India needs to redouble its efforts to develop industrial and urban infrastructure that so far have not caught up with the pace of its economic growth, said Indian scholars taking part in a recent symposium in Tokyo who want Japan to play a key role to support such efforts.
Despite an economic partnership agreement that took effect in 2011, trade and investment relations between the two countries have yet to realize their full potential, the experts said, urging Japan to view India also as a platform for exports to the Middle East and Africa.
The experts from think tanks and universities in India were speaking at a symposium organized by the Keizai Koho Center on Dec. 14 to discuss areas of Japan-India cooperation on business, infrastructure building and regional security.
As one of the fast-growing emerging powers, India’s economy has grown by an average of 7.3 percent annually over the past decade. However, the government acknowledges that the country’s existing infrastructure is inadequate to support the rapid economic growth, said Purna Chandra Parida, a research fellow of the National Council of Applied Economic Research in New Delhi.
“There is a large gap between demand and supply of infrastructure,” Parida said, citing as an example a major power outage that affected 700 million people in July 2012, when three regional power grids collapsed due to excessive demand.
Electricity consumption in India is forecast to increase significantly in the coming years as per capita income increases, he said. While per-capita power consumption in India was less than a quarter of that in China in 2008, India’s per-capita gross domestic product — if it continues to rise at the current pace — is forecast to equal China’s current levels in 10 years, at which point power consumption is likely to reach triple the current level, he noted.
India has invested heavily on infrastructure building especially after 2000, but the gap remains huge, Parida said. For example, the total length of road networks in India has increased eight times over the past four decades, but the number of vehicles in the country grew 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, he said.
To fill the gap, the government has 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.
Parida said that Japan, the largest donor of official development aid to India, has played a major role in the country’s infrastructure development because much of the aid money has come in the form of soft loans for infrastructure projects.
Of the ongoing major projects, for example, loans from the Japan International Cooperation Agency cover 52 percent of the $7.7 billion cost of the Delhi-Mumbai Dedicated Freight Corridor, which is to be completed by 2018. Similarly, Japanese soft loans cover $4.5 billion of the total $90 billion in expenses of the Delhi-Mumbai Industrial Corridor project, which aims to create multiple mega-industrial zones in the area complete with three ports, six airports and a six-lane freeway, he noted.
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, Parida said. 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 welcome, he said.
Infrastructure investment also needs to increase in India’s rapidly expanding urban areas, he said. As the urban population is estimated to account for more than 40 percent of the country’s total by 2030, there will be an “enormous demand for better quality infrastructure in water, electricity, sewerage, public transport and low-cost housing,” he said.
The urban population in India increased from 285 million in 2001 to 377 million in 2011, accounting for 31.16 percent. “These figures matter more if we realize that urban areas account for more than 60 percent of India’s GDP,” said Debjani Ghosh, a senior research officer with the National Institute of Urban Affairs.
The urban population is estimated to soar to 590 million in 2030 and cities could generate 70 percent of the net job creation in that year, producing more than 70 percent of the GDP, she said.
As Indian cities expand on a larger scale and at a faster pace than ever before, the government realizes the need to “put in more funds and efforts to reform the city management so they can ultimately sustain themselves and be the engine of growth,” Ghosh said.
“If the cities are managed poorly, it could lead to lots of other issues, including weak urban governance, inadequate urban infrastructure and supply of serviced land,” she noted. “We already have a high proportion of urban poor and slum population, which has increased due to more opportunities in the cities and migration from surrounding areas. As a result, inability to deliver services citywide is increasing.”
The problem, Ghosh said, is that many of those cities rely on grants from central and state governments, and “ultimately it is the cities who are left dependent on grants that are never adequate to provide for the increasing population.”
Trade and investment between Japan and India have rapidly increased in recent years, but remain far below the potential, said Biswajit Nag, an associate professor at the Indian Institute of Foreign Trade.
The Japan-India Comprehensive Economic Partnership Agreement, which came into effect in August 2011, has yet to have its intended effect of boosting such ties, partly due to limited application of the tariff-free arrangement, he said.
