competitiveness of Indian firms, many of which still lack the fundamental concept of value creation, human capital development, environmental concerns and other competitive factors, Momaya said.

Meanwhile, Prem Motwani, professor of the Center for Japanese, Korean and North East Asian Studies at Jawaharlal Nehru University, said the education business can be one avenue to expand human exchanges between the two countries and create a positive cycle in bilateral ties.

“It is often said — in Japan as well — that India with its young population is rich in human resources. But the 25-or-younger population of 600 million, accounting for half the nation’s total, includes large numbers of school dropouts, and youth unemployment is a serious issue,” Motwani said.

The quality of higher education in India has been recognized as a problem, and the government’s plan to increase university enrollment rate from the current 10 percent to 30 percent by 2020 will require sharp increases in the number of institutions, he said. India can actually face a serious human resources shortage in the future if its industrial development proceeds at the current pace, he noted.

Competition for enrollment in good universities is very intense, with roughly 400,000 people — 40 times more than the capacity — applying each year to enter the Indian Institute of Technology, Motwani said. Because of the tight competition at home, more than 400,000 youths go abroad each year to study at institutions not only in the U.S., Britain and Europe but also recently in Singapore, China and Russia, he noted.

Meanwhile, there are only about 400 Indians studying at universities in Japan, most of whom are coming here on the Japanese government-sponsored programs, Motwani said. This suggests that Japan has not been able to commercialize its traditional strength in human resources development, as exemplified by Japanese companies’ in-house training programs for their workers, he said.