India is rapidly evolving as a consumer market and Japan, whose trade and investment relations with the emerging South Asian giant have so far been limited, should take advantage of the huge potential created by the new trends of consumerism in the country, scholars and experts from Indian universities and think tanks said at a recent symposium in Tokyo.

The two countries are also advised to beef up maritime security cooperation to secure the increasingly vital sea lanes through the Indian Ocean, they said.

The experts were taking part in the symposium organized by the Keizai Koho Center on Jan. 19 under the theme “The Japan-India relationship in the 21st century Asia-Pacific era.” Makoto Kojima, a professor of international relations at Takushoku University in Tokyo, served as moderator of discussions.

Among the world’s emerging powers, India stands out for the demographic composition of its 1.19 billion people, said Srabani Roy Choudhury, an associate professor in Japanese studies at the Center for East Asian Studies at Jawaharlal Nehru University’s School of International Studies in New Delhi. Companies entering India must understand the changing dynamics of the market there, she added.

“India is a young country” where nearly 65 percent of the population are in the 15-64 age bracket, and another 30 percent are up to the age of 14, she said. And people in these age brackets are driving the rapid changes in consumer trends in the country, she noted.

India’s urban sector “is a layered society” where divisions among the underprivileged and privileged groups still remain strong, Choudhury said. But the privileged group alone has 22 million families and account for 30 percent of the total, and there is the “aspiring group” of another 17 million families that aspire to join the group driving the nation’s booming consumerism, she noted.

A major segment of this consumer group, she said, are the 300 million children up to age 14. “This group itself is a great market, but they are actually influencing the buying patterns of the products their parents buy — from mobile phones to cars to air conditioners” because this Internet-savvy generation is helping their parents compare data and consulting with them in their purchases, she noted.

The most significant group in the population is the young generation below the age of 30, many of whom enter the job market as skilled workers and have the largest amount of money at their disposal, Choudhury said. They have a great love for brands and gadgets, and “are well-informed about global fashion and aspire to be trendy and in sync with the youths of the world,” she observed. “They have significantly changed the market dynamics of cosmetics, mobile phones and apparel.”

Women in urban India are also changing in their quest to break from their traditional image in society, Choudhury said. They are increasingly assertive and “feeling more secure to venture out to the stores and buy things on their own,” and a growing number of high-profile women “desire the best and are creating a niche market for power dressing and boutiques,” she said.

“A widespread feeling for self-indulgence, which is leading to self-pampering in the form of beauty services and vacations, is emerging. These women are often the biggest potential buyers of niche products in which Japan has a great market. It is this group who want to buy high-quality, high-end products,” she said.

Another significant emerging segment of the market is the rural sector, which accounts for 70 percent of India’s population, she said. New communication technologies and services have exposed them to a wide range of products not available before, and people in rural India are “fast progressing to become a very dynamic” sector as their aspirations to become an urbanized society are much greater than their counterparts in urban India, she noted.

These changing market dynamics offer large opportunities for Japanese companies, Choudhury said, noting that NTT DoCoMo has already entered the telecoms sector, where the number portability policy has paved the way for more competition and lower rates. Cosmetics is a major sector where men and rural consumers are becoming increasingly influential, she said, adding that while Japanese companies have built their presence in the automobile and motorcycle industries, auto components are another sector that can benefit from greater Japanese investments.

It is against this background that the Japan-India Comprehensive Economic Partnership Agreement took effect last August. Bilateral trade and investments have increased in recent years but still remain low-key compared with India’s surging ties with other Asian economies, said Mathew Joseph, a professor at the FORE School of Management in New Delhi.

“India-Japan merchandise trade has been on a declining path,” Joseph said, pointing to each country’s negligible share in the other’s global trade picture. While bilateral trade has increased 15 percent each year on average between 2006 and 2011, India’s trade with China, for example, rose at a rate of 27 percent during the same period, he noted.

“India is almost insignificant in Japan’s merchandise trade,” as the nation accounted for a mere 0.6 percent of Japan’s global trade as of 2005, he said. Japan accounted for only 2 percent of both India’s exports and imports in 2010, down from 6 percent and 7 percent, respectively, in 1995.

Foreign direct investments into India as well as outbound investments by Indian firms rose rapidly during the 2000s, but Japan accounted for a mere 3.4 percent of the inbound FDI into India over the decade. Though Japanese investments began to jump over the past two years, the amount is still small compared to investments from countries such as Singapore, which accounts for 10 percent of the total, Joseph noted.

The Japan-India CEPA, which came into effect Aug. 1, 2011, eliminates each other’s tariffs on 94 percent of bilateral trade over the next 10 years. Japan will abolish its tariffs on 97 percent of India’s exports, while India is to eliminate tariffs on about 90 percent of imports from Japan, not including autos and auto parts.

It has long been observed that while other countries have expanded their presence in the Indian market, many Japanese firms were long reluctant to invest in India because of the “tough” business environment there — poor infrastructure; complicated tax system; cumbersome procedures for land acquisitions and use; legal, regulatory and procedural delays; bureaucratic inefficiency; and lack of administrative transparency, Joseph noted.

“But a more significant reason has been the inadequate knowledge and information about each other’s market, stemming from language and cultural barriers between the two countries,” he said.

Japanese investments in India began to pick up faster since mid-2010, and the reasons cited include the information gap being bridged and rising concerns about China, Joseph said. Rising wages and labor relations problems in China, coupled with political tensions with Beijing that resurfaced over the Senkaku Islands dispute, came just as recognition sank in of the potential of the Indian market and the country’s pool of workers with managerial, scientific and technical expertise, he said.

Recent Japanese surveys cite India as an attractive investment destination, with a Japan Bank for International Cooperation poll in 2010 showing that the surveyed companies see India as the most attractive destination in the long run and the second most promising destination in the medium term after China, Joseph said.

Pinaki Dasgupta, an associate professor at the Indian Institute of Foreign Trade, expressed hope that the CEPA with Japan will create a win-win situation for the two countries.

A series of free trade agreements signed with Asian countries has helped India’s integration with the regional economy, he said. A pact with South Korea, which took effect in 2010, has helped Korean firms in the auto, pharmaceutical and textile sectors make significant inroads into the Indian market, he noted.

While Japan should stand to gain from India’s booming consumer market, Indian firms can benefit from more Japanese investments, for example, in the country’s small and medium-size firms, which account for 70 percent of India’s exports, he said.

The processing industry is another area where Japanese technology and knowhow can bring more efficiency, Dasgupta said. Roughly 5-7 percent of India’s farm products, for example, are lost at the farms due to the lack of processing technology, another 17 percent of the products are damaged or destroyed when they are shipped to the warehouses, and yet another 2-3 percent are lost when they are processed.

Shamshad Ahmad Khan, a research assistant with the Institute for Defense Studies and Analyses in New Delhi, said India’s diplomatic policy of trying to “reintegrate” with South Asia — for example, by reviving its old railways and bus routes across borders with its neighbors -will benefit Japanese firms thinking about investments in India as a hub for exports to other parts of the region.

“The stability and prosperity of South Asia will have a direct impact on the Japanese economy,” given that some Japanese firms are shifting operations to this region in light of the rise of middle-income consumers, he said.

Meanwhile, India has sharply expanded its economic ties with China, but remains diplomatically ambivalent toward the other rising Asian power, Khan said.

Economic interdependence between the two countries is growing, with bilateral trade surging from $1 billion in 2001 to $60 billion in the 2010-11 period and projected to increase further to $100 billion in the next few years, Khan said. However, the widening trade imbalance in China’s favor may create trade frictions in the near future, he noted.

Diplomatically, India’s position is that there is space for both China and India rising in Asia without their interests being on a collision course, Khan said.

But China’s more aggressive diplomatic postures and defense buildup have led to various strategic thinking in India as to how to deal with China, he said.

One calls for an alliance with the United States and Japan to thwart China’s preeminence in the region, while another thinking dictates that India should avoid doing anything that stokes insecurity with China, he noted. What India has done so far, he said, is an “internal balancing” by augmenting its military preparation to meet any security challenges while keeping China engaged.

Probal Ghosh, a senior fellow with the Observer Research Foundation in New Delhi, called for maritime security cooperation between Japan and India to ensure the safety of sea lanes in the Indian Ocean, which, he said, is an “active ocean” in the throes of a power struggle amid “the slow erosion of the strategic leverage of the United States.”

“Many players have emerged in the region” including India, China, Australia, South Africa and Indonesia, who “are all jostling for power,” he said. “Although Japan is geographically very far, much of its interests lie in the Indian Ocean,” said the security analyst.

“The stakes are high because this is the region through which the sea lines of communication go and if the sea lanes are interdicted for any of the countries, their economies will come to a standstill,” he said.

Ghosh said the days of stable security balance and maritime order guaranteed by superpower competition are gone, and that the security scenario today is “driven by coalition and market forces” to some extent. And Japan, relying heavily on oil supply through the area, “needs natural allies” like India, he said.

The “string of pearls” is the phrase often cited by security experts to describe how China tries to encircle India in a containment strategy, and India has responded by forging “strategic partnerships” and deepening security dialogues with many Asian countries, including Japan, Ghosh said. And Japan itself faced the brunt of China’s aggressive maritime strategy when the Senkaku dispute resurfaced in 2010, he said.

Aside from the China factor, piracy poses a serious security threat to the sea lane in the Indian Ocean, and it’s not enough for governments to dispatch naval ships to fight the piracy, Ghosh said.

“The ranges (of the pirate ships) are increasing, sophistication is increasing, and you’re not addressing the problem at the root,” he said, noting that sending naval ships will only deal with the symptoms. “If you remove the naval forces now, the piracy will rise again,” he said, urging nations to coordinate on non-military actions against the pirates’ financial links, and to exchange information and intelligence.

Japan’s 2010 national defense program guideline focuses on the Self-Defense Forces’ role in cooperative approaches for humanitarian assistance, disaster relief and non-traditional security, such as counter-piracy and counter-proliferation activities — “areas where it can cooperate with India,” Ghosh said, adding that Japan needs to match words with action.

What is needed, he said, is bilateral naval exercises and contingency plans. For that, India and Japan need to build “a satisfactory level of interoperability and share actionable intelligence on piracy” and other maritime challenges, including drug running, he added.