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. Nag said that 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, he said.
Meanwhile, Japanese firms 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, he noted.
Nag also said that his research shows that 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.
Still, Nag said that some of these problems are issues that can be addressed when the agreement comes up for review in the future. Even though it’s not producing the intended results, the accord “gives a confidence that the two countries have agreed to reduce” the barriers to bilateral trade and it “provides a future direction for more liberalization,” he said.
Rather, Nag said that for deeper economic ties, Japanese firms should change their view of India — from a market to a key part of their international production network.
India wants to enter the Japanese market in services — not just in the IT sectors, but various other sectors, he said. On the other hand, India hopes for more engagement of Japanese firms with small and medium-size enterprises in India to help enhance their capabilities, he said.
So far, Japanese firms have overlooked Indian SMEs and instead export parts and components from their Southeast Asian affiliates or from Japan, Nag said. Meanwhile, Indian auto component producers supply mostly to European automakers such as Mercedes-Benz and Fiat, he noted.
Japanese companies should consider joint ventures with Indian firms, making India their new export platform, Nag said. “Japanese companies never consider India as a production hub. They always consider India as a market,” he said.
Meanwhile, European and U.S. firms, which view India as being in the same region as West Asia and Africa, serve African and Mideast markets from India, he said.
Japanese companies consider India as part of Asia and think of serving the Indian market from Southeast Asia or China, he noted. But they can think differently and produce in India and reach Africa and the Middle East from there, he added.
And in dealing with Indian firms, Nag said that Japanese firms need to reconsider the way of replicating their domestic production process — as they did previously in Southeast Asia. “Indian SMEs are doing business from the colonial period. They are more accustomed to open bargaining with workers in terms of compensation, work environment, etc. Japanese firms have to understand how each country is different and how you need to do business in a different environment,” he said.
India is indeed a difficult market to penetrate, with its bureaucracy and rigid laws, “but other countries are doing business there, and as the Japanese are not doing business there, countries like South Korea are already aggressive in the Indian market and competing with — and in many cases ahead of —Japanese brands,” Nag said.
Yasukuni Enoki, a former Japanese ambassador to India who served as moderator of the discussions, said that economic ties are finally coming to the forefront of Japan-India relations, which until the late 2000s used to be driven mainly by political ties.
Although the presence of the Japanese business community in India is still far smaller than in China or many Southeast Asian economies, the number of Japanese firms operating in the country is increasing by around 100 each year, with the number of Japanese residents expected to have hit 6,500 or 7,000 in 2012, he said.
Until recently, it was the government aid and initiatives that drove Japan’s involvement in industrial development projects in India, and Japanese companies were largely hesitant to enter the infrastructure sector in the country, Enoki said. Today, some companies are starting to take part, albeit still in small numbers, he said.
Political dialogue, meanwhile, has progressed to the point where the two governments regularly exchange mutual visits of prime ministers in recent years, and the focus will shift from bilateral relations to broader Japan-India cooperation on regional issues, Enoki noted.
The key issues on the agenda, he said, will be how Japan and India will deal with China, and how the two countries will cooperate to secure maritime security in the Indian Ocean and the South China Sea. Japan and India also need to maintain close coordination on the issue of economic integration in Asia including India, he said.
Mohammed Badrul Alam, a professor of political science at Jamia Millia Islamia University in New Delhi, said the two countries can work together for multilateral efforts on non-traditional security issues such as energy security, maritime security, natural disasters, anti-drug and anti-piracy operations.
Also, there is room for Japan and India to cooperate on how to constructively engage and at the same time contain — but not as an adversary — China, he said.
Even though the 21st century is billed as the Asian century, “who’s going to be ahead of whom” among Japan, China and India will be one of the puzzles in the regional landscape in the next 10 to 20 years, he said.
While there will be multiple long-term scenarios on the region’s future balance of power, one of the core questions will be how India and Japan see their own international roles, he said. Other questions will include, he said, what foreign policy options Japan has today as a major power, or will have as possibly a middle power or peripheral power in the future, and how relations between its major allies and partners will develop in the foreseeable future.