Japan and India’s trade relationship can be characterised as one of untapped potential.
Authors: Keshav Kelkar and Marc McCrum, UBC
5 November 2014
Since taking office, Prime Minister Narendra Modi has made efforts to entice foreign investment into India and to establish closer ties with Japan. Warm diplomatic gestures between Modi and Japanese Prime Minister Shinzo Abe have garnered considerable attention, with some commentators arguing that Modi’s recent visit to Japan marks the beginning of a new Indo-Japanese relationship aimed at countering China’s growing influence in the region. Others have referred to ‘India’s pivot to Japan’ and ‘Japan’s pivot to India’.
But analysts must look beyond the ‘pivot’ rhetoric and see these recent developments for what they are: an attempt by the Modi government to build on India’s existing, but underdeveloped, rapport with Japan. Abe’s efforts to expand Japan’s trade relations with India represent an attempt to seize an opportunity that has been left untouched for far too long.
Initiated under the leadership of former prime minister Narashima Rao, India’s ‘Look East’ policy sought to expand India’s economic networks across Southeast Asia. But under Modi’s leadership, India is stepping outside its regional neighbourhood and seeking to strengthen ties with Japan and South Korea. During his interaction with Japanese media, Modi recognised Japan’s ‘importance in India’s foreign policy and economic development … at the heart of India’s Look East Policy’. Expanding India’s trade relations also falls in line with Modi’s chief mandate to revitalise a stagnant economy.
East Asian countries like Japan are a natural and attractive source for Indian investment. The capacity of the West to finance infrastructure projects is diminishing and India wants to attract FDI to develop its ageing infrastructure. Japan and India’s trade relationship can be characterised as one of untapped potential. The Indian embassy in Tokyo notes that ‘the current level of FDI from Japan reflects neither the potential of Japan to invest nor the capacity of India to absorb. India’s growing economy and stable investment climate offer large opportunities for Japanese companies’.
Despite the increased spending capacity of its ever-growing middle class, India continues to punch under its weight in terms of trade with Japan. While India’s trade with China has soared over the past decade, increases in trade with Japan have been marginal in comparison. In 2013 Japan was India’s 11th largest bilateral trading partner, ranking behind Singapore, Hong Kong and Iraq. India is Japan’s 11th most important trade partner in Asia and 23rd internationally.
Both parties recognise this shortcoming. Prime Minister Abe has often expressed his belief that ‘Japan–India relations have more potential than any other ties in the world’. He hopes to ‘boost ties in every possible field and elevate this to a special strategic and global partnership’. To back up the rhetoric, Modi has eased the FDI regulatory regime and signalled foreign investors to come ‘Make in India’. Japan has obliged; Japan and India recently set a target to double Japan’s direct investment in India over the next five years from some US$2 billion in 2013.
Increased engagement with India makes sense for Japan. Although China is Japan’s most important trading partner, relations have been marred in recent years by deteriorating diplomatic relations. This is largely due to the confrontational measures taken by both sides in response to the territorial dispute over the Senkaku/Diaoyu islands. While trade between Japan and China has increased slightly in the first half of 2014, this rise follows a drop of 6.5 per cent in overall trade in 2013 which was preceded by a contraction of 3.3 per cent in 2012. Sporadic outbursts of anti-Japanese violence in China has forced some Japanese companies to temporarily cease operations and second-guess continued operations within the country.
On the other hand, the absence of serious historical tensions bodes well for the expansion of Japan–India ties. India is continuing to develop into a global economic force; the stable trade connection it can provide may serve as a buffer for Japan to weather the ups and downs with its Northeast Asian neighbours.
The Abe government’s recent courtship with India can also be attributed to good old-fashioned survival politics. In Japan, political figures live and die by their public support ratings. Since Junichiro Koizumi’s five year run ended in 2006, Japan has experienced seven prime ministerial changes largely as a result of floundering public approval. Although Abe’s second attempt as prime minister has been the longest in the post-Koizumi era, his cabinet’s until now solid ratings have begun to sag as of late. In July, following their reinterpretation of the constitution’s Article 9 peace clause, which is aimed at a limited right to exercise collective self-defence, Abe’s approval rating dipped below 50 per cent for the first time. Recent scandals resulting in two high profile ministers tendering their resignations as a well as continued debate over increasing the country’s consumption tax from 5 to 8 per cent are likely to pose further challenges. Having staked his political legitimacy on revitalising Japan’s economy after two-decades of stagnation, any talk Abe can conjure of Japan engaging in greater levels of trade with up-and-coming economic powerhouses like India is music to his supporters’ ears.
While commentaries about geopolitical posturing and counterbalancing have their merits, analysts must realise that both Abe and Modi’s political legitimacy rest on revitalising their respective economies.
Article Originally Published in the East Asia Forum